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As filed with the Securities and Exchange Commission on August 13, 1999
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
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HUGHES ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-1106564
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
200 North Sepulveda Boulevard 90245
El Segundo, California (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code:
(310) 662-9985
Securities to be registered pursuant to Section 12(b) of the Act:
None.
Securities to be registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, par value $1.00
To the extent the items in this Form 10 are identical to items in a Form 10-
K, this Registration Statement on Form 10 has been prepared on the reduced
disclosure format specified in Instruction I to Form 10-K. Specifically, items
2 and 3 have been prepared in accordance with such Instruction I, and items 4,
5, 6 and 7 have been omitted in accordance with such Instruction I.
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HUGHES ELECTRONICS CORPORATION
Forward-Looking Statements
This registration statement may contain certain statements that we believe
are, or may be considered to be, "forward-looking statements." These forward-
looking statements generally can be identified by use of statements that
include phrases such as we "believe," "expect," "anticipate," "intend," "plan,"
"foresee" or other similar words or phrases. Similarly, statements that
describe our objectives, plans or goals also are forward-looking statements.
All of these forward-looking statements are subject to certain risks and
uncertainties that could cause our actual results to differ materially from
those contemplated by the relevant forward-looking statement. Readers are urged
to consider these factors carefully in evaluating the forward-looking
statements. The forward-looking statements included in this registration
statement are made only as of the date of this registration statement and we
undertake no obligation to publicly update these forward-looking statements to
reflect subsequent events or circumstances.
General
We are a wholly-owned subsidiary of General Motors Corporation. General
Motors is primarily engaged in the automotive and satellite and wireless
communications industries. General Motors also has financing and insurance
operations and, to a lesser extent, engages in other industries. General Motors
has two classes of common stock, Class H common stock and $1-2/3 common stock.
The Class H common stock tracks the performance of our company. Our financial
performance determines the earnings per share attributable to the Class H
common stock and the amounts available for the payment of dividends on the
Class H common stock. This registration statement, however, does not relate to
registration of the Class H common stock or the $1-2/3 common stock. Rather, it
relates to the registration of the common stock of Hughes Electronics
Corporation, all of which is owned by General Motors.
Item 1. Business
Overview
We are a leading global provider of digital direct broadcast satellite
entertainment services, satellite communications services and satellite-based
private business networks. We are also a leading global manufacturer of
satellite systems. Since our founding, we have been a pioneer in many aspects
of the satellite and wireless communications industry, and our technologies
have driven the creation of new services and markets. We believe that our
ability to identify, define and develop new markets early has provided us with
a significant competitive advantage in building sustainable market leadership
positions.(/1/)
Since our reorganization in 1997, we have focused on providing advanced
communications services on a global basis. By leveraging our technological
leadership in satellite and wireless communications systems, we have developed
a range of entertainment, information, and communications services for the home
and business markets, including video, data, voice, multimedia and Internet
services. These services provide the potential for higher margins and higher
growth than our traditional manufacturing businesses. For the year ended
December 31, 1998, direct broadcast, leasing and other services revenues
represented approximately $2.6 billion or 44% of our total revenues.
Our business includes:
. DIRECTV, which is the world's leading digital direct broadcast satellite
service based on number of subscribers. DIRECTV includes businesses in
the United States, Latin America and Japan, and constitutes our Direct-
to-Home Broadcast segment. As referred to in this registration
statement, the
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(1) DIRECTV(R), Galaxy(R), Spaceway(TM), AIReach(TM), DirecDuo(TM), Turbo
Internet(TM), SPOTbytes(R), PRIMESTAR(R), DirecPC(R) and USSB(R) are
trademarks of Hughes Electronics Corporation or its subsidiaries. All other
trademarks are properties of their respective owners.
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direct broadcast satellite industry does not include providers and
subscriber data for the large satellite receiving dish, C-band direct-
to-home services market.
. PanAmSat, which owns and operates the largest commercial satellite fleet
in the world with 19 satellites that can transmit signals to geographic
areas covering 99% of the world's population. PanAmSat, a publicly-held
company of which we own 81%, constitutes our Satellite Services segment.
. Broadband Services, which includes Spaceway, a planned satellite-based
broadband communications platform that is expected to provide customers
with high-speed two-way multimedia transmission on a more cost-efficient
basis than current systems. Broadband Services is expected to be
launched in North America in 2002 and currently is not a separately
reported business segment.
. Hughes Network Systems, which is a leading provider of satellite and
wireless communications ground equipment and services with an estimated
55% to 60% share of the global market for very small aperture terminal
or "VSAT" private business networks. Hughes Network Systems is also the
second largest producer of DIRECTV receiver equipment. Hughes Network
Systems constitutes our Network Systems segment.
. Hughes Space and Communications, which is a leading satellite
manufacturer that has won over 50% of its competitive bids from 1991
through 1998. Hughes Space and Communications is the principal component
of our Satellite Systems segment.
Industry Trends and Opportunities
We seek to capitalize on several key trends that are revolutionizing the
communications industry, including:
. Growing demand for an increased variety of digital broadcast
entertainment services. We believe that satellite direct-to-home
entertainment will continue to be the fastest growing sector of the
multichannel entertainment industry both in the United States and
internationally. Since 1994, the total number of direct broadcast
satellite subscribers in the United States has grown from 570,000 to
10.0 million as of June 30, 1999. Direct broadcast satellite is now the
largest sector of the satellite communications services industry based
on revenues.
. Increasing demand for digitized data and Internet services for both home
and business users. We believe that the next wave of demand for
satellite-based communications services will be fueled by the increasing
need for digitized data, Internet and broadband services. Drivers of
this demand include the need for cost-effective, high-speed data
transmission and increasing Internet traffic.
. Emerging demand for mobile satellite services, including telephony,
paging and information systems. Worldwide, approximately 70% of the
earth's land mass lacks cellular coverage. Mobile satellite services are
increasingly being used to meet wireless telephony and other
communications needs of end users in these markets.
In meeting the demand created by these trends, satellite technology has
inherent competitive advantages over ground-based communications technologies
for many applications, including:
. the ability to broadcast hundreds of channels economically to millions
of recipients over very wide geographic areas;
. the potential for low cost two-way communications to areas of low
subscriber density;
. the ability to roll-out new infrastructure to a large number of
customers quickly; and
. the ability to deliver large amounts of information at high transmission
speeds.
Competitive Advantages
We believe that our satellite and wireless communications technological
capabilities, together with the inherent advantages of satellite technology
over ground-based technology for many applications, provide us
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with competitive advantages. We believe these competitive advantages should
enable us to achieve sustainable market leadership positions and accelerate
revenue and operating cash flow growth. These competitive advantages include:
. DIRECTV Brand and Franchise. The acquisitions of PRIMESTAR Inc. and
United States Satellite Broadcasting Company, Inc. solidify DIRECTV's
leadership position in the United States direct broadcast satellite
market. In the United States, DIRECTV has:
. the largest subscriber base--about 74% of direct broadcast satellite
subscribers, which provides greater opportunity to obtain
programming on favorable terms, secure exclusive programming and
introduce new services;
. substantial channel capacity--currently delivers over 210
entertainment channels and, following the successful launch of an
additional satellite later in 1999 and with the recently acquired
in-orbit satellite and related 11 satellite orbital frequencies of
Tempo Satellite, Inc., a wholly-owned subsidiary of TCI Satellite
Entertainment Inc., will have capacity for about 370 channels; and
. the largest distribution network--based on retail points of sale,
including national retailers such as Circuit City, Radio Shack and
Best Buy, several regional Bell operating companies which provide
installation, customer service and billing and the PRIMESTAR dealer
network in small urban and rural markets.
. a strategic alliance with America Online, Inc., the world's leading
interactive services company--both companies will launch cross-
marketing initiatives designed to package and extend the reach of
both DIRECTV and AOL TV (TM) to their collective base of over 24
million subscribers in the United States.
In addition, there are currently only three licensed United States
orbital slots that provide the capability to deliver high-power
television signals throughout the contiguous United States. Out of a
total of 96 available frequencies at these orbital slots, DIRECTV is
authorized to use 46 frequencies, which include the 11 frequencies
acquired from Tempo Satellite.
We believe these factors, together with DIRECTV's brand name, provide us
with significant competitive advantages over other U.S. multichannel
service providers. We also believe that DIRECTV's high quality digital
picture and sound, its increased variety of programming and its high
quality customer service provide competitive advantages over traditional
cable television. We are utilizing the DIRECTV brand name and U.S.
leadership position to accelerate growth in selected international
markets.
. Direct Digital Interactive and Broadband Links to Home and Business. We
believe that our established customer relationships in both the business
and home segments will become increasingly valuable as key portals to
offer expanded services. Consumers and businesses are increasingly
demanding the flow of greater amounts of data at higher speeds than can
be provided by traditional computer modems and phone lines. In many
cases, satellite-based systems are well suited to address this need on a
cost-effective basis. In meeting this demand, we intend to capitalize on
our existing customer relationships. For example, under a recent
agreement with AOL, Hughes and AOL have formed a strategic alliance
under which Hughes and AOL intend to introduce two new Internet-based
interactive services. The first is a combined DIRECTV/AOL TV receiver
which will allow the consumer to not only receive DIRECTV's extensive
video programming line-up, but also to access the Internet via their
television through AOL's extensive Internet content. DIRECTV and AOL
also plan to jointly develop new Internet-based services and content for
DIRECTV customers. Separately, Hughes and AOL will introduce a high
speed Internet service for the personal computer that will provide AOL
Internet content through DirecPC. DirecPC(R) is a satellite-based
Internet service which uses a small receiver dish (similar to that of
DIRECTV) to provide access speeds up to 400 kilobits-per-second,
approximately 14 times faster than the standard 28.8 kilobits-per-second
analog modem.
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Hughes and AOL also plan to jointly develop new Internet-based services
and content for this AOL/DirecPC service. The DIRECTV/AOL alliance is
intended to accelerate subscriber growth and revenue-per-subscriber for
DIRECTV and DirecPC, and to expand the subscriber base for AOL's
developing AOL TV and AOL-Plus services. Also, we plan to begin
upgrading some of our existing corporate data network clients and
satellite Internet customers, many of whom are Fortune 500 companies and
the AOL/DirecPC subscribers, to Spaceway, which is planned for launch in
North America in 2002.
. Global Spectrum and Orbital Slots. We consider our regulatory
authorization to use desirable broadcast spectrum and orbital slots for
our current and planned global satellite fleet to be a significant
competitive advantage. Operation of an international satellite fleet
requires significant international and national regulatory approvals. We
and PanAmSat have received regulatory approval for 27 licenses in the C-
band, the traditional network and cable television distribution band,
the Ku-band, the band used for many telecommunications services and
direct-to-home television, or both bands. In addition, we and PanAmSat
have obtained United States Federal Communications Commission
authorization for 17 licenses in the Ka-band, a high-power spectrum that
will enable new broadband, high-speed data and Internet service
offerings.
. Global Market Leader. We believe that our global leadership positions in
our target markets--digital direct-to-home entertainment and
information, satellite transponder leasing, private business networks,
and satellite systems manufacturing--enable us to achieve economies of
scale. The satellite and wireless communications business is
characterized by high fixed costs with relatively lower variable costs.
A market leadership position enables the cost of developing expanded
services, such as exclusive programming for DIRECTV or specialized
broadcasting services for PanAmSat, to be spread across a larger
customer base. Similarly, economies of scale have enabled Hughes Space
and Communications to increase standardization of manufacturing
processes by developing a family of satellite structures, electronics,
and propulsion and power systems which can be replicated at relatively
low cost in a variety of commercial and defense configurations. In
addition, Hughes Network Systems has benefited from economies of scale
in manufacturing VSATs.
. Comprehensive Portfolio of Global Satellite Businesses. We believe that
our presence in several major segments of the satellite communications
industry affords significant synergies, vertical integration benefits
and the ability to remain at the forefront of the latest industry growth
trends. We have leveraged our satellite manufacturing and systems
expertise to develop new service businesses such as DIRECTV, satellite
transponder leasing and Spaceway. In addition, our vertically integrated
structure has enabled us to respond quickly to the growth needs of our
services businesses and was an important element in the formation of the
Hughes/AOL strategic alliance. For example, Hughes Network Systems'
ability to increase production of DIRECTV receiving equipment on short
notice enabled DIRECTV to achieve record subscriber growth in 1998. In
addition, our complete range of integrated satellite wireless
communication services enables us to meet our customers' needs for end-
to-end communication solutions.
. Technology Leadership. We believe our leadership positions in our
markets results in large part from our technological capabilities,
particularly in satellite design, production and operation. Our
technologies have significantly enhanced the transmission capacity,
power and efficiency of satellites and improved their cost
effectiveness. Because these innovations have improved the economics of
the commercial satellite business, we believe that our technological
leadership has expanded, and will continue to expand, the market for
satellites, satellite equipment and satellite services. We also believe
that our technological expertise provides us with an advantage in our
other equipment and services businesses. For example, our technologies
enabled DIRECTV to be first to market with digital direct broadcast
satellite services and these technologies will be critical to the
successful development of Spaceway broadband services.
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Strategy
Our business objective is to maximize the creation of shareholder value by
leveraging our satellite and wireless communications systems expertise and
capitalizing on the competitive advantages discussed above in order to enhance
our position as a premier global communications company with an emphasis on
higher margin, higher growth services. Our core strategies for achieving our
business objective are to:
. Achieve Sustainable Market Leadership Positions Through Innovation. We
have achieved market leadership positions through our core competence in
identifying, defining and developing new markets and our ability to
develop innovative products and services to serve these markets. For
example:
. early development of satellite transponder leasing has allowed us to
capture a significant share of the world's limited supply of both
satellite orbital slots and broadcast spectrum;
. early entry into the digital high-powered direct-to-home broadcast
industry has provided us with direct relationships with consumers to
whom an expanded array of services can be offered; and
. based on our commercial satellite systems manufacturing and private
business network services expertise, we announced our intention to
make a significant investment in an advanced global broadband
satellite network. We expect to be an early entrant into the market,
allowing Spaceway to attain a leadership position in the high-speed
transfer of digitized data through broadband networks.
In addition, we have pursued and will continue to pursue acquisitions
and strategic alliances, such as our acquisitions of PRIMESTAR and U.S.
Satellite Broadcasting Company and our alliance with AOL, to extend our
leadership in core markets and divest or reposition businesses in those
markets where leadership cannot be attained.
. Lead the Multichannel Entertainment Market. We intend to capitalize on
favorable demand trends for multichannel entertainment in the United
States and selected international markets. We intend to maintain
DIRECTV's leadership in the United States by providing a premier line-up
of exclusive entertainment programming, high definition television or
"HDTV" programming, unique interactive services and Internet-based
services. We are leveraging our United States direct-to-home broadcast
satellite expertise and brand name in selected international markets.
. Exploit Growth Opportunities in the Markets for Digitized Data and
Internet Services. We believe that the digitized data and Internet
revolution will have a major impact on the satellite and wireless
communications industry. We have several initiatives in this area,
including:
. DIRECTV expects to integrate a range of web-based and interactive
technologies into its programming in the United States and Latin
America. For example, through the AOL strategic alliance, DIRECTV
expects to introduce a new DIRECTV/AOL TV receiver capable of
accessing the Internet via your television.
. Hughes Network Systems has developed an array of digitized data,
intranet and Internet services for the private business systems and
consumer markets. The strategic alliance with AOL will accelerate
Hughes Network Systems' Internet strategy of providing high-speed
access to both its consumer and business customers.
. PanAmSat has developed a range of Internet-related services,
including SPOTbytes(R), a bundled Internet service that offers links
from international locations to the United States Internet backbone
via PanAmSat teleports, and a new service that provides the direct
broadcast of web content to local servers in the United States and
internationally.
. We expect that, beginning with the anticipated North American launch
in 2002, the Spaceway platform will enable service providers,
including Hughes Network Systems and PanAmSat, to offer customers a
wide range of two-way, high-data-rate applications under their own
brands. In addition, AOL has acquired the right to purchase capacity
on the Spaceway platform to continue to enhance the AOL service via
DirecPC.
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. Increase Revenue-Per-User Through Provision of Enhanced Services. A core
principle of our consumer and business service strategy is to increase
average revenue-per-user. Examples of this include:
. DIRECTV's monthly revenue per residential U.S. DIRECTV subscriber
has increased from about $39 in 1995 to about $47 as of March 1999
and, after implementing the conversion of PRIMESTAR and U.S.
Satellite Broadcasting Company subscribers to DIRECTV, is expected
to increase by more than $8 per subscriber. With the introduction of
AOL TV planned for mid-2000, DIRECTV expects average revenue-per-
subscriber to grow even further.
. PanAmSat has increased its revenue from existing customers by
providing unique one-stop shopping for customers' national, regional
or global satellite transmissions, network design and systems
engineering, transmission of video channels and the management of
private business network traffic from PanAmSat teleports.
. Hughes Network Systems has generated incremental revenue by offering
networking and other services to equipment customers. Hughes Network
Systems also expects to receive additional revenue-per-subscriber
through the AOL service that will be delivered via DirecPC.
. Focus on Customer Satisfaction and Quality. We emphasize customer
satisfaction and quality in all of our manufacturing and services
businesses. For example:
. the cumulative channel availability of in-orbit satellites that we
manufacture is above 98%;
. DIRECTV's surveys show a customer satisfaction rating of over 90% in
the United States and Latin America; and
. Hughes Network Systems has shipped over 1 million DIRECTV receivers
with a monthly defect rate of less than two-tenths of one percent.
We believe that a continued focus on customer satisfaction and quality
is key to our ability to expand our customer base and maintain
leadership positions in each of our businesses.
. Focus on Key Performance Measurements. We focus on performance
measurements that we believe will best help us achieve our goal of
maximizing long-term shareholder value. These include:
. Performance of Class H common stock. A portion of the compensation
of all of our full-time employees, excluding employees of non-100%
owned subsidiaries, is linked to the Class H common stock price. In
particular, more than half of the compensation of our top executives
is based on the Class H common stock price.
. Long-term EBITDA growth and EBITDA margin improvement. We believe
that EBITDA serves as a good proxy for operating cash flow and that
improvements in operating cash flow signify the overall strength and
value of a business. EBITDA or earnings before interest, taxes,
depreciation and amortization is defined as operating profit plus
depreciation and amortization.
. Revenue growth, subscriber growth and growth in average revenue-per-
subscriber. We believe that these measurements are especially
relevant to DIRECTV, where the initial cost incurred in acquiring a
customer is offset by the long-term profit potential of that
customer.
We believe that these measurements are similar to those tracked by other
large communications, entertainment and media service providers, such as
cable and wireless communications companies, and are consistent with our
transformation from an aerospace, defense and automotive electronics
company to an entertainment and information communications company.
DIRECTV
Highlights
. Over 7.4 million U.S. subscribers of the DIRECTV and PRIMESTAR by
DIRECTV services
. Monthly revenue per residential U.S. DIRECTV subscriber of about $47 as
of March 1999, which is expected to increase by more than $8 per
subscriber after implementing the conversion of PRIMESTAR and U.S.
Satellite Broadcasting Company subscribers to DIRECTV
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. Currently delivers more than 210 entertainment channels, and, following
successful launch of an additional satellite later in 1999 and with the
satellite recently acquired from Tempo Satellite, will have capacity for
about 370 entertainment channels in the United States
. The broadest U.S. distribution network in its market based on retail
points of sale
.A leading multi-channel television provider in Latin America and Japan
Strategic Goals
. Expand channel capacity and add new and exclusive programming, including
local broadcast network channels in over 20 of the top U.S. markets upon
expected passage of federal legislation
. Broaden and strengthen distribution channels
. Increase average revenue-per-subscriber
. Minimize subscriber churn
. Introduce new interactive and web-based services
. Leverage U.S. expertise to accelerate growth in selected international
markets
Introduced in June 1994, DIRECTV was the first digital direct broadcast
satellite service in North America. Currently, DIRECTV provides programming in
the 48 contiguous United States, 26 countries in Latin America and Japan. We
recently acquired PRIMESTAR and U.S. Satellite Broadcasting Company. For a
further discussion of these acquisitions and DIRECTV's plans to integrate
PRIMESTAR and U.S. Satellite Broadcasting Company, see "--Recent Acquisitions."
United States. DIRECTV, under the DIRECTV and PRIMESTAR brands, as of June
30, 1999 has about 7.4 million of the 10.0 million direct broadcast satellite
subscribers in the U.S. This includes approximately 1.1 million subscribers
located primarily in rural areas of the continental United States who receive
DIRECTV services under an arrangement with the National Rural
Telecommunications Cooperative. Excluding National Rural Telecommunications
Cooperative subscribers and related revenues, average revenue per residential
U.S. DIRECTV subscriber was about $47 per month as of March 31, 1999. After
implementing the conversion of PRIMESTAR and U.S. Satellite Broadcasting
Company subscribers to DIRECTV, we expect average revenue per residential U.S.
DIRECTV subscriber to increase by more than $8 per month, to the highest in the
United States direct broadcast satellite industry.
Currently, DIRECTV subscribers can receive more than 210 channels of
television shows, premium movies, sports and pay-per-view events, including 31
audio channels. DIRECTV also provides premium sports and other premium
programming such as THE NFL SUNDAY TICKET(R), which allows subscribers, subject
to local restrictions, to view every National Football League game played each
Sunday during the regular season. DIRECTV is the exclusive small dish provider
of THE NFL SUNDAY TICKET through 2002. We believe that DIRECTV's increased
channel offerings, channel capacity and subscriber base resulting from the
PRIMESTAR and U.S. Satellite Broadcasting Company acquisitions provides DIRECTV
with a competitive advantage in acquiring subscribers, obtaining exclusive
programming from leading content providers on favorable terms and generating
advertising revenue. Also, we believe we have enhanced ability to provide
consumers new and innovative service offerings. For example, DIRECTV expects to
introduce:
. Interactive services--including data-enhanced programming, e-commerce,
Internet-based services and interactive advertising. For example,
through DIRECTV's new alliance with AOL, DIRECTV will offer subscribers
access to a wealth of information through connected interactivity and
AOL members will be offered the ability to connect to a new AOL
interactive service designed to enhance the television viewing
experience.
. Personal Video Recorder Service--will allow subscribers to control the
programming they watch by being able to pause live TV and create their
own TV programming line-up based on personal preferences.
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We believe that the frequencies DIRECTV is authorized to use for delivering
digital television signals in the United States are significant assets. There
are currently only three licensed United States orbital slots that provide the
capability to deliver high-power television signals throughout the contiguous
United States. These orbital slots have a total of 96 available frequencies.
DIRECTV controls 46 frequencies, including 11 frequencies recently acquired
from Tempo Satellite.
Currently, in the United States, DIRECTV is prohibited from providing local
television channels in local markets. DIRECTV believes this inability is a
disadvantage with respect to competing with cable television. Currently pending
legislation is expected to authorize the delivery of local broadcast channels
by satellite. If adopted, this legislation would enhance the competitiveness of
DIRECTV as compared to cable television. We cannot assure you if or when this
legislation will be adopted. DIRECTV expects to begin immediately providing
local broadcast network channels to DIRECTV subscribers in New York and Los
Angeles from its existing orbital slot at 101 degrees West Longitude after
adoption of enabling legislation. Soon thereafter, DIRECTV expects to roll out
similar local television service in a number of additional markets by utilizing
the in-orbit satellite and related frequencies at the orbital slot at 119
degrees West Longitude acquired from Tempo Satellite in June 1999. New dual-
feed, dual-receive satellite receiving equipment expected to be available later
in 1999, will be required in markets other than New York and Los Angeles to
receive both the local broadcast network channels for their market and current
DIRECTV programming.
DIRECTV programming service and equipment are currently distributed through
consumer electronics stores such as Circuit City, Radio Shack and Best Buy, and
satellite television dealers. In addition, we have agreements with several
regional Bell operating companies to distribute DIRECTV programming and service
by bundling it with local phone services. The regional Bell operating companies
provide installation, customer service and billing. In addition, we believe
that DIRECTV's ability to reach rural and small urban areas has been enhanced
by the addition of PRIMESTAR's dealer network which primarily serves these
areas. Finally, AOL will market DIRECTV to its on-line subscriber base,
providing a promising new distribution channel.
DIRECTV's 1998 net subscriber churn rate was approximately 1.1%. For the
first half of 1999 it has risen to about 1.5% due to the court-ordered
disconnection of distant network signals to many subscribers and the conversion
of both U.S. Satellite Broadcasting Company and PRIMESTAR customers to DIRECTV.
This compares to an average churn rate of approximately 2.5% for the cable
television industry. DIRECTV has implemented aggressive churn management
programs designed to reduce subscriber turnover. DIRECTV's net subscriber churn
for a given period is calculated by dividing the number of subscribers
canceling service during the period by the total number of subscribers at the
end of the period.
DIRECTV's cost of acquiring new subscribers is expected to increase due to,
among other things, incentives granted by U.S. Satellite Broadcasting Company
to manufacturers of DIRECTV receiving equipment which were assumed by DIRECTV
in connection with its merger with U.S. Satellite Broadcasting Company.
Subscriber acquisition costs will increase further due to increased incentives
to dealers and consumers. In addition, in connection with the AOL alliance, our
subscriber acquisition costs will increase with respect to both the DIRECTV
system and the new DIRECTV/AOL TV system. We expect to offer additional
incentives to dealers to reduce the cost of DIRECTV/AOL TV receiver equipment
for the consumer and we intend to offer additional consumer promotions designed
to attract more subscribers. In the future, subscriber acquisition costs will
continue to be largely determined by the competitive environment.
DIRECTV is currently broadcast from three Hughes Space and Communications HS
601 satellites directly to 18-inch receiving antennae and set-top boxes located
in households and businesses. A fourth satellite under construction and
scheduled for launch in the third quarter of 1999 will provide additional
channels and allow for additional back-up capability to DIRECTV's satellite
fleet, including the satellite which experienced the failure of its primary
spacecraft control processor in 1998. See "--Other Business Risks--We Are
Vulnerable to Satellite Failure." In addition, DIRECTV has acquired two
additional satellites, a ground satellite and an in-orbit satellite, and 11
related satellite orbital frequencies from Tempo Satellite that will provide
additional
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channel capacity. DIRECTV's signal originates from its 55,000 square foot
broadcast facility in Castle Rock, Colorado. DIRECTV also currently broadcasts
some services from a second broadcast center in Los Angeles. DIRECTV expects to
have expanded this facility to full capacity for additional channels as well as
backup capacity for the Castle Rock facility by the first quarter of 2000.
DIRECTV receiving equipment is manufactured by a number of name brand
consumer electronics companies. Equipment prices have fallen steadily from the
initial $699-$899 range in June 1994 to approximately $99-$249 today. The
technology for the DIRECTV service is based, in part, on our satellite and
satellite-based services experience and in part, on the expertise of the
consumer electronics manufacturers which produce the equipment. DIRECTV has
outsourced many of the significant facets of consumer marketing, the operation
of the related infrastructure and support services to vendors experienced in
the respective fields.
International. We believe we can leverage the DIRECTV brand name and market
leadership position in the United States in selected international markets. We
currently provide DIRECTV service in 26 countries in Latin America and in
Japan. Our direct-to-home broadcast business in Latin America is conducted
under the DIRECTV brand name by Galaxy Latin America, a partnership in which we
are the majority owner. The direct-to-home broadcast business in Japan is
conducted by DIRECTV Japan Management, Inc., a joint venture in which we hold a
42.2% ownership interest. We evaluate, on an ongoing basis, opportunities to
expand DIRECTV to serve other international markets.
As a result of the competitive environment in its international markets,
DIRECTV may have to incur increased subscriber acquisition costs through
competitive offers in the future to maintain or improve its market positions.
Latin America. Introduced in 1996, Galaxy Latin America was the first
direct-to-home satellite television service available in Latin America and
currently offers over 197 video and 35 audio channels. We hold a 77.8%
ownership share in Galaxy Latin America and Cisneros Group of Venezuela holds
22.2%.
Local operating companies in each country provide marketing, sales,
distribution, customer service and other infrastructure services. We believe
that having an equity stake, and in some situations a controlling interest, in
the local operating companies will help us to pursue a coordinated strategy
throughout Latin America. In furtherance of this strategy, we have recently
increased our ownership of the local operating company in Mexico and now manage
its day-to-day operations. Also, in July 1999, Galaxy Latin America acquired a
77.8% interest in Galaxy Brasil, Ltda., the exclusive distributor of DIRECTV
services in Brazil from Tevecap S.A. For further discussion of this
acquisition, see "--Recent Acquisitions--Galaxy Brasil, Ltda." Additionally, we
have purchased or plan to purchase an interest in each of the local operating
companies operating in other large Latin American markets, including Venezuela,
Colombia, Argentina and Puerto Rico.
As of June 30, 1999, there were approximately 601,000 subscribers in Latin
America. The local operating companies' average revenue per subscriber is
currently about $35 per month. Galaxy Latin America believes that approximately
one-half of television households in Latin America, or about 50 million
households, earn an income sufficient to afford multichannel pay television
services, but only a small fraction currently subscribe to such services.
Japan. We estimate that there are more than 40 million television households
in Japan, with very low cable penetration due to regulatory restrictions. We
believe that DIRECTV Japan's competitive strengths include its programming
line-up, which contains a number of unique local Japanese programs and major
U.S. programming channels, and its interactive services. The DIRECTV Japan
service commenced commercial operations in December 1997 with a partial
offering of channels. Full service began in April 1998 with 88 channels and
capacity was expanded to 190 channels in December 1998. As of June 30, 1999,
DIRECTV Japan had approximately 291,000 subscribers and average monthly revenue
per subscriber of about $40.
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PanAmSat
Highlights
. A leading commercial provider of global satellite communications
services, based on sales volume
. Global network of 19 satellites supported by seven teleport operations
facilities in the United States and more than 500 sales, marketing and
engineering employees on five continents
. A unique one-stop provider of global satellite services
Strategic Goals
. Pursue a satellite fleet expansion plan designed to provide unparalleled
growth and back-up resources for customers worldwide
. Continue to offer customers unique one-stop shopping for their national,
regional or global satellite transmission needs
. Expand innovative value-added services and applications such as Internet
distribution and HDTV
Through our 81% interest in PanAmSat Corporation, we offer comprehensive
end-to-end satellite services. PanAmSat, a publicly-held corporation traded on
the Nasdaq National Market System, was created through the merger of our Galaxy
satellite services operations and PanAmSat's satellite services operations in
May 1997. Today, the PanAmSat network:
. Distributes cable and broadcast television programming that reaches more
than 125 million households each day for clients including: CNN, CBS,
NBC, ABC, Disney, Fox, Sony, TCI, Viacom, Turner Broadcasting, ESPN, the
British Broadcasting Corporation, NHK (Japan), Cisneros Group
(Venezuela) and the Australian Broadcasting Corporation.
. Operates platforms for current and planned direct-to-home television
services to Latin America, South Africa, Taiwan and India that
cumulatively will broadcast more than 500 channels.
. Provides live transmission services for news, sports and special events
coverage, and transmits news coverage for virtually every major news
gathering organization in the world.
. Provides satellite services to more than 35 telecommunications carriers
worldwide, including MCI-WorldCom, Sprint, ImpSat, Microspace and
Telstra (Australia).
. Provides access to the U.S. Internet backbone in more than 50 countries
to Internet Service Providers or "ISPs" and other telecommunications
providers.
. Relays digitized data via more than 125,000 VSATs to the private
networks of clients such as the Associated Press, Citicorp, IBM,
Reuters, the University of Southern California and its largest VSAT
customer, Hughes Network Systems.
We believe that PanAmSat's global transmission capability, especially its
ability to transmit signals among all of the world's major regions, provides it
with a significant advantage over commercial competitors who operate fleets
limited to regional coverage. PanAmSat currently operates the largest
commercial network of communications satellites capable of remaining directly
above a fixed location on the earth, known as geosynchronous satellites, and
possesses the ability to transmit signals to a geographic area that includes
99% of the world's population. PanAmSat is the only commercial entity that
offers geosynchronous satellite services on a global, one-stop-shopping basis.
To maintain this advantage, PanAmSat plans to expand its fleet from 19
satellites to 25 by the end of 2001, increasing transponder capacity by about
70%, from about 530 transponders in 1998 to over 900 transponders in 2001. This
will involve the launch of seven additional satellites and the retirement of
one existing satellite. These additional satellites are intended to meet the
expected demand for additional satellite capacity, replace capacity affected by
satellite anomalies and provide additional back-up to existing capacity. See
"--Other Business Risks--We Are Vulnerable to Satellite Failure." The current
schedule reflects
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manufacturing delays at Hughes Space and Communications. See "Item 2. Financial
Information--Management's Discussion and Analysis of Results of Operations and
Financial Condition--General." There can be no assurance that the new schedule
for PanAmSat's future satellite launches will be met. Further delays in the
production or successful launch of these satellites could materially affect the
ability of PanAmSat to deliver services and benefit from the opportunities it
is currently pursuing. In addition, revenues attributable to satellites
affected by anomalies could be at reduced levels.
We consider PanAmSat's regulatory authorization to use various broadcast
spectrums and the desirable orbital locations of its satellite fleet to be a
significant competitive advantage. PanAmSat has regulatory approval to operate
its satellite fleet in the C-band, the traditional network and cable television
distribution band, the Ku-band, the band used for many telecommunications
services and direct-to-home television, or both bands. In addition, PanAmSat
has obtained Federal Communications Commission authorization for 9 licenses in
the Ka-band. The Ka-band is a high-powered frequency that will be used
primarily for broadband, high-speed data and Internet service offerings.
Like our other business units, PanAmSat seeks to obtain market leadership
positions by identifying, defining and developing new markets early. In 1983,
we revolutionized the television industry by launching Galaxy I, the first
cable television satellite for the United States. We pioneered the "cable
neighborhood" concept in the satellite services industry by securing key cable
programming for Galaxy I. Similar to the "anchor tenant" strategy pursued by
shopping mall operators, this strategy prompted a core group of cable operators
to focus their ground antennas on Galaxy I's orbital position. Because so many
cable head-end antennas were focused on Galaxy I, transmission capacity on the
satellite sold at a premium.
Additionally, in 1988, PanAmSat launched the PAS-1 Atlantic Ocean Region
satellite, becoming the first private-sector international satellite service
provider. In 1995, with the launch of the PAS-4 Indian Ocean satellite,
PanAmSat became the world's first private-sector company to provide global
satellite services.
PanAmSat provides satellite services to its customers primarily through
long-term operating lease contracts for the use of full or partial transponder
capacity. PanAmSat also offers services to its customers through sales and
sales-type lease contracts. PanAmSat currently provides service to hundreds of
video distribution and telecommunications customers worldwide. As of June 30,
1999, PanAmSat had long-term arrangements for satellite services representing
future payments of approximately $6.3 billion, including amounts due from
affiliated companies, as well as approximately $400 million relating to
arrangements on satellites that are under construction.
Broadband Services and Spaceway
Highlights
. Approval for $1.4 billion investment in Spaceway, a satellite-based
broadband communications network for North America
. Spaceway leverages our satellite industry leadership in manufacturing,
business networks, direct-to-home entertainment and services
. Spaceway is expected to utilize innovative satellite technology such as
on-board digital processing, packet switching and spot beams to offer
high-speed bandwidth-on-demand broadband services
. Spaceway is expected to seamlessly integrate and be compatible with
land-based systems
Strategic Goals
. Become the first satellite-based broadband service in North America
serving large businesses, telecommuters, small office/home office users
and consumers upon launch in 2002
. Upgrade a portion of Hughes Network Systems' existing extensive blue-
chip business and DirecPC customer base to Spaceway and sell broadband
services to DIRECTV subscribers
. Work with global strategic partners to roll out additional
geosynchronous systems in other regions as the markets develop
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. Further expand the Spaceway network's global capacity by launching
complementary nongeosynchronous satellites
As part of our broadband strategy, we intend to make an initial investment
of $1.4 billion in Spaceway. Spaceway will provide "bandwidth-on-demand," the
ability to transmit and receive data, video, audio, and multimedia while
offering customers the opportunity to use and pay for only the amount of
bandwidth they need for their specific application, from e-mail to high-
bandwidth, high-speed corporate networks. In addition, Spaceway is expected to
provide an overlay to current ground-based networks, providing network
operators with a wireless extension of their existing capabilities.
Offering satellite-based broadband services will be a key growth opportunity
for us in the 21st century, and we believe we will be among the first to a
market for which the demand has been forecast to increase dramatically in the
future. We expect that upon launch in North America in 2002, the Spaceway
platform will supply service providers, including Hughes Network Systems and
PanAmSat, with the ability to offer customers a wide range of two-way, high
data-rate applications under their own brands. These include desktop video
conferencing, distance learning, tele-imaging, corporate intranet and extranet
connectivity, and Internet access.
We are already a market leader in VSAT corporate data networking and
satellite broadband Internet businesses, many of which are Fortune 500
companies. In addition, through the new AOL strategic alliance, Hughes Network
Systems will deliver the AOL service via DirecPC. AOL also has acquired the
right to purchase capacity on the Spaceway platform to continue to enhance the
AOL service via DirecPC. See "--Hughes Network Systems." By migrating these
existing and planned DirecPC customers to the Spaceway platform, we expect to
provide expanded capabilities to these customers while keeping end-user costs
low enough to provide competitive advantages over ground-based and other
satellite-based offerings.
Our advanced technologies and networking services expertise will be the key
to Spaceway's success. The system will start with the construction and launch
of three HS 702 spacecraft to be built by Hughes Space and Communications, and
will utilize ground stations and very small satellite dishes designed by Hughes
Network Systems. PanAmSat will provide expertise in satellite and network
operations, and will resell capacity in certain markets. DIRECTV will cross-
sell the services to its extensive customer base.
We anticipate working with strategic global partners to roll out Spaceway
systems in other regions, including Europe, Latin America, Africa and Asia. As
these markets and the technology evolve, our strategy contemplates making
additional investments to add a fleet of spacecraft in lower earth orbits that
will support additional interactive broadband services, including services
without a transmission delay, in high-traffic markets.
Spaceway is still under development and is subject to a number of risks and
uncertainties. Thus, there can be no assurance that the introduction of the
Spaceway system will not be delayed or that the Spaceway system will ever be
implemented, or if implemented, that it will operate properly or be accepted by
the marketplace.
Hughes Network Systems
Highlights
. World's leading supplier of satellite-based private business networks,
based on an estimated worldwide market share of 55% to 60%
. Has shipped over 300,000 one-way and two-way VSATs to customers in 85
countries
. The second largest manufacturer of DIRECTV subscriber equipment
. Provides satellite-based high-speed access to the Internet through its
DirecPC service
Strategic Goals
. Maintain leadership in core markets for private business networks
. Significantly expand production of DIRECTV subscriber equipment
. Leverage products and technologies into service business opportunities
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. Aggressively market AOL service through DirecPC to consumers
. Lead our development of the emerging market for broadband communications
services
Hughes Network Systems is the leading supplier, based on market share, of
very small aperture terminals or VSATs used in satellite-based private business
networks. Hughes Network Systems has delivered or received orders for more than
300,000 of these terminals for use in the private networks of companies,
government agencies, universities and research institutions. These include more
than 9,000 terminals installed in the GM Pulsar network, currently the world's
largest private business network. Since 1987, Hughes Network Systems has sold
private business networks to a variety of customers worldwide, including
DaimlerChrysler, Ford, Toyota, Chevron, Texaco, Mobil, Amoco, Wal-Mart, Toys
"R" Us, Jusco (Japan) and France Telecom.
Hughes Network Systems developed DirecPC, a satellite-based information
delivery service that uses a small antenna and high-speed digital transmission
to make Internet access, software, documents, desk-top video, games, news and
other information accessible through personal computers. DirecPC allows
consumers to download data and video at speeds of up to 400 kilobits-per-
second. Through the AOL alliance, Hughes Network Systems plans to reposition
DirecPC to the consumer market, particularly to AOL's current customer base and
through the broad consumer electronics distribution network of Hughes Network
Systems and DIRECTV. This service will provide high-speed access to AOL content
and introduce new applications and services to the consumer.
Utilizing its expertise in private business networks, the AOL alliance and
advanced ground-based communications infrastructure, Hughes Network Systems
plans to focus on offering new broadband services via the Spaceway platform to
a wide range of customers, including its existing blue-chip customer base and
planned DirecPC customer base. Because of its early investments in broadband
technology and its networking expertise, Hughes Network Systems believes it
will be a leader in offering innovative broadband services to businesses,
government agencies and individuals.
Hughes Network Systems began manufacturing subscriber equipment for DIRECTV
in 1996 and is now the second leading supplier of this equipment in terms of
volume. Hughes Network Systems was able on short notice to increase its
production of DIRECTV receivers in 1998 to more than 650,000 units, enabling
DIRECTV to achieve record subscriber growth. Hughes Network Systems intends to
continue its production of DIRECTV units, including the new dual-feed, dual-
receive equipment for receiving local channels discussed above under "--
DIRECTV," and expects its production to continue to grow. Also, Hughes Network
Systems will design and build the initial dual purpose DIRECTV/AOL TV set-top
receivers for the DIRECTV/AOL interactive television Internet service discussed
above under "--DIRECTV." Other manufacturers may eventually build these
receivers as well.
Through Hughes Network Systems' DirecDuo, both the AOL service via DirecPC
and DIRECTV will be available, allowing customers to receive both DIRECTV
television entertainment and AOL content for the computer through a single
satellite dish.
We believe that significant opportunities exist for fixed wireless
telecommunications networks and mobile communications systems in areas with
deficient communications infrastructures. For example, in October 1998, Hughes
Ispat Limited, a limited liability company in which we have a minority
ownership interest, began providing basic telecommunications services within
the Indian state of Maharashtra.
We also believe that significant opportunities exist in utilizing digital
ground-based technologies to provide broadband fiber-quality wireless access to
businesses worldwide. For example, Hughes Network Systems has entered into
agreements to provide competitive local exchange carriers Winstar
Communications, Inc. and Teligent, Inc. with its AIReach(TM) Broadband system.
The AIReach Broadband system uses wireless technology to provide high-quality,
high-speed access to buildings not reached by fiber optic cables.
Hughes Network Systems believes that its technologies and other capabilities
position it to become a leading provider of satellite-based mobile
communications equipment and services. Several programs that have been awarded
in recent years to provide satellite ground telecommunications networking
equipment have established Hughes Network Systems' credentials in this sector.
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Hughes Space and Communications
Highlights
. Manufactured the world's first communications satellite capable of
remaining directly above a fixed location on the earth, known as a
geosynchronous satellite
. 98% cumulative channel availability on Hughes built in-orbit satellites
. Won over 50% of its competitive bids between 1991 and 1998
Strategic Goals
. Leverage technology leadership to gain a competitive advantage and
create new opportunities in our service businesses
. Provide customers with total satellite systems solutions
. Focus on quality in design and manufacturing
. Further improve productivity while decreasing the time it takes to build
a satellite
Hughes Space and Communications designs and builds satellite systems for
commercial customers worldwide and for the Department of Defense, NASA and
other government agencies. About 75% of Hughes Space and Communications
revenues in 1998 were from commercial customers.
As of June 30, 1999, Hughes Space and Communications had outstanding orders
to construct 32 communications satellites for companies and government agencies
in several countries, representing over $2.8 billion in backlog. In 1998, 11
satellites built by Hughes Space and Communications were launched and Hughes
Space and Communications expects to exceed that number in 1999. Launch
schedules are subject to a number of factors, some of which are beyond the
control of Hughes Space and Communications, including weather, availability of
launch vehicles, launch vehicle problems and governmental and political
pressures. Launch difficulties and delays, as well as construction delays, can
result in increased costs to Hughes Space and Communications.
We believe that Hughes Space and Communications' leadership position in the
competitive satellite manufacturing industry results from its technological
superiority in satellite design, production and operation. Since the launch of
Hughes Space and Communications' first satellite in 1963, its satellites have
accumulated over 1,000 years of in-orbit experience, with channel availability
of 98% on HS 376, HS 601 and other current generation in-orbit commercial
satellites. Approximately 95% of Hughes Space and Communications' satellites
have remained in service past their originally scheduled retirement dates.
Hughes Space and Communications' technological capabilities have enhanced
the power and capacity of its satellites and improved their cost effectiveness.
This enhances our competitiveness as a satellite manufacturer and also results
in increases in both revenue-per-satellite and the margin earned on those
revenues for satellite owners and operators. These improvements strengthen our
leadership position and expand the market for satellites as a whole. For
example, Hughes Space and Communications has developed a family of satellite
structures, electronics, propulsion and power systems which can be replicated
at relatively low cost in a variety of commercial and government
configurations. In addition, Hughes Space and Communications has applied signal
compression and other methods to enhance the efficiency of transponders. The
newest product in this family is the HS 702 satellite, which will offer
substantially higher power levels than those previously achieved. Advances in
digital electronics, high-power amplifiers, antenna implementations and
propulsion systems offer improved performance capabilities of satellites built
by Hughes Space and Communications, which we expect will provide us with a
competitive advantage both as a manufacturer and as a service provider.
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In order to enhance its competitive position in both the government and
commercial satellite manufacturing markets, Hughes Space and Communications
continues to work to lower its costs and improve productivity and quality. For
example, satellite manufacturing productivity has improved by approximately
64%, measured by satellite sales dollars per employee, since 1992, and order to
delivery cycle times have been reduced to as low as 12 to 14 months for new HS
376 and HS 601 spacecraft. In addition, Hughes Space and Communications has
secured commitments for 45 launch vehicles over the next several years, which
will facilitate its access to space at competitive costs.
Other
We own equity interests in other businesses in addition to those described
above. These businesses are reported as part of the "Other" segment in our
financial statements and the revenues of these businesses are not, in the
aggregate, material to us. For example, we are the largest stockholder of
American Mobile Satellite Corporation, with a current equity interest of
approximately 16%. American Mobile's common stock is publicly traded and other
stockholders include Motorola, Inc., Singapore Telecommunications, Ltd. and
AT&T Wireless Services. In addition, Broadband Services is currently reported
as part of the "Other" segment in our financial statements.
Acquisitions, Strategic Alliances and Divestitures
Due to rapid growth in the telecommunications and space industry,
particularly internationally, and increasing competitive pressures, we review
our competitive position on an ongoing basis and from time to time consider
various acquisitions, strategic alliances and divestitures in order to continue
to compete effectively, grow our business and allocate our resources
efficiently. It is especially important for us to form strategic partnerships
with other firms to bring together the necessary expertise, such as
distribution, market knowledge and technology, to address competitive pressures
and meet new market demands. We have done this in our DIRECTV businesses, our
network systems businesses and through our recent alliance with AOL. We also
seek acquisitions which will improve our position in these high growth and
increasingly competitive markets. The PRIMESTAR/Tempo Satellite and U.S.
Satellite Broadcasting Company transactions and the PanAmSat merger are
significant recent examples of this strategy. We continue to evaluate
acquisitions, alliances and divestitures, and from time to time engage in
discussions regarding possible transactions, which we believe will improve our
competitive position and financial results.
Regulation
Various aspects of our businesses are subject to federal and state
regulation. Noncompliance with these regulations may result in the suspension
or revocation of our licenses or registrations at issue, the termination or
loss of contracts at issue or the imposition of contractual damages, civil
fines or criminal penalties. In particular, our ability to sell satellites and
other technologies to customers outside the United States is dependent on our
obtaining export licenses from the United States government. See "--Other
Business Risks."
U.S. Government Contracts
We act as a prime contractor or major subcontractor with respect to U.S.
government programs. Principally, this business is performed by Hughes Space
and Communications. Sales to the U.S. government may be affected by:
. changes in acquisition policies;
. budget considerations;
. changing concepts of national defense;
. civilian space needs;
. spending priorities; and
. other factors that are outside our control.
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U.S. government spacecraft acquisition programs generally follow a life
cycle of three phases. The first is the research and development phase,
followed by an engineering development phase which includes the first
spacecraft, and finally progressing into a production phase for the remaining
spacecraft. The production phase may continue with refinements and improvements
for several years. Large programs with significant start-up costs, which are
usually incurred in the research and development phase, do not become
profitable until the engineering development phase. The U.S. government
typically uses multiple sources during the research and development phase to
intensify competition and selects one source to perform the later phases of the
program. Therefore, we may not be selected for engineering development and
production phases even when considerable resources have been expended in the
research and development phase of a program.
We perform our U.S. government business under two general types of
contracts:
. Fixed-Price Contracts. Under fixed-price contracts, we realize all the
benefit or detriment caused by decreased or increased costs of
performing the contract.
. Cost Reimbursement Contracts. Under cost reimbursement contracts, we
receive reimbursement of our reasonable costs that are allocable to the
particular contract and allowable under applicable regulations, plus a
fee.
Approximately 37% of our total sales to the U.S. government in 1998 were
under fixed-price contracts, and approximately 63% were under cost
reimbursement contracts. Net sales to the U.S. government in 1998 were
approximately $700 million.
Most of our contracts with the U.S. government which are the basis of our
backlog are incrementally funded and therefore are subject to appropriations
decisions subsequent to award. Once awarded, contracts may be contested by
other bidders. In addition, our contracts with the U.S. government are subject
to termination by the U.S. government, either for its own convenience or
because of our default. In the event of a termination for convenience, we may
not receive full reimbursement for our costs, and the profit or fee we receive
may be lower than that which we had expected for the portion of the contract
performed. In the event of a termination for default, normal contract remedies
generally apply.
The U.S. government has broad discretion to suspend or prohibit contractors
from engaging in new government business, and often determines the period of
suspension or prohibition. A contractor may be prohibited based on a conviction
or civil judgment involving various offenses, including fraud in connection
with obtaining or performing a public contract or subcontract, and may be
suspended, if indicted for such an offense or if there is other adequate
evidence that such an offense has been committed. Like other government
contractors, we are subject to civil and criminal audits and investigations of
our contracting activity. This liability includes potential contract cost
reductions due to the defective pricing claims. See "--Other Business Risks."
Competition
Although we have certain advantages which we believe help us compete in our
markets, each of our markets is highly competitive. Some of our competitors in
each of our markets have similar or better financial, technological and
personnel resources than us. As described elsewhere in this document, we
believe technological capabilities and innovation and the ability to invest in
new and developing businesses are critical to obtaining and maintaining
leadership in our markets and the communications industry in general. We cannot
assure you as to the effect that competition may have on our financial
condition or results of operations. See "--Other Business Risks."
. DIRECTV. DIRECTV faces stiff competition from local cable operators as
well as other direct-to-home satellite systems in each of its regional
markets. With respect to traditional cable television, DIRECTV believes
that it can compete effectively because it provides higher quality
picture and sound and greater programming variety and believes it
provides higher quality customer service. DIRECTV expects to face
increasing competition from digital cable television over time. Digital
cable is capable of delivering high quality picture and sound and a
broader range of programming
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than traditional cable. We believe that the current prohibition in the
United States on delivering by satellite local television channels into
local markets is a disadvantage with respect to competing with cable
television. Currently pending legislation would remove this prohibition.
See "--DIRECTV--United States."
With our acquisition of PRIMESTAR and the U.S. Satellite Broadcasting
Company merger, Echostar Communications Corporation is the only other
direct-broadcast service company currently in operation in the United
States. Echostar has recently announced its acquisition of the
satellites and orbital slots owned by The News Corporation Limited and
MCI WorldCom, Inc. DIRECTV faces competition from other direct broadcast
service providers in major regions of Latin America and in Japan.
DIRECTV service also competes with telephone companies, broadcast
television and other entertainment services, including video rentals. We
believe that DIRECTV can compete effectively through a combination of
its broad range of programming, including exclusive programming and
extensive distribution.
As a result of this competitive environment, DIRECTV in the United
States and internationally may have to incur increased subscriber
acquisition costs through competitive offers in the future to maintain
or improve its market positions.
. PanAmSat. PanAmSat primarily competes with companies and organizations
that own or utilize satellite or ground-based transmission facilities.
Satellite operators include global competitors such as Intelsat,
regional operators expanding globally, such as Loral Space and
Communications, Ltd., GE Americom, and Lockheed Martin Corporation, and
numerous other regional operators and governments. We believe PanAmSat
can compete favorably in its markets because of its large satellite
fleet, global satellite coverage and the location of its orbital
positions.
. Broadband Services. The Spaceway platform will face competition from
companies that offer both ground-based and satellite-based broadband
services. Companies offering ground-based broadband services include
AT&T Corp., Qwest Communications International, Inc., Time Warner Inc.
and Bell Atlantic Corporation. Companies who may offer satellite-based
broadband services include Teledesic LLC, Skybridge LP and Loral Space &
Communications Ltd.'s Cyberstar. We believe we will compete favorably
because of our advanced technology for satellites and the related ground
equipment, and because of Hughes Network Systems' and DIRECTV's existing
customer bases.
. Hughes Network Systems. Hughes Network Systems faces global competition
in the VSAT market from Gilat Satellite Networks Ltd. and in its
wireless communications markets from firms such as Lucent Technologies
Inc., Telefonaktiebolaget LM Ericsson, AT&T Corporation, as well as
other large telecommunications companies and the various regional Bell
operating companies. Hughes Network Systems faces competition from
RCA/Thomson Consumer Electronics and Sony Corporation in the
manufacturing of DIRECTV subscriber equipment. We believe that Hughes
Network Systems' technologies and other capabilities provide us with a
competitive advantage in its markets.
. Hughes Space and Communications. Hughes Space and Communications faces
competition in the United States from companies such as Loral Space &
Communications Ltd., Lockheed Martin Corporation, and TRW, Inc. and
internationally from Matra Marconi, Alcatel Alsthom S.A. and DASA. We
believe Hughes Space and Communications can compete favorably because of
its family of satellite structures, electronics, propulsion and power
systems and its technological capabilities. Hughes Space and
Communications' ability to compete with international satellite
manufacturers could be adversely impacted by U.S. government action. See
"--Other Business Risks--The U.S. Government Could Adversely Impact the
Ability of the U.S. Satellite Industry to Compete for Foreign Satellite
Commerce."
In addition, our businesses compete generally with other communications
technologies and systems, such as telecommunications systems for fixed and
mobile applications, fiber optics networks, cable systems, wireline telephony
and radio-based systems and other satellite-based systems.
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Research and Intellectual Property
The ability to continue to generate technological innovations is critical to
ensure our long-term success and the competitiveness of our business. See "--
Other Business Risks." The continued development of new technologies may
provide new and improved products which will continue to fuel business
opportunities and product improvements which, among other things, will enable
the extension of profitable production programs. Research and development is
carried on in each of our business units in connection with ongoing product
improvement efforts. In addition, HRL Laboratories LLC, a company of which we
own 50%, conducts long-range applied research in the specialized fields of
physics, chemistry, electronics and information sciences.
We utilize a large number of patents and trademarks which are held by us or
our affiliates. We believe that, in the aggregate, the rights existing under
such patents, trademarks and licenses are important. We believe that our
competitive position is dependent on research, engineering and production
capabilities. We actively pursue patent and trademark protections of our
technological and engineering innovations, and actively pursue enforcement of
our intellectual property rights.
Recent Developments
Investment by AOL. On June 21, 1999, we announced an expansion of our
strategic alliance with AOL to develop and market digital entertainment and
Internet services nationwide. The new alliance is intended to accelerate
subscriber growth and revenue-per-subscriber for DIRECTV and DirecPC, as well
as expand the subscriber base for AOL's developing AOL TV and AOL-Plus
services. As part of the alliance, Hughes and AOL plan to jointly develop new
content and interactive services for U.S. and international markets.
Additionally, an extensive cross-marketing initiative will be instituted to
market each company's products and services through their respective retail
outlets and to their respective subscribers. As part of the marketing
initiative, we have committed to spend over the next three years for sales and
marketing activities more than $500 million for DirecPC/AOL-Plus, up to
approximately $500 million for DIRECTV, approximately $400 million for
DIRECTV/AOL TV, and approximately $100 million for DirecDuo.
Also as part of the alliance, AOL invested $1.5 billion in shares of a
General Motors preferred equity security. General Motors, in turn, invested the
proceeds received from AOL in shares of a Hughes preferred equity security. See
"Item 2. Financial Condition--Management's Discussion and Analysis of Results
of Operations and Financial Condition" for a further discussion of this
investment.
Issuance of Debt. We have filed a shelf registration statement with the
Securities and Exchange Commission with respect to an issuance of up to $2
billion of debt securities from time to time. We expect to issue up to $1
billion of these securities in the third quarter of 1999. We will use these
funds principally to repay commercial paper borrowings we incurred in
connection with the PRIMESTAR/Tempo Satellite and U.S. Satellite Broadcasting
Company transactions and to fund our short-term working capital requirements.
Recent Acquisitions
We have recently made the following acquisitions:
PRIMESTAR and Tempo Satellite
We acquired the direct-broadcast satellite medium-power business of
PRIMESTAR and the related high-power satellite assets of Tempo Satellite, a
wholly owned subsidiary of TCI Satellite Entertainment, in related
transactions. PRIMESTAR operates a 160-channel medium-power direct broadcast
service using leased satellite capacity at 85(degrees) west longitude. As of
March 31, 1999, PRIMESTAR had 2.3 million subscribers in the United States.
DIRECTV intends to operate the medium-power PRIMESTAR business for a period of
approximately two years, during which time PRIMESTAR subscribers will be
offered the opportunity to transition to the high-power DIRECTV service. During
this period, PRIMESTAR's distribution network will continue servicing PRIMESTAR
subscribers and begin offering the DIRECTV service to new subscribers.
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The purchase price for the PRIMESTAR medium-power business was approximately
$1.1 billion in cash and approximately 4.9 million shares of Class H common
stock. The purchase price for the Tempo high-power satellite assets was $500
million in cash. Of this purchase price, $150 million was paid in March 1999
for a satellite that has not yet been launched, and the remaining $350 million
was paid in June 1999 for an in-orbit satellite and 11 related satellite
orbital frequencies.
The PRIMESTAR acquisition provides DIRECTV with an immediate increase in
revenues from the existing PRIMESTAR subscribers, and ongoing revenues from
those subscribers that transition to the DIRECTV service.
The Tempo Satellite in-orbit satellite and related frequencies acquisition
provides DIRECTV with 11 high-power DBS frequencies at 119(degrees) west
longitude, from which it can begin delivering programming to the contiguous
United States at any time.
U.S. Satellite Broadcasting Company
We acquired by merger all of the outstanding capital stock of U.S. Satellite
Broadcasting Company in exchange for cash and shares of Class H common stock
totaling approximately $1.6 billion. U.S. Satellite Broadcasting Company
provided subscription television programming to households throughout the
continental United States via the digital satellite broadcasting system that it
shared with DIRECTV. U.S. Satellite Broadcasting Company delivered 25 channels
of video programming, including premium networks such as HBO(R), Showtime(R),
Cinemax(R) and The Movie Channel(R). The programming delivered by U.S.
Satellite Broadcasting Company included over 800 movies per month.
As of March 31, 1999, U.S. Satellite Broadcasting Company had over 2.2
million subscribers. Over 90% of U.S. Satellite Broadcasting Company's
subscribers were also DIRECTV subscribers. DIRECTV has begun integrating the
U.S. Satellite Broadcasting Company business into its business and offering
more diverse programming packages to subscribers, including the premium
programming offered by U.S. Satellite Broadcasting Company.
The acquisition of U.S. Satellite Broadcasting Company provides DIRECTV
with:
. a simplified offer to the consumer;
. the opportunity to achieve cost savings through the consolidation of
duplicate operations;
. the opportunity to increase its average revenue per subscriber; and
. the ability to expand its channel offering from 185 to more than 210 via
the addition of U.S. Satellite Broadcasting Company's premium channels.
Galaxy Brasil, Ltda.
On July 28, 1999, Galaxy Latin America, acquired 77.8% of Galaxy Brasil,
Ltda., the exclusive distributor of DIRECTV services in Brazil, from Tevecap
S.A. for approximately $89.0 million plus the assumption of debt. In connection
with the transaction, Tevecap sold its 10% equity interest in Galaxy Latin
America to us and Cisneros Group, the remaining Galaxy Latin America partners.
Our share of the purchase amounted to approximately $101.1 million and
increased our ownership of Galaxy Latin America to 77.8%.
Class H Common Stock Issued in the PRIMESTAR and U.S. Satellite Broadcasting
Company Acquisitions
In connection with the PRIMESTAR acquisition, 4,871,448 shares of Class H
common stock were issued to PRIMESTAR. These shares were not registered under
the Securities Act of 1933 and may not be transferred
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prior to April 28, 2000, except for limited transfers from PRIMESTAR to its
stockholders and certain related parties. Under an agreement with General
Motors, PRIMESTAR and these other holders, at any time after February 28, 2000,
may demand on two occasions registration of these shares under the Securities
Act of 1933, provided that General Motors is not required to register any
shares that can be sold publicly without registration. As a result, shares held
by non-affiliates of General Motors will generally not be entitled to
registration rights after April 28, 2000. General Motors has the right to delay
any required registration if it certifies that registration could materially
interfere with the business activities or plans of our company or General
Motors. General Motors may not delay any registration for more than an
aggregate of 90 days in any 12-month period. In addition, General Motors is not
required to register any shares for 30 days prior to the anticipated
consummation of a public offering by General Motors of its securities and 90
days after the completion of the public offering where, in the good faith
judgment of the managing underwriter(s), registration would have an adverse
effect on the offering. General Motors will be required to bear the expenses of
all required registrations and provide customary indemnification to the selling
holders.
Of the shares of Class H common stock to be issued in the U.S. Satellite
Broadcasting Company acquisition, we currently expect that a substantial
portion will not be freely transferable and may only be transferred in
accordance with Rule 145 under the Securities Act of 1933. In addition, the
holders of these restricted shares have agreed that, in connection with any
underwritten offerings of Class H common stock prior to May 20, 2001, they will
sign lock-up agreements with similar provisions, including as to the lock-up
period, to those entered into by General Motors and/or other stockholders of
General Motors.
Other Business Risks
The following risks are related principally to our business. The risks and
uncertainties described below are not the only ones facing our business. You
should carefully review the information set forth elsewhere in this
registration statement. Additional risks and uncertainties not presently known
to us or that we currently believe to be immaterial may also adversely affect
our business. If any of the following risks and uncertainties develop into
actual events, our business, financial condition or results of operations could
be materially adversely affected.
We Will Be Adversely Affected If We Fail to Maintain Leading Technological
Capabilities
The rapid technological changes and innovation inherent in the satellite and
wireless communications industry could cause the products and services offered
by our company to become obsolete. If the new technologies on which we are
currently focusing our research and development investments fail to achieve
acceptance in the marketplace, we would suffer a material adverse effect on our
future competitive position and results of operations. For example, our
competitors could be the first to obtain proprietary technologies that are
perceived by the market as being superior. In addition, after substantial
research and development expenditures, one or more of the technologies under
development by us could become obsolete even prior to its introduction.
Our operating results will depend to a significant extent on our ability to
continue to introduce new products and services on a timely basis and to reduce
costs of existing products and services. We cannot assure you that we will
successfully identify new product or service opportunities and develop and
market these opportunities in a timely or cost-effective manner. The success of
new product development depends on many factors, including proper
identification of customer needs, cost, timely completion and introduction,
differentiation from offerings of competitors and market acceptance.
Technological innovation depends, to a significant degree, on the work of
technically skilled employees. Competition for the services of such employees
is vigorous. We cannot assure you that we will be able to attract and retain
these employees. If we were unable to attract and maintain technically skilled
employees, our competitive position could be adversely affected.
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We Could Have Inadequate Access to Capital for Growth
We may not be able to raise adequate capital to complete some or all of our
business strategies or to react rapidly to changes in technology, products,
services or the competitive landscape. We believe that key success factors in
the satellite and wireless communications industry include superior access to
capital and financial flexibility. Industry participants often face high
capital requirements in order to take advantage of new market opportunities,
respond to rigorous competitive pressures and react quickly to changes in
technology. For example, as a result of its competitive environment, DIRECTV
may have to incur increased subscriber acquisition costs through competitive
offers in the future to maintain its market leadership.
We expect the global satellite and wireless communications services market
to continue to grow due to the high demand for communications infrastructure
and the opportunities created by industry deregulation. Many of our competitors
are committing substantial capital and, in many instances, are forming
alliances to acquire or maintain market leadership. Our strategy is to be a
leader in providing satellite and wireless communications products and services
by building on our experience in satellite technology and by making
acquisitions and establishing, maintaining and restructuring strategic
alliances as appropriate. See "--Recent Acquisitions." This strategy will
require substantial investments of capital over the next several years. We may
be unable to satisfy our capital requirements in the future, whether through
lack of competitive access to capital markets, General Motors' overall
financial condition or otherwise. General Motors' ability to issue Class H
common stock as a means of funding our capital requirements may be limited in
the event of the enactment of a proposal to amend the Internal Revenue Code
that is included in the Clinton administration's budget proposal for the fiscal
year 2000. This amendment, which is proposed to apply to tracking stock,
including exercises of existing employee stock options, issued on or after the
date of enactment, would require General Motors to recognize gain for federal
income tax purposes when it issues Class H common stock. We do not know whether
or in what form this legislation will be adopted.
We could be adversely affected by our customers' inability to obtain
financing.
Certain customers of Hughes Space and Communications and Hughes Network
Systems are dependent from time to time upon third party equity or debt
financing in order to pay for products and services purchased from us. Our
collection of amounts due to us from these customers may be adversely affected
by any inability on their part to obtain this financing. If these customers are
unable to obtain, or are delayed in obtaining, third party financing, and were
therefore unable to pay amounts due to us in the future, we may incur
substantial losses related to costs we have incurred in excess of amounts
collected to date from such customers. This could also have a negative affect
on our future cash flows.
We are Vulnerable to Satellite Failure
DIRECTV, including the operations of PRIMESTAR, PanAmSat and other
businesses of ours own or utilize satellites in their businesses. Orbiting
satellites are subject to the risk of failing prematurely due to, among other
things, mechanical failure, a collision with objects in space or an inability
to maintain proper orbit. Satellites are subject to the risk of launch delay
and failure, destruction and damage while on the ground or during launch and
failure to become fully operational once launched. 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
these businesses. With respect to both in-orbit and launch problems, insurance
carried by PanAmSat and our company does not compensate for business
interruption or loss of future revenues or customers. In addition, any future
in-orbit failures involving satellites built by our company could adversely
impact satellite sales by Hughes Space and Communications.
These risks were highlighted during 1998, when four Hughes-built satellites,
three owned and operated by PanAmSat and the fourth owned by DIRECTV,
experienced the failure of a primary spacecraft control processor. With the
exception of the Galaxy IV satellite owned and operated by PanAmSat, control of
the satellites was automatically switched to the backup spacecraft control
processor and the spacecraft are operating
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normally. The backup spacecraft control processor on the Galaxy IV satellite
had previously failed, resulting in the loss of the satellite.
An extensive investigation by us revealed that electrical shorts involving
tin-plated relay switches were the most likely cause of the primary spacecraft
control processor failures. The failure of the second spacecraft control
processor on Galaxy IV appears to be unrelated and is being treated as an
isolated anomaly.
In total, 14 satellites owned by PanAmSat and three satellites owned by
DIRECTV were constructed by Hughes Space and Communications. Of these, five
PanAmSat satellites and the three DIRECTV satellites, which include the
satellites described above, are the same model spacecraft as the affected
satellites and have tin-plated relay switches similar to the switches on the
failed spacecraft control processors. We cannot assure you that additional
spacecraft control processor failures will not occur on these satellites.
Battery anomalies have occurred in two other Hughes-built PanAmSat
satellites. In both cases, battery cells have failed, resulting in the need to
briefly shut-off a number of transponders for a brief time during twice-yearly
eclipse periods. It is possible that service to full-time customers could be
interrupted for brief periods during future eclipse periods, or that additional
battery cell failures could occur in the future. Such future interruptions,
depending on their extent, could result in claims by affected customers for
termination of their transponder agreements.
During April 1999, the primary spacecraft control processor failed on a
satellite built by our company for an unaffiliated customer. While the
investigation into the cause of the failure is still in process, it is likely
that the failure was caused by the same factors that caused the spacecraft
control processor failures described above.
In addition, following the launch of a PanAmSat satellite that was not built
by Hughes Space and Communications, an error by the satellite's manufacturer
was discovered that affected the geographical coverage or flexibility of a
number of the transponders on the satellite. PanAmSat is evaluating the impact
of the error and currently believes that a portion of those transponders will
not be marketable for their intended purpose, although the affected
transponders may be capable of generating revenue at a reduced rate.
Grand Jury Investigation/State Department Review Could Result in Sanctions
There is a pending grand jury investigation into whether we should be
accused of criminal violations of the export control laws arising out of the
participation of two of our employees on a committee formed to review the
findings of the Chinese engineers regarding the failure of a Long March rocket
in China in 1996. We are also subject to the authority of the State Department
to impose sanctions for non-criminal violations of the Arms Export Control Act.
The possible criminal and/or civil sanctions could include fines as well as
debarment from various export privileges and participation in government
contracts. We do not expect the grand jury investigation or State Department
review to result in a material adverse effect upon our business. However, we
cannot assure you as to those conclusions. In addition, a congressional
committee chaired by Representative Cox released a report in May 1999
containing negative commentary about the compliance of U.S. satellite
manufacturers, including our company, with the export control laws. We are
uncertain of the impact that this report will have on the satellite
manufacturing and launching industries. Many of our satellite launches,
including those of PanAmSat, are scheduled for non-U.S. launch providers. We
cannot assure you that future satellite launches by non-U.S. launch providers
will not be adversely affected by this investigation and report, including the
possibility of significant launch delays.
The U.S. Government Could Adversely Impact the Ability of the U.S. Satellite
Industry to Compete for Foreign Satellite Commerce
The U.S. government has broad discretion over the issuance of export
licenses for the sale to foreign customers and/or overseas launches of
commercial communication satellites. We sell a substantial number of satellites
to foreign customers and launch a substantial number of satellites overseas.
Effective March 1999,
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Congress directed that satellites and their components be placed on the
munitions list and made subject to the export licensing jurisdiction of the
State Department. Prior to March 1999, satellites were classified as dual-use
exports under the jurisdiction of the Department of Commerce. It is anticipated
that future licenses for satellite exports will not be granted in the same
manner and time frame as was previously the case, which could adversely impact
the ability of not only our company, but all other domestic satellite
manufacturers, to compete on equal footing with international satellite
manufacturers for foreign satellite sales.
In February 1999, the Department of Commerce notified us that it intended to
deny the export licenses required by us to fulfill our contractual obligations
to Asia-Pacific Mobile Telecommunications Satellite Pte. Ltd., a Singapore-
based company with a majority interest held by Chinese entities. As a result,
we and Asia-Pacific Mobile Telecommunications terminated the contract,
resulting in a pre-tax charge to our earnings of $92.0 million in the first
quarter of 1999. See "Item 2. Financial Information--Management's Discussion
and Analysis of Results of Operations and Financial Condition."
Disputes with Raytheon Company Regarding Former Defense Operations Could
Result in a Material Payment from Our Company to Raytheon Company
In connection with the 1997 spin-off of the defense electronics business of
our predecessor and the subsequent merger of that business with Raytheon
Company, the terms of the merger agreement provided processes for resolving
disputes that might arise in connection with post-closing financial adjustments
that were also called for by the terms of the merger agreement. These financial
adjustments might require a cash payment from Raytheon to our company or vice
versa. A dispute currently exists regarding the post-closing adjustments which
our company and Raytheon have proposed to one another and related issues
regarding the adequacy of disclosures made by us to Raytheon in the period
prior to consummation of the merger. Raytheon and our company 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 our company making a payment to Raytheon that would be
material to us. However, the amount of any payment that either party might be
required to make to the other cannot be determined at this time. We intend to
vigorously pursue resolution of the disputes through the arbitration process,
opposing the adjustments proposed by Raytheon, and seeking the payment from
Raytheon that we have proposed.
We Might Fail to Realize the Benefits of Recent Acquisitions
We cannot assure you that the anticipated benefits of the PRIMESTAR/Tempo
Satellite and U.S. Satellite Broadcasting Company acquisitions will be
realized. We could experience difficulties integrating the operations of these
companies with our own operations, or could find that the anticipated cost
savings from such integration do not materialize.
Employees
As of March 31, 1999, we employed approximately 15,500 persons.
As of March 31, 1999, approximately 13% of our work force in the United
States was represented by unions. We have not experienced any significant labor
problems in the past five years, and management considers its employee
relations to be good.
Item 2. Financial Information
Management's Discussion and Analysis of Results of Operations and Financial
Condition
As provided in General Motors' restated certificate of incorporation, the
earnings attributable to Class H common stock for purposes of determining the
amount available for the payment of dividends on Class H common stock excludes
purchase accounting adjustments related to General Motors' acquisition of
Hughes Aircraft Company, our predecessor, in 1985. Therefore, the following
discussion excludes such adjustments.
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You should review this section in connection with our summary financial
statements, which exclude these adjustments, and our audited financial
statements, which reflect these adjustments, both of which are included in this
registration statement.
General
On December 17, 1997, our predecessor, which was also known as Hughes
Electronics Corporation, and General Motors completed a series of transactions
designed to address strategic challenges facing its then-three principal
businesses and unlock stockholder value in General Motors. These transactions
included:
. the tax-free spin-off of its defense electronics business to holders of
General Motors $1-2/3 common stock and Class H common stock;
. the transfer of Delco Electronics Corporation, its automotive
electronics business, to General Motors' Delphi Automotive Systems unit,
which is now a separate corporation; and
. the recapitalization of General Motors Class H common stock into a new
tracking stock of the same name, that is linked to our
telecommunications and space businesses.
These transactions were followed immediately by the merger of the defense
electronics business with Raytheon Company. In connection with this
recapitalization, the telecommunications and space business, consisting
principally of the direct-to-home broadcast, satellite services, network
systems and satellite systems businesses, were contributed to the recapitalized
Hughes by our predecessor. The following discussion and accompanying financial
statements pertain only to our company as it now exists, and do not pertain to
balances of our company for the period prior to our recapitalization, the
defense electronics business or Delco. For additional information on the basis
of presentation, see Note 1 to our financial statements included elsewhere in
this registration statement.
In May 1997, our company and PanAmSat Corporation merged their respective
satellite service operations into a new publicly-held company, which retained
the name PanAmSat Corporation. As a result of this merger, our 1997 financial
information includes PanAmSat's results of operations from the date of merger.
For further information regarding this merger, see note 14 to our financial
statements included elsewhere in this registration statement.
During 1998, four satellites built by Hughes Space and Communications
experienced the failure of a primary spacecraft control processor. Three of
these satellites were owned and operated by PanAmSat and the fourth was owned
by DIRECTV. With the exception of the Galaxy IV satellite, operated by
PanAmSat, control of the satellites was automatically switched to the spare
spacecraft control processor and the spacecraft are operating normally. The
spare spacecraft control processor on the Galaxy IV satellite had previously
failed, resulting in the loss of the satellite.
An extensive investigation by us revealed that electrical shorts involving
tin-plated relay switches are the most likely cause of the primary spacecraft
control processor failures. The failure of the second spacecraft control
processor on Galaxy IV appears to be unrelated and is being treated as an
isolated anomaly. Although there exists the possibility of failure of other
currently operating spacecraft control processors, we believe the probability
of a primary and spare spacecraft control processor failing in any one in-orbit
HS-601 satellite is low. We believe that the phenomenon will not be repeated on
satellites currently being built and those ready for launch, although there can
be no assurance in this regard.
In total, 14 satellites owned by PanAmSat and three satellites owned by
DIRECTV were constructed by Hughes Space and Communications. Of these, five
PanAmSat satellites and the three DIRECTV satellites, which include the
satellites described above, are the same model spacecraft as the affected
satellites and have tin-plated relay switches similar to the switches on the
failed spacecraft control processors. We cannot assure you that additional
spacecraft control processor failures will not occur on these satellites.
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Battery anomalies have occurred on two other PanAmSat satellites that we
built. In both cases, battery cells have failed, resulting in the need to shut-
off a number of transponders for a brief time during twice-yearly eclipse
periods. To date, the impact on customers has been minimal. There can be no
assurance, however, that service to all full-time customers will not be
interrupted for brief periods during future eclipse periods or that additional
battery cell failures will not occur in the future. Such future service
interruptions, depending on their extent, could result in a claim by affected
customers for termination of their transponder agreements or the displacement
of other customers. PanAmSat is developing solutions for its customers that may
include transition of the affected services to other PanAmSat satellites or the
launch of replacement satellites.
During April 1999, the primary spacecraft control processor failed on a
satellite built by Hughes Space and Communications for an unaffiliated
customer. While the investigation into the cause of the failure is still in
process, it is likely that the failure was caused by the same factors that
caused the spacecraft control processor failures described above.
In addition, following the launch of a PanAmSat satellite that was not built
by Hughes Space and Communications, an error by the satellite's manufacturer
was discovered that affected the geographical coverage or flexibility of a
number of the transponders on the satellite. PanAmSat is evaluating the impact
of the error and currently believes that a portion of those transponders will
not be marketable for their intended purpose, although the affected
transponders may be capable of generating revenue at a reduced rate.
In August 1998, Galaxy X, a PanAmSat satellite, was destroyed as a result of
the launch failure of a Boeing Delta III rocket. Galaxy X was fully insured.
In 1998, PanAmSat adopted a comprehensive satellite expansion and
restoration plan pursuant to which PanAmSat would expand its fleet of
satellites in 1999 and 2000. The additional satellites are intended to meet the
expected demand for additional satellite capacity, replace capacity affected by
satellite anomalies, and provide added backup to existing capacity. In
connection with the plan, seven satellites are under construction by Hughes
Space and Communications. As a result of manufacturing delays being experienced
by Hughes Space and Communications, however, it is expected that there will be
delays in the launch of these satellites. PanAmSat now expects to launch one
additional satellite in 1999, followed by five satellites in 2000 and one in
2001. It is expected that these delays will result in 1999 revenues and
earnings at PanAmSat that are significantly lower than previously anticipated.
A substantial portion of these revenues and earnings previously anticipated in
1999 are expected to be recognized in future years after the satellites
commence commercial service.
On February 24, 1999, the Department of Commerce notified us that it
intended to deny a U.S. government export license we were required to obtain in
connection with a contract with Asia-Pacific Mobile Telecommunications
Satellite Pte. Ltd. for the provision of a satellite-based mobile
telecommunications system. As a result, we and Asia-Pacific Mobile
Telecommunications terminated the contract on April 9, 1999, resulting in a
pre-tax charge to our earnings of $92 million in the first quarter of 1999.
This charge represents the write-off of receivables and inventory, with no
alternative use, related to the contract.
We have maintained a suit against the U.S. government since September 1973
regarding the U.S. government's infringement and use of one of our satellite
technology patents. On April 7, 1998, the U.S. Court of Appeals for the Federal
Circuit reaffirmed earlier decisions in this case, including an award of $114.0
million in damages, plus interest. In March 1999, we received and recognized as
income a $154.6 million payment from the U.S. government as a final settlement
of the suit.
There is a pending grand jury investigation into whether we should be
indicted for criminal violations of the export control laws arising out of the
participation of two of our employees on a committee formed to review the
findings of the Chinese engineers regarding the failure of a Long March rocket
in China in 1996. We are also subject to the authority of the State Department
to impose sanctions for non-criminal violations of the Arms Export Control Act.
The possible criminal and/or civil sanctions could include fines as well as
debarment from various export privileges and participation in government
contracts. We do not expect the
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grand jury investigation or State Department review to result in a material
adverse effect upon our business. However, there can be no assurance as to
those conclusions. In addition, a congressional committee chaired by
Representative Cox released a report in May 1999 containing negative commentary
about the compliance of U.S. satellite manufacturers, including our company,
with export control laws. We are uncertain of the impact that this report will
have on the satellite manufacturing industry.
On March 17, 1999, we announced our intent to make an initial investment of
$1.4 billion in the Spaceway(TM) satellite system. The Spaceway system, when
completed, will provide for high speed, two-way communications of video, voice
and data direct to companies and individual consumers. We expect that the
initial investment will allow us to build three high-powered satellites to
provide broadband network services "on demand" for video-conferencing, data
transfer and other purposes in North America in 2002. We are currently
investigating subsequent phases in which we would provide Spaceway services to
most of the world using high-orbit satellites as well as complementary services
from a low-orbit system. These subsequent phases would require significant
additional investment.
On May 5, 1999, DIRECTV announced plans for delivering local broadcast
network channels by satellite to DIRECTV customers in major metropolitan areas
across the United States. The delivery of local network channels into DIRECTV's
domestic local markets, also referred to as local-into-local, is contingent
upon the passage by Congress of legislation that has been introduced that will
allow satellite companies to provide the local-into-local service. DIRECTV
plans to utilize its existing satellites to deliver the local-into-local
service to the New York and Los Angeles markets, and utilize the frequencies
acquired from Tempo Satellite to deliver the local-into-local service to
DIRECTV's other major metropolitan markets. To receive local channels, outside
the Los Angeles and New York markets, consumers will have to purchase a small
elliptical-shaped dish, which is expected to be available later this year.
There can be no assurance that the necessary legislation will be passed by
Congress.
On May 11, 1999, it was announced that DIRECTV and Hughes Network Systems
will collaborate with AOL on a new service that will combine digital satellite
television programming from DIRECTV with AOL's new interactive television
Internet service. Hughes Network Systems will design and build the initial dual
purpose DIRECTV/AOL receiver equipment. The new service will be suited for both
frequent Internet users and the mass market consumer who wants to connect to
the Internet.
On June 21, 1999, we announced an expansion of our strategic alliance with
AOL to develop and market digital entertainment and Internet services
nationwide. The new alliance is intended to accelerate subscriber growth and
revenue-per-subscriber for DIRECTV and DirecPC, as well as expand the
subscriber base for AOL's developing AOL TV and AOL-Plus services. As part of
the alliance, Hughes and AOL plan to jointly develop new content and
interactive services for U.S. and international markets. Additionally, an
extensive cross-marketing initiative will be instituted to market each
company's products through their respective retail outlets and to their
respective subscribers. As part of the marketing initiative, we have committed
to spend over the next three years for sales and marketing activities more than
$500 million for DirecPC/AOL-Plus, up to approximately $500 million for
DIRECTV, approximately $400 million for DIRECTV/AOL TV, and approximately $100
million for DirecDuo.
As part of the alliance, AOL invested $1.5 billion in shares of General
Motors Series H 6.25% Automatically Convertible Preference Stock. The General
Motors Series H preference stock will automatically convert into Class H common
stock in three years and may be converted earlier in certain circumstances,
based upon a variable conversion factor linked to the Class H common stock
price at the time of conversion, and accrues quarterly dividends at a rate of
6.25% per year. General Motors immediately invested the $1.5 billion received
from AOL in shares of Hughes Series A Preferred Stock designed to correspond to
the financial terms of the General Motors Series H preference stock. Dividends
on the Hughes Series A preferred stock are payable to General Motors quarterly
at an annual rate of 6.25%. These preferred stock dividends payable to General
Motors will reduce Hughes' earnings used for computation of the available
separate consolidated net
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income of Hughes attributed to General Motors Class H common stock, which will
have an equivalent effect to the payment of dividends on the Series H preferred
stock if those dividends were paid by Hughes. Upon conversion of the General
Motors Series H preference stock into General Motors Class H common stock,
Hughes will redeem the Series A preferred stock through a cash payment to
General Motors equal to the fair market value of the Class H common stock
issuable upon the conversion. Simultaneous with General Motors' receipt of the
cash redemption proceeds, General Motors will make a capital contribution to
Hughes of the same amount. In connection with this capital contribution, the
denominator of the fraction used in the computation of the available separate
consolidated net income of Hughes attributed to General Motors Class H common
stock will be increased by the number of shares of General Motors Class H
common stock issued. Accordingly, upon conversion of the General Motors Series
H preference stock into General Motors Class H common stock, both the numerator
and denominator used in the computation of available separate consolidated net
income will increase by the amount of the General Motors Class H common stock
issued.
Under an agreement with General Motors, AOL, at any time after the
occurrence of certain events related to the conversion of the General Motors
Series H preference stock to General Motors Class H common stock, may demand on
up to four occasions registration of the Class H common stock issued upon
conversion under the Securities Act of 1933, provided that General Motors is
not required to register any shares that can be sold publicly without
registration. General Motors has the right to delay any required registration
if it certifies that registration could materially interfere with the business
activities or plans of our company or General Motors and upon certain other
instances. General Motors may not delay any registration for more than an
aggregate of 90 days in any 12 month period. In addition, General Motors is not
required to register any shares for 30 days prior to the anticipated
consummation of a public offering by General Motors of its securities and 90
days after the completion of the public offering where, in the good faith
judgment of the managing underwriter(s), registration would have an adverse
effect on the offering. As between General Motors and AOL, General Motors will
be required to bear the expenses of all required registrations and provide
customary indemnification to the selling holders.
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
Revenues. First quarter 1999 revenues increased 12.5% to $1,451.8 million
compared with $1,291.0 million in the first quarter of 1998. The increase in
first quarter 1999 revenues reflects continued growth in the DIRECTV
businesses.
Direct-To-Home Broadcast segment first quarter 1999 revenues increased 43.5%
to $556.6 million from $387.9 million in the first quarter of 1998. The
increase resulted from continued record subscriber growth, higher average
monthly revenue per subscriber and low subscriber churn rates. Domestic DIRECTV
contributed significantly to this growth with quarterly revenues of $474
million, a 34% increase over last year's first quarter revenues of $353
million. With its best-ever first quarter of 304,000 net new subscribers in the
United States, total DIRECTV subscribers grew to 4,762,000 as of March 31,
1999. Our Latin American DIRECTV subsidiary, Galaxy Latin America, nearly
doubled its revenues to $61 million from $31 million in the first quarter of
1998. With the addition of 70,000 net new subscribers in the first quarter, an
84% increase over the 38,000 net new subscribers acquired in the same period
last year, total DIRECTV subscribers in Latin America were 554,000 as of March
31, 1999.
The Satellite Services segment's first quarter 1999 revenues increased to
$193.5 million compared with $193.0 million in the prior year. The slight
change in revenues resulted primarily from an increase in telecommunication
services revenue, primarily due to growth in data and Internet-related service
agreements.
First quarter 1999 revenues for the Network Systems segment were $230.9
million compared with $184.7 million in the same period last year, an increase
of 25.0%. This increase in revenues was primarily due to higher sales of
DIRECTV receiver equipment and satellite-based mobile telephony systems.
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For the first quarter of 1999, revenues for the Satellite Systems segment
increased to $630.3 million from $624.3 million for the same period in 1998.
Increased sales to commercial customers of $31 million, including Thuraya
Satellite Telecommunications, ICO Global Communications and PanAmSat were
largely offset by $25 million of lower sales on government contracts such as
UHF Follow-on and Tracking and Data Relay Satellites.
Costs and Expenses. Selling, general and administrative expenses increased
to $404.8 million in the first quarter of 1999 from $302.6 million in the same
period of 1998. The increase resulted primarily from higher programming,
marketing and subscriber acquisition costs in the Direct-To-Home Broadcast
segment. The increase in depreciation and amortization expense to $123.0
million in the first quarter of 1999 from $97.7 million in the same period of
1998 resulted primarily from higher depreciation due to additions to PanAmSat's
satellite fleet and increased goodwill amortization related to the May 1998
purchase of an additional 9.5% interest in PanAmSat.
Operating Profit (Loss). We incurred an operating loss of $36.8 million in
the first quarter of 1999 compared with operating profit and operating profit
margin, on the same basis, of $83.6 million and 6.5%, respectively, in the
first quarter of 1998. The operating loss in the first quarter of 1999 was
principally the result of a one-time pre-tax charge of $92.0 million resulting
from the termination of the Asia-Pacific Mobile Telecommunications Satellite
contract and $25.3 million of higher depreciation and amortization expense
discussed above.
The operating loss in the Direct-To-Home Broadcast segment for the first
quarter of 1999 was $23.4 million compared with an operating loss of $31.6
million in the first quarter of 1998. The lower operating loss in 1999 was
principally due to increased subscriber revenues that more than offset
increased programming, marketing and subscriber acquisition costs. Domestic
DIRECTV reported operating profit for the first quarter of 1999 of $5 million
compared with an operating loss of $10 million in the first quarter of 1998.
Galaxy Latin America's first quarter operating loss for 1999 was $28 million
compared with $22 million in the same period of 1998. The higher operating loss
for Galaxy Latin America in the first quarter of 1999 was primarily due to the
increased cost of its new higher-capacity Galaxy VIII-i satellite and increased
advertising expenditures.
In 1999, domestic DIRECTV's cost of acquiring new subscribers is expected to
increase due to, among other things, incentives granted by U.S. Satellite
Broadcasting Company to manufacturers of DIRECTV receiving equipment which will
be assumed upon the successful completion of the U.S. Satellite Broadcasting
Company acquisition. In addition, depending on the competitive environment,
subscriber acquisition costs could increase further due to increased incentives
to dealers and consumers. Beyond 1999, subscriber acquisition costs will
continue to be largely determined by the competitive environment. Additionally,
the international DIRECTV businesses, due to competition, may also have to
incur increased subscriber acquisition costs through competitive offers in the
future to maintain or improve their market positions.
The Satellite Services segment operating profit in the first quarter of 1999
decreased 7.7% to $79.1 million from $85.7 million in the same period of 1998.
The decrease in operating profit was due to increased depreciation related to
additions to PanAmSat's satellite fleet. As a result, operating profit margin
for the first quarter of 1999 declined to 40.9% from 44.4% in the same period
last year.
The Network Systems segment operating loss in the first quarter of 1999 was
$17.8 million compared with an operating loss of $11.9 million in the first
quarter of 1998. The higher operating loss in the first quarter of 1999 was
primarily due to a one-time pre-tax charge of $11.0 million resulting from the
termination of the Asia-Pacific Mobile Telecommunications contract. Excluding
the one-time pre-tax charge, the segment's operating loss for the first quarter
was $6.8 million. The decrease in operating loss was primarily due to higher
sales of DIRECTV receiver equipment and satellite-based mobile telephony
systems.
The Satellite Systems segment reported an operating loss in the first
quarter of 1999 of $14.4 million compared to operating profit of $55.1 million
and an operating profit margin of 8.8% in the first quarter of
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1998. The operating loss in the first quarter of 1999 resulted from the one-
time pre-tax charge of $81.0 million resulting from the termination of the
Asia-Pacific Mobile Telecommunications contract. Excluding the one-time charge,
operating profit increased $11.5 million or 20.9% over 1998, primarily due to
earnings adjustments in the first quarter of 1999 on several commercial
satellite contracts.
Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA). Prior to 1999, we did not report EBITDA. EBITDA is defined as
operating profit (loss), plus depreciation and amortization. EBITDA is not
presented as an alternative measure of operating results or cash flow from
operations, as determined in accordance with generally accepted accounting
principles. However, we believe EBITDA is a meaningful measure of our company's
performance and that of our business units. EBITDA is a performance measurement
commonly used by other communications, entertainment and media service
providers and therefore can be used to analyze and compare our financial
performance to that of our competitors. EBITDA is also a measurement used for
certain of our debt covenants and is used by rating agencies in determining
credit ratings. EBITDA does not give effect to cash used for debt service
requirements and thus does not reflect funds available for investment in our
business, dividends or other discretionary uses. EBITDA margin is calculated by
dividing EBITDA by total revenues.
For the first quarter of 1999, EBITDA, excluding a one-time pre-tax charge
of $92.0 million in 1999 related to the termination of the Asia-Pacific Mobile
Telecommunications contract, was $178.2 million versus $181.3 million for the
same period in 1998. EBITDA margin on the same basis was 12.3% for the first
quarter of 1999 compared to 14.0% in the first quarter of 1998.
Direct-To-Home Broadcast had positive EBITDA in the first quarter of 1999 of
$3.9 million compared with negative EBITDA of $9.1 million in the first quarter
of 1998. Domestic DIRECTV contributed significantly to this growth with EBITDA
of $25 million in the first quarter of 1999 compared to $8 million in last
year's quarter as strong revenue growth outpaced increased programming,
marketing and subscriber acquisition costs. As a result, EBITDA margin in the
first quarter of 1999 increased to 5.2% from 2.3% in the same period of 1998.
This gain was partially offset by Galaxy Latin America's EBITDA in the first
quarter of 1999 of negative $20 million compared to negative $13 million in the
same period of 1998, primarily due to the increased cost of the new higher-
capacity Galaxy VIII-i satellite and increased advertising expenditures.
For Satellite Services, EBITDA in the first quarter of 1999 was $145.9
million compared with $140.2 million in the same period of last year. EBITDA
margin increased to 75.4% versus 72.6% in last year's first quarter. The
increases in EBITDA and EBITDA margin were principally due to lower satellite
leaseback expenses resulting from the exercise of certain early buy-out options
under sale-leaseback agreements during the first quarter of 1999.
Network Systems' EBITDA, excluding a pre-tax charge of $11.0 million
resulting from the termination of the Asia Pacific Mobile Telecommunications
contract under which Hughes Network Systems was providing ground network
equipment and handsets, grew to $5.1 million in the first quarter of 1999,
compared to a negative EBITDA of $3.4 million in the first quarter of 1998.
EBITDA margin on the same basis was 2.2% compared to a negative EBITDA margin
in the first quarter of 1998. The increase in EBITDA was primarily due to the
higher sales discussed above.
Excluding the 1999 first quarter pre-tax charge of $81.0 million related to
the termination of the Asia-Pacific Mobile Telecommunications contract, EBITDA
for the Satellite Systems segment increased to $79.6 million from $65.8 million
in the first quarter of 1998. The increase included earnings adjustments in the
current quarter on several commercial satellite contracts. As a result, EBITDA
margin, on the same basis, was 12.6% for the first quarter of 1999 compared to
10.5% for the first quarter of 1998.
Interest Income and Expense. Interest income decreased to $13.6 million in
the first quarter of 1999 compared with $37.5 million in the first quarter of
1998. The decrease in interest income was due to lower cash balances in the
first quarter of 1999 compared to the first quarter of 1998 which resulted from
the purchase of an additional 9.5% interest in PanAmSat, additional capital
expenditures for satellites, payment to General Motors for the Delco post-
closing price adjustment, a payment for certain of the Tempo Satellite assets
in
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March 1999, and the early buy-out of a satellite sale-leaseback at PanAmSat.
Interest expense increased $3.9 million in the first quarter of 1999 from the
same period in 1998 due to the increase in PanAmSat's borrowings to finance the
early buy-out of a satellite sale-leaseback and from an additional $170.1
million of borrowings related to SurFin Ltd.
Other, net. Other, net in the first quarter of 1999 reflects the $154.6
million pre-tax gain related to the settlement of the patent infringement case
discussed under "Item 8. Legal Proceedings," offset by losses from
unconsolidated subsidiaries of $30.6 million attributable principally to equity
investments in American Mobile Satellite Corporation and DIRECTV Japan. The
first quarter 1998 amount includes losses from unconsolidated subsidiaries of
$28.9 million, primarily related to American Mobile Satellite Corporation,
DIRECTV Japan and SurFin.
Income Taxes. The effective income tax rate was 33.3% in the first quarter
of 1999 and 37.5% in the first quarter of 1998. The decrease in the first
quarter 1999 effective tax rate compared to the same period of 1998 reflects
the favorable resolution of tax contingencies related to prior years.
Accounting Change. In 1998, we adopted American Institute of Certified
Public Accountants Statement of Position 98-5, Reporting on the Costs of Start-
Up Activities. Statement of Position 98-5 requires that all start-up costs
previously capitalized be written off and recognized as a cumulative effect of
accounting change, net of taxes, as of the beginning of the year of adoption.
On a prospective basis, these types of costs are required to be expensed as
incurred. The unfavorable cumulative effect of this accounting change was
$9.2 million after-tax, or $0.02 per share of General Motors Class H common
stock in the first quarter of 1998.
Earnings. 1999 first quarter earnings increased to $78.3 million from $44.5
million in the first quarter of 1998. Basic earnings per share for the first
quarter were $0.20 per share versus earnings per share of $0.11 in the first
quarter of 1998.
Backlog. The 1999 first quarter backlog of $9,673.5 million decreased from
the $11,097.8 million in the first quarter of 1998. This decrease in backlog
was primarily due to the fact that no new competitive geosynchronous satellite
contracts were awarded to any satellite manufacturer during the first quarter
of 1999.
1998 compared to 1997
Revenues. 1998 revenues increased 16.3% to $5,963.9 million compared with
$5,128.3 million in 1997. Each of our four primary business segments
contributed to the growth in revenue, including continued strong subscriber
growth in the Direct-to-Home Broadcast segment, the effect of the PanAmSat
merger and increased operating lease revenues for video, data and Internet-
related services in the Satellite Services segment, increased sales of DIRECTV
receiver equipment in the Network Systems segment and increased sales of
commercial satellites in the Satellite Systems segment.
Direct-to-Home Broadcast segment revenues for 1998 increased 42.2% to
$1,816.1 million from $1,276.9 million in 1997. The large increase in revenues
resulted from record U.S. subscriber growth, increased average monthly revenue
per subscriber and low subscriber churn rates. Domestic DIRECTV was the biggest
contributor to this growth, with revenues of $1,604.1 million for 1998, a 45.4%
increase over prior year's revenues of $1,103.3 million. Our Latin American
DIRECTV subsidiary, Galaxy Latin America, LLC, had revenues of $141.3 million
compared with $70.0 million in 1997. Total DIRECTV subscribers as of December
31, 1998 were 4,458,000 in the United States and 484,000 in Latin America. In
addition, our unconsolidated affiliate, DIRECTV Japan, which initiated its
service in December 1997, had a total of 231,000 subscribers as of December 31,
1998.
Revenues for the Satellite Services segment in 1998 increased 21.8% to
$767.3 million from $629.9 million in 1997. The increase in revenues was due to
the May 1997 PanAmSat merger and increased operating lease revenues from the
commencement of service agreements for full-time video distribution, as well as
short-
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term special events and an increase in data and Internet-related service
agreements. The increase was partially offset by a decrease in sales and sales-
type lease revenues.
Revenues in 1998 for the Network Systems segment were $1,076.7 million
compared with $1,011.3 million in 1997. The increase in revenues resulted from
the growth in sales of DIRECTV receiver equipment and the increased sales of
private business networks and satellite-based mobile telephony equipment offset
by lower international sales of wireless telephone systems and private business
networks, primarily in the Asia Pacific region.
Satellite Systems segment revenues increased 13.6% in 1998 to $2,831.1
million from $2,491.9 million in 1997, primarily due to higher commercial
satellite sales to customers such as Thuraya Satellite Telecommunications
Company, PanAmSat, ICO Global Communications and Orion Asia Pacific
Corporation.
Operating Profit. Operating profit, excluding amortization of purchase
accounting adjustments related to General Motors' acquisition of our company,
was $270.1 million in 1998 compared with $306.4 million in 1997. Full-year 1998
operating profit margin on the same basis was 4.5% compared with 6.0% in 1997.
The lower 1998 operating profit and operating profit margin resulted
principally from lower sales of wireless telephone systems and private business
networks in the Asia Pacific region, as well as provisions for estimated losses
at Hughes Network Systems associated with uncollectible amounts due from
certain wireless customers. Also contributing to the decline was goodwill
amortization associated with the May 1997 PanAmSat merger and the additional
May 1998 investment in PanAmSat.
The operating loss in the Direct-to-Home Broadcast segment in 1998 was
$228.1 million compared with an operating loss of $254.6 million in 1997. The
full-year 1998 operating loss for domestic DIRECTV was $100.0 million compared
with $137.0 million in 1997. Galaxy Latin America's operating loss was $125.8
million in 1998 versus $116.0 million in 1997. The lower operating loss for
domestic DIRECTV in 1998 was principally due to increased subscriber revenues
which more than offset increased sales and marketing expenditures.
As a result of the increased revenues described above, the Satellite
Services segment operating profit increased 8.6% to $321.6 million in 1998,
compared with the prior year's operating profit of $296.2 million. Operating
profit margin in 1998 declined to 41.9% from 47.0% in the prior year
principally due to goodwill amortization associated with the PanAmSat merger, a
provision for losses relating to the May 1998 failure of PanAmSat's Galaxy IV
satellite and increased depreciation expense resulting from increased capital
expenditures by PanAmSat.
The Network Systems segment operating profit in 1998 was $10.9 million
versus $74.1 million in 1997 and operating profit margin declined to 1.0% from
7.3% last year. The decrease in operating profit and operating profit margin
was primarily due to a $26 million provision for estimated losses associated
with the bankruptcy filing by a customer, provision for uncollectible amounts
due from certain wireless customers and lower international sales of wireless
telephone systems and private business networks, primarily in the Asia Pacific
region.
Operating profit for the Satellite Systems segment in 1998 was $246.3
million, an increase of 8.8% over $226.3 million in 1997. The increase was
primarily due to the higher commercial satellite sales noted above. The
operating profit margin for the year was 8.7% compared with the 9.1% margin
earned in the prior year.
Costs and Expenses. Selling, general and administrative expenses increased
to $1,457.0 million in 1998 from $1,119.9 million in 1997. The increase in
these expenses resulted primarily from increased marketing and subscriber
acquisition costs in the Direct-to-Home Broadcast segment and increased
expenditures to support the growth in the remaining business segments. The
increase in depreciation and amortization expense to $433.8 million in 1998
from $296.4 million in 1997 resulted from increased goodwill amortization
related to the May
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1997 PanAmSat merger and the purchase of an additional 9.5% interest in
PanAmSat in May 1998, and increased capital expenditures in the Direct-to-Home
Broadcast and Satellite Services segments.
Interest Income and Expense. Interest income increased to $112.3 million in
1998 compared to $33.1 million in 1997, due primarily to higher cash balances
resulting from the recapitalization of our company. Interest expense decreased
$73.5 million to $17.5 million in 1998 versus $91.0 million in 1997, resulting
from the repayment at the end of 1997 of debt arising from the PanAmSat merger.
Other, net. Other, net for 1998 relates primarily to losses from
unconsolidated subsidiaries of $128.3 million, attributable principally to
equity investments, including American Mobile Satellite Corporation and DIRECTV
Japan, and a provision for estimated losses associated with bankruptcy filings
by two customers. The amount for 1997 includes the $489.7 million pre-tax gain
recognized in connection with the May 1997 PanAmSat merger offset by losses
from unconsolidated subsidiaries of $72.2 million.
Income Taxes. The effective income tax rate was (21.1)% in 1998 and 37.0% in
1997. The effective income tax rate in 1998 benefited from the favorable
adjustment relating to an agreement with the Internal Revenue Service regarding
the treatment of research and experimentation costs for the years 1983 through
1995.
Discontinued Operations and Extraordinary Item. On December 15, 1997, Hughes
Avicom International, Inc. was sold to Rockwell Collins, Inc., resulting in an
after-tax gain of $62.8 million. We recorded an extraordinary after-tax charge
of $20.6 million in 1997 related to the refinancing of PanAmSat's debt. For
additional information see Note 6 to our financial statements included
elsewhere in this registration statement.
Accounting Changes. In 1998, we adopted American Institute of Certified
Public Accountants Statement of Position 98-5, Reporting on the Costs of Start-
Up Activities. Statement of Position 98-5 requires that all start-up costs
previously capitalized be written off and recognized as a cumulative effect of
accounting change, net of taxes, as of the beginning of the year of adoption.
On a prospective basis, these types of costs are required to be expensed as
incurred. The unfavorable cumulative effect of this accounting change at
January 1, 1998 was $9.2 million after-tax, or $0.02 per share of Class H
common stock.
Earnings. 1998 earnings were $271.7 million, or $0.68 per share of Class H
common stock, compared with 1997 earnings of $470.7 million, $1.18 per share of
Class H common stock on a pro forma basis. 1997 earnings per share are
presented on a pro forma basis assuming the recapitalized General Motors Class
H common stock was outstanding for all of 1997. For further discussion see Note
13 to our financial statements included elsewhere in this registration
statement.
Backlog. The 1998 year-end backlog of $10,064.9 million decreased from the
$10,337.6 million reported at the end of 1997, primarily due to a decrease in
the Satellite Services segment.
1997 compared to 1996
Revenues. 1997 revenues increased 27.9% to $5,128.3 million compared with
$4,008.7 million in 1996. The increase reflects strong subscriber growth in the
Direct-to-Home Broadcast segment, increased revenues in the Satellite Services
segment resulting primarily from the PanAmSat merger and increased sales on
commercial satellite programs in the Satellite Systems segment.
Direct-to-Home Broadcast segment revenues more than doubled to $1,276.9
million from $621.0 million in 1996. This increase resulted from strong
subscriber growth and continued low subscriber churn rates. Domestic DIRECTV
fueled this growth with revenues of $1,103.3 million, a 78.5% increase over
1996 revenues of $618.2 million. Galaxy Latin America, LLC had revenues of
$70.0 million compared with $2.7 million in 1996. Total DIRECTV subscribers as
of December 31, 1997 were 3,301,000 in the United States and 300,000 in Latin
America. DIRECTV Japan initiated its service in December 1997.
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Revenues for the Satellite Services segment in 1997 increased 30.5% to
$629.9 million from $482.8 million in 1996. The increased revenues were due to
the PanAmSat merger and increased operating lease revenues for both video
distribution and business communications services. PanAmSat's services were
expanded in 1997 with the successful launch of two dedicated direct-to-home
satellites and a new cable TV distribution satellite in Latin America, leading
to an increase in total transmission capability since the May merger.
Revenues in 1997 for the Network Systems segment were $1,011.3 million
compared with $1,070.0 million in 1996. The decline was primarily due to lower
domestic mobile cellular telephone equipment sales, which were partially offset
by higher satellite-based mobile telephony equipment sales.
Satellite Systems segment revenues increased 21.2% in 1997 to $2,491.9
million from $2,056.4 million in 1996, primarily due to higher commercial
satellite sales within the high-powered product line of satellites and on the
ICO Global Communications satellite contracts.
Operating Profit. Operating profit for our company increased to $306.4
million in 1997 from $210.1 million in 1996. The 45.8% increase reflects
reduced losses in the Direct-to-Home Broadcast segment, higher commercial
satellite sales and the completion of the PanAmSat merger.
The operating loss in the Direct-to-Home Broadcast segment in 1997 was
$254.6 million compared with an operating loss of $319.8 million in 1996. The
full-year 1997 operating loss for domestic DIRECTV was $137.0 million compared
with $192.0 million in 1996. Galaxy Latin America's operating loss was $116.0
million in 1997 versus $131.0 million in 1996. The lower operating losses in
1997 were principally due to increased subscriber revenues which more than
offset higher marketing and subscriber related expenditures.
The Satellite Services segment operating profit was $296.2 million in 1997,
an increase of 22.2% over the prior year's operating profit of $242.4 million.
The increase resulted primarily from the PanAmSat merger and increased
operating lease revenues for both video distribution and business
communications services. Operating profit margin in 1997 declined to 47.0% from
50.2% in 1996, principally due to goodwill amortization associated with the
PanAmSat merger.
The Network Systems segment operating profit in 1997 was $74.1 million
versus $107.7 million in 1996 and operating profit margin declined to 7.3% from
10.1% in 1996. These decreases were primarily the result of lower domestic
mobile cellular telephone equipment sales, increased research and development
expenditures and higher marketing expenditures associated with the launch of
the DirecPC(R)/DirecDuo(TM) products.
Operating profit for the Satellite Systems segment in 1997 was $226.3
million, an increase of 23.5% over $183.3 million in 1996. The increase was
primarily due to the higher commercial program sales noted above. The operating
profit margin for the year was 9.1% compared with 8.9% in the prior year.
Costs and Expenses. Selling, general and administrative expenses increased
to $1,119.9 million in 1997 from $788.5 million in 1996. The increase resulted
principally from the PanAmSat merger, increased programming and subscriber
acquisition costs in the Direct-to-Home Broadcast segment and increased
research and development and marketing expenditures in the Network Systems
segment. The increase in depreciation and amortization expense to $296.4
million in 1997 from $194.6 million in 1996 resulted from increased goodwill
amortization related to the PanAmSat merger and additional satellite
depreciation in 1997.
Interest Income and Expense. Interest income increased $26.3 million in 1997
compared to 1996 due primarily to higher cash balances resulting from the
PanAmSat merger as well as increased cash resulting from the recapitalization
of our company. Interest expense increased $48.1 million in 1997 versus 1996
due to the increased borrowings resulting from the PanAmSat merger.
Other, net. The 1997 amount included a $489.7 million pre-tax gain related
to the PanAmSat merger, partially offset by losses from unconsolidated
subsidiaries of $72.2 million attributable principally to equity
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investments in American Mobile Satellite Corporation, DIRECTV Japan and SurFin
Ltd. The 1996 amount included a $120.3 million pre-tax gain recognized from the
sale of 2.5% of DIRECTV to AT&T, partially offset by losses from unconsolidated
subsidiaries of $42.2 million, primarily related to American Mobile Satellite
Corporation.
Income Taxes. The effective income tax rate was 37.0% in 1997 and 43.1% in
1996. The decrease in the effective income tax rate in 1997 was due primarily
to an increase in research and development credits and favorable resolution of
certain tax contingencies in 1997.
Discontinued Operations and Extraordinary Item. On December 15, 1997, Hughes
Avicom was sold to Rockwell Collins, Inc., resulting in an after-tax gain of
$62.8 million. We recorded an extraordinary after-tax charge of $20.6 million
in 1997 related to premiums paid for the refinancing of PanAmSat's debt. For
additional information see Note 6 to our financial statements included
elsewhere in this registration statement.
Earnings. 1997 earnings were $470.7 million, or $1.18 per share of Class H
common stock on a pro forma basis, compared with 1996 earnings of $183.5
million, or $0.46 per share of Class H common stock on a pro forma basis.
Earnings per share are presented on a pro forma basis assuming the
recapitalized Class H common stock was outstanding during all periods
presented. For further discussion in Note 13 to our financial statements
included elsewhere in this registration statement.
Backlog. The 1997 year-end backlog of $10,337.6 million increased from the
$6,780.5 million reported at the end of 1996, primarily due to the PanAmSat
merger.
Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents were $780.0 million at March 31, 1999 compared to
$1,342.1 million at December 31, 1998. The $562.1 million decline during the
quarter was due to additional capital expenditures for satellites, a payment
for certain of the Tempo Satellite assets, the early buy-out of a satellite
sale-leaseback at PanAmSat and general working capital requirements. Cash and
cash equivalents were $1,342.1 million at December 31, 1998 compared to
$2,783.8 million at December 31, 1997. This decrease in cash resulted primarily
from the purchase of an additional 9.5% interest in PanAmSat, expenditures for
PanAmSat and DIRECTV satellites, other equity investments and cash paid to
General Motors for a post-closing price adjustment related to the transfer of
Delco Electronics Corporation as part of the 1997 restructuring transactions,
offset in part by proceeds from insurance claims related to the loss of the
Galaxy IV and Galaxy X satellites.
Cash provided by operating activities for the first quarter of 1999 was $6.5
million, compared to cash used by operating activities of $38.7 million in the
first quarter of 1998. This change was due primarily to the increase in net
income during the 1999 first quarter versus the same period in 1998. Cash
provided by continuing operations was $875.2 million in 1998, compared to $10.5
million in 1997 and $367.4 million in 1996. The change in 1998 from 1997
resulted primarily from increased revenues and a decrease in working capital,
while the change in 1997 from 1996 resulted primarily from an increase in
working capital.
Net cash used in investing activities was $660.7 million for the three
months ended March 31, 1999 and $395.6 million for the same period in 1998. The
substantial increase in the first quarter of 1999 compared to the first quarter
of 1998 resulted from increased investments in companies, net of cash acquired,
which included the acquisition of the Tempo Satellite assets (see "--
Acquisitions and Divestitures") and the early buy-out of a satellite sale-
leaseback at PanAmSat. Net cash used in investing activities was $2,253.3
million in 1998, $2,231.5 million in 1997 and $80.5 million in 1996. The
increase in 1998 investing activities reflects the purchase of an additional
9.5% interest in PanAmSat, the early buy-out of satellite sale-leasebacks at
PanAmSat and an increase in expenditures for satellites compared to 1997,
offset in part by proceeds from
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insurance claims related to the loss of the Galaxy IV and Galaxy X satellites.
The increase in 1997 investing activities reflects the repurchase of AT&T's
2.5% equity interest in DIRECTV, the PanAmSat merger, and an increase in
satellites and equity investments compared to 1996, offset by proceeds received
from the sale of Hughes Avicom and the sale of investments.
Net cash provided by financing activities was $92.1 million for the first
quarter of 1999, compared with $150.0 million for the first quarter of 1998.
The 1999 first quarter financing activities reflect lower net borrowings
compared to the first quarter of 1998. Net cash used in financing activities
was $63.6 million in 1998, compared with net cash provided by financing
activities of $5,014.0 million in 1997 and net cash used in financing
activities of $279.8 million in 1996. 1998 financing activities include the
payment to General Motors for the Delco post-closing price adjustment, offset
in part by net long-term borrowings. 1997 financing activities reflect the
impact of the PanAmSat merger, the recapitalization of Hughes and cash
contributions from former Hughes, while the 1996 amount consisted of cash
distributions to former Hughes.
Liquidity Measurement
As a measure of liquidity, the current ratio, which is the ratio of current
assets to current liabilities, at March 31, 1999 and December 31, 1998 was 1.69
and 1.91, respectively. Working capital decreased by $518.4 million to $1,318.5
million at March 31, 1999 from $1,836.9 million at December 31, 1998. The
current ratio at December 31, 1998 and 1997 was 1.91 and 3.29, respectively.
Working capital decreased by $1,486.4 million to $1,836.9 million at December
31, 1998 from $3,323.3 million at December 31, 1997. The change in working
capital resulted principally from the decrease in cash discussed above.
Property and Satellites
Property, net of accumulated depreciation, increased $169.5 million to
$1,059.2 million in 1998 from $889.7 million in 1997. Satellites, net of
accumulated depreciation, increased $554.1 million to $3,197.5 million in 1998
from $2,643.4 million in 1997. The increase in property and satellites resulted
primarily from the construction of an additional broadcast center and increased
capital expenditures for satellites. Capital expenditures, including
expenditures related to satellites, increased to $1,428.5 million in 1998 from
$826.6 million in 1997. The increase reflects additions to property and
equipment to support revenue growth at our various businesses, as well as
additional satellites to support future operations, the replacement of certain
satellites, including Galaxy X, and to provide spare satellites as part of our
satellite sparing strategy.
Dividend Policy and Use of Cash
As discussed in Note 13 to our financial statements included elsewhere in
this registration statement, since the completion of the recapitalization of
our company in late 1997, the General Motors board has not paid, and does not
currently intend to pay in the foreseeable future, cash dividends on its Class
H common stock. Similarly, since such time, we have not paid dividends to
General Motors and do not currently intend to do so in the foreseeable future.
Future Hughes earnings, if any, are expected to be retained for the development
of our businesses. Expected cash requirements for the second half of 1999
relate to capital expenditures for property and equipment and expenditures for
additional satellites of approximately $1.0 billion, the early buy-out of
satellite sale-leasebacks, the funding of business acquisitions, including the
acquisitions discussed below, and additional equity investments. These cash
requirements are expected to be funded from the $1.5 billion investment by AOL
in June and a combination of existing cash balances, amounts available under
existing credit facilities, additional borrowings and equity offerings, as
needed. Also, although we may be required to make a cash payment to or receive
a cash payment from Raytheon Company, the amount of a cash payment to or from
Raytheon, if any, is not determinable at this time. See further discussion in
Note 18 to our financial statements included elsewhere in this registration
statement and in "Item 1. Business--Other Business Risks--Disputes With
Raytheon Company Regarding Former Defense Operations Could Result in a Material
Payment from Us to Raytheon Company."
36
<PAGE>
Debt and Credit Facilities
At March 31, 1999 and December 31, 1998, our 59.1% owned subsidiary, SurFin,
had a total of $170.1 million and $155.9 million, respectively, outstanding
under two separate $150.0 million unsecured revolving credit facilities.
Borrowings under these credit facilities bear interest at the Eurodollar rate
plus 0.15%, and are subject to a facility fee of 0.10% per annum. These
facilities were replaced in June 1999 with a single $400.0 million unsecured
revolving credit facility.
In January 1998, PanAmSat issued five, seven, ten and thirty-year notes
totaling $750.0 million. The proceeds received were used by PanAmSat to repay a
revolving credit facility of $500.0 million and bridge loan of $100.0 million.
The outstanding principal balances and interest rates for the five, seven, ten
and thirty-year notes as of March 31, 1999 and December 31, 1998 were $200.0
million at 6.00%, $275.0 million at 6.13%, $150.0 million at 6.38% and $125.0
million at 6.88%, respectively. Principal on the notes is payable at maturity,
while interest is payable semiannually.
PanAmSat maintains a $500.0 million multi-year revolving credit facility and
a $500.0 million commercial paper program. The multi-year revolving credit
facility provides for a commitment through December 24, 2002, subject to a
facility fee of 0.10% per annum. Borrowings bear interest at a rate which
approximates LIBOR plus 0.30%. Borrowings under the credit facility and
commercial paper program are limited to $500.0 million in the aggregate and are
expected to be used to fund PanAmSat's satellite expansion program. No amounts
were outstanding under the credit facility at March 31, 1999. At March 31,
1999, $85.0 million was outstanding under the commercial paper program. No
amounts were outstanding under either agreement at December 31, 1998.
At March 31, 1999 and December 31, 1998, other long-term debt of $21.6
million and $28.9 million, respectively, was outstanding. Other long-term debt
consisted of notes bearing fixed rates of interest of 9.61% to 11.11%.
Principal is payable at maturity in April 2007 while interest is payable semi-
annually.
We have $1.0 billion of unused credit available under two unsecured
revolving credit facilities, consisting of a $750.0 million multi-year facility
and a $250.0 million 364-day facility. The multi-year credit facility provides
for a commitment of $750.0 million through December 5, 2002, subject to a
facility fee of 0.07% per annum. Borrowings bear interest at a rate which
approximates the London Interbank Offered Rate, or LIBOR, plus 0.155%. The 364-
day credit facility provides for a commitment of $250.0 million through
December 1, 1999, subject to a facility fee of 0.05% per annum. Borrowings bear
interest at a rate which approximates LIBOR plus 0.25%, with an additional
0.125% utilization fee when borrowings exceed 50% of the commitment. No amounts
were outstanding under either facility at March 31, 1999 and December 31, 1998.
These facilities provide back-up capacity for our $1.0 billion commercial paper
program. No amounts were outstanding under the commercial paper program at
March 31, 1999 and December 31, 1998.
In order to fund the purchase price of PRIMESTAR, on April 28, 1999, we
borrowed $500.0 million under loans maturing on April 17, 2000. The loans were
repaid in June 1999 with a portion of the proceeds received from General Motors
as part of the AOL transaction.
We have filed a shelf registration statement with the Securities and
Exchange Commission with respect to the issuance of up to $2 billion of debt
securities from time to time. We expect to issue up to $1 billion of these
securities in the third quarter of 1999. The proceeds from the debt issuances
will be used to repay commercial paper borrowings incurred for the purchase of
the Tempo Satellite assets, the acquisition of U.S. Satellite Broadcasting
Company and to fund our short-term working capital requirements.
Acquisitions and Divestitures
On May 20, 1999, we acquired by merger all of the outstanding capital stock
of U.S. Satellite Broadcasting Company, a provider of subscription television
via the digital broadcasting system that it shares
37
<PAGE>
with DIRECTV. The total consideration of approximately $1.6 billion paid in
July 1999, consisted of approximately $0.4 billion in cash and 22,596,859
shares of Class H common stock. We will account for the U.S. Satellite
Broadcasting Company acquisition using the purchase method of accounting.
On July 28, 1999, Galaxy Latin America, our 70% owned subsidiary, acquired
77.8% of Galaxy Brasil, Ltda., the exclusive distributor of DIRECTV services in
Brazil, from Tevecap S.A. for approximately $89.0 million plus the assumption
of debt. In connection with the transaction, Tevecap sold its 10% equity
interest in Galaxy Latin America to our company and Cisneros Group, the
remaining Galaxy Latin America partners. Our share of the purchase amounted to
approximately $101.1 million and increased our ownership of Galaxy Latin
America to 77.8%.
On January 22, 1999, we agreed to acquire PRIMESTAR's 2.3 million subscriber
medium-power direct-to-home satellite business and the high-power satellite
assets and direct-broadcast satellite orbital frequencies of Tempo Satellite, a
wholly-owned subsidiary of TCI Satellite Entertainment, Inc. The transactions
will be accounted for using the purchase method of accounting. On April 28,
1999, we completed the acquisition of PRIMESTAR's direct-to-home broadcast
satellite business. The purchase price consisted of $1.1 billion in cash and
4,871,448 shares of Class H common stock, for a total purchase price of $1.33
billion, based on the average market price of $47.87 per share of Class H
common stock at the time the acquisition agreement was signed. On June 3, 1999,
we completed the acquisition of the high-power satellite assets and direct-
broadcast satellite orbital frequencies of Tempo Satellite. The purchase price
for the Tempo Satellite assets consisted of $500.0 million in cash,
$150.0 million of which was paid on March 10, 1999 for a satellite that has not
yet been launched, and the remaining $350.0 million of which was paid on June
3, 1999 for an in-orbit satellite and 11 related satellite orbital frequencies.
In February 1999, we acquired an additional ownership interest in Grupo
Galaxy Mexicana, S.A. de C.V., a Galaxy Latin American local operating company
which is the exclusive distributor of DIRECTV service in Mexico, from Grupo
MVS, S.A. de C.V. Our equity ownership represents 49.0% of the voting equity
and all of the non-voting equity of Grupo Galaxy Mexicana. The Grupo Galaxy
Mexicana transaction was accounted for using the purchase method of accounting.
The increased ownership resulted in Grupo Galaxy Mexicana's consolidation since
the date of acquisition. As part of the transaction, in October 1998 we
acquired from Grupo MVS an additional 10.0% interest in Galaxy Latin America,
increasing our ownership interest to 70.0%, as well as an additional 19.8%
interest in SurFin, a company providing financing of subscriber receiver
equipment for certain local operating companies located in Latin America and
Mexico, increasing our ownership percentage from 39.3% to 59.1%. The Galaxy
Latin America and SurFin transactions were accounted for using the purchase
method of accounting. The increased ownership in SurFin resulted in its
consolidation since the date of acquisition. The aggregate purchase price for
the transactions was $197.0 million in cash.
In May 1998, we purchased an additional 9.5% interest in PanAmSat for $851.4
million in cash, increasing our ownership interest in PanAmSat from 71.5% to
81.0%.
In May 1997, Hughes and PanAmSat completed the merger of their respective
satellite service operations into a new publicly-held company, which retained
the name PanAmSat Corporation. We contributed our Galaxy(R) satellite services
business in exchange for a 71.5% interest in the new company. Existing PanAmSat
stockholders received a 28.5% interest in the new company and $1.5 billion in
cash. Such cash consideration and other funds required to consummate the merger
were funded by new debt financing totaling $1,725.0 million borrowed from
General Motors, which was subsequently repaid in December 1997.
On December 15, 1997, we sold substantially all of the assets and
liabilities of the Hughes Avicom business to Rockwell Collins, Inc. for cash,
which resulted in an after-tax gain of $62.8 million. Hughes Avicom is treated
as a discontinued operation for all periods presented.
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<PAGE>
In March 1996, we sold a 2.5% equity interest in DIRECTV to AT&T for $137.5
million, with options to increase AT&T's ownership interest under certain
conditions. The sale resulted in a $120.3 million pre-tax gain, which was
included in other income. In December 1997, we repurchased from AT&T the 2.5%
equity interest in DIRECTV for $161.8 million, ending AT&T's marketing
agreement to distribute the DIRECTV(R) direct-broadcast satellite television
service and DIRECTV(TM) receiver equipment and its options to increase its
ownership in DIRECTV.
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement requires all derivatives to be recorded
as either assets or liabilities and the instruments to be measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives are to be recognized immediately or deferred depending on the use
of the derivative and whether or not it qualifies as a hedge. We plan to adopt
this statement by January 1, 2001, as required. We are currently assessing the
impact of this statement on our results of operations and financial position.
Year 2000
Many computer technologies made or used by us throughout our business have
the potential for operational problems if they lack the ability to handle the
transition to the Year 2000. Computer technologies include both information
technology in the form of hardware and software, as well as non-information
technology which includes embedded technology such as microprocessors.
Because of the potential disruption that this issue could cause to our
business operations and our customers, we initiated a comprehensive, company-
wide, Year 2000 program in 1996 to identify and remediate potential Year 2000
problems. The Year 2000 program addresses both information technology and non-
information technology systems related to internal systems and our products and
services.
Our Year 2000 program is being implemented in seven phases, some of which
are being conducted concurrently:
(1) Awareness--establish project teams made up of project leaders from
each of our operating companies, assign responsibilities and establish
awareness of Year 2000 issues. The awareness phase has been completed.
(2) Inventory--identify all systems within our company, determine if
they are critical and identify responsible personnel for compliance. The
inventory phase has been completed. Many of our systems are already Year
2000 compliant, or had already been scheduled for replacement as part of
our ongoing systems plans.
(3) Assessment--categorize all systems and determine activities that are
required to achieve compliance, including contacting and assessing the Year
2000 readiness of material third party vendors and suppliers of hardware
and software. The assessment phase is substantially complete. All critical
systems have been identified in this phase and are the primary focus of the
project teams. Critical systems identified requiring remediation include
satellite control and communication software, broadcast systems, systems
utilized in customer service/billing, engineering and manufacturing
operations. We have also identified the need to upgrade network control
software for customers who have maintenance agreements with us. Our in-
orbit satellites do not have date-dependent processing.
(4) Remediation--modify, repair or replace categorized systems.
Remediation has begun on many systems and is targeted for completion by the
end of the second quarter of 1999, with the exception of satellite control
software, which is expected to be completed early in the fourth quarter of
1999. The remediation tasks for the satellite control software and ground
stations delivered by us are being coordinated with Raytheon, the supplier.
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<PAGE>
(5) Testing--test remediated systems to assure normal function when
placed in their original operating environment and further test for Year
2000 compliance. Overall testing is completed at approximately the same
time as remediation due to the overlap of the remediation and testing
phases. Testing is currently underway and is expected to be a primary focus
of the project teams over the next several quarters. We expect to complete
this phase shortly after the remediation phase, with ongoing review and
follow-up.
(6) Implementation--once a remediated system and its interfaces have
been successfully tested, the system will be put into its operating
environment. A number of remediated systems have already been put back into
operations. The remaining remediated systems will be put into operations
during 1999.
(7) Contingency Planning--development and execution of plans that narrow
the focus on specific areas of significant concern and concentrate
resources to address them. All Year 2000 critical systems are expected to
be Year 2000 compliant by the end of 1999. However, we are in the process
of developing contingency plans to address the risk of any system not being
Year 2000 compliant and expect to complete such plans in the third quarter
of 1999. We currently believe that the most reasonably likely worst case
scenario is a temporary loss of functionality in satellite control and
communication software. The loss of real-time satellite control software
functionality would be addressed through the use of back-dated processors
or through manual procedures but could result in slightly higher operating
costs until the Year 2000 problems are corrected.
We are utilizing both internal and external resources for the remediation
and testing of our systems that are undergoing Year 2000 modification. Our Year
2000 program is generally on schedule with the exception of the satellite
control software which is expected to be completed early in the fourth quarter
of 1999. We have incurred and expensed approximately $4.0 million during the
first quarter of 1999 and approximately $7.0 million during 1998 related to the
assessment of, and ongoing efforts in connection with, our Year 2000 program.
Future spending for system remediation and testing is currently estimated to be
from $13 million to $17 million, with the majority of the expense expected to
be incurred by mid-1999. Each of our operating companies is funding its
respective Year 2000 efforts with current and future operating cash flows.
We have mailed Year 2000 verification request letters to our suppliers and
other third parties and are coordinating efforts to assess and reduce the risk
that our operations could be adversely affected by the failure of these third
parties to adequately address the Year 2000 issue. A high percentage of the
third parties have replied and a large number of our third parties' systems are
Year 2000 compliant or are expected to be Year 2000 compliant in a timely
manner. For those third party systems that are not yet Year 2000 compliant, we
will continue to identify action plans or alternatives to meet our
requirements.
In view of the foregoing, we do not currently anticipate that we will
experience a significant disruption of our business as a result of the Year
2000 issue. However, there is still uncertainty about the broader scope of the
Year 2000 issue as it may affect us and third parties that are critical to our
operations. For example, lack of readiness by electrical and water utilities,
financial institutions, governmental agencies or other providers of general
infrastructure could pose significant impediments to our ability to carry on
our normal operations. If the modifications and conversions required to make us
Year 2000 ready are not made or are not completed on a timely basis and in the
event that we are unable to implement adequate contingency plans in the event
that problems are encountered internally or externally by third parties, the
resulting problems could have a material adverse effect on our results of
operations and financial condition.
Security Ratings
In March 1999, Standard and Poor's Rating Services lowered the long-term
debt rating of our company from A- to BBB. The Standard and Poor's BBB credit
rating indicates the issuer has adequate capacity to pay interest and repay
principal. Additionally, Standard and Poor's affirmed its A-2 rating on Hughes'
commercial paper. The A-2 commercial paper rating is the third highest category
available and indicates a strong degree of safety regarding timely payment.
Standard and Poor's ratings outlook for our company remains developing.
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<PAGE>
In April 1999, Moody's Investors Service lowered the long-term credit rating
of our company from Baa1 to Baa2. The Baa2 rating for senior debt indicates
medium-grade obligations with adequate likelihood of interest and principal
payment and principal security. Moody's ratings for our commercial paper
remained unchanged at P-2. The rating is the second highest rating available
and indicates that the issuer has a strong ability for repayment relative to
other issuers. Moody's ratings outlook for our long-term and short-term debt is
stable.
Debt ratings by the various rating agencies reflect each agency's opinion of
the ability of issuers to repay debt obligations punctually. The lowered
ratings reflect increased financial leverage at our company resulting from a
significant acceleration of our growth initiatives, including the recent
PRIMESTAR/Tempo and U.S. Satellite Broadcasting Company transactions,
PanAmSat's satellite deployment and restoration plan, and the investment in
Spaceway. Lower ratings generally result in higher borrowing costs. A security
rating is not a recommendation to buy, sell, or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating
organization. Each rating should be evaluated independently of any other
rating.
Market Risk Disclosure
The following discussion and the estimated amounts generated from the
sensitivity analyses referred to below include forward-looking statements of
market risk which assume for analytical purposes that certain adverse market
conditions may occur. Actual future market conditions may differ materially
from such assumptions because the amounts noted below are the result of
analyses used for the purpose of assessing possible risks and the mitigation
thereof. Accordingly, the forward-looking statements should not be considered
projections by us of future events or losses.
General
Our cash flows and earnings are subject to fluctuations resulting from
changes in foreign currency exchange rates, interest rates and changes in the
market value of our equity investments. We manage our exposure to these market
risks through internally established policies and procedures and, when deemed
appropriate, through the use of derivative financial instruments. Our policy
does not allow speculation in derivative instruments for profit or execution of
derivative instrument contracts for which there are no underlying exposures. We
do not use financial instruments for trading purposes and are not a party to
any leveraged derivatives.
Foreign Currency Risk
We generally conduct our business in U.S. dollars with a small amount of
business conducted in a variety of foreign currencies and therefore are exposed
to fluctuations in foreign currency exchange rates. Our objective in managing
the exposure to foreign currency changes is to reduce earnings and cash flow
volatility associated with foreign exchange rate fluctuations to allow us to
focus our attention on our core business issues and challenges. Accordingly, we
primarily enter into foreign exchange-forward contracts to protect the value of
our existing assets, liabilities and firm commitments. Foreign exchange-forward
contracts are legal agreements between two parties to purchase and sell a
foreign currency, for a price specified at the contract date, with delivery and
settlement in the future. At December 31, 1998, the impact of a hypothetical
10% adverse change in exchange rates on the fair values of foreign exchange-
forward contracts and foreign currency denominated assets and liabilities would
not be significant.
Investments
We maintain investments in publicly-traded common stock of unaffiliated
companies and are therefore subject to equity price risk. These investments are
classified as available-for-sale and, consequently, are reflected in the
balance sheet at fair value with unrealized gains or losses, net of tax,
recorded as part of accumulated other comprehensive income (loss), a separate
component of owner's equity. At December 31,
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<PAGE>
1998, the fair value of the investments in such common stock was $8.0 million.
The investments were valued at the market closing price at December 31, 1998.
We have not taken any actions to hedge this market risk exposure. A 20% decline
in the market price of both investments would cause the fair value of the
investments in common stock to decrease by $1.6 million.
Interest Rate Risk
We are subject to interest rate risk related to our $934.8 million of debt
outstanding at December 31, 1998. Debt, which is classified as held-to-
maturity, consisted of PanAmSat's fixed-rate borrowings of $750.0 million,
SurFin's variable rate borrowings of $155.9 million and Hughes' fixed-rate
borrowings of $28.9 million. We are subject to fluctuating interest rates which
may adversely impact our results of operations and cash flows for our variable
rate bank borrowings. Fluctuations in interest rates may also adversely affect
the market value of our fixed-rate borrowings. At December 31, 1998,
outstanding borrowings bore interest at rates ranging from 5.55% to 11.11%. The
potential fair value loss resulting from a hypothetical 10% decrease in
interest rates related to our outstanding debt would be approximately $32.5
million.
In connection with debt refinancing activities by PanAmSat in 1997, PanAmSat
entered into certain U.S. Treasury rate lock contracts to reduce its exposure
to fluctuations in interest rates. The aggregate notional value of these
contracts was $375.0 million and these contracts were accounted for as hedges.
The cost to settle these instruments in 1998 was $9.1 million and is being
amortized to interest expense over the term of the related debt securities.
Credit Risk
We are exposed to credit risk in the event of non-performance by the
counterparties to our foreign exchange-forward contracts. While we believe this
risk is remote, credit risk is managed through the periodic monitoring and
approval of financially sound counterparties.
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<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSEDFINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
have been derived from the historical consolidated financial statements of
Hughes Electronics Corporation, U.S. Satellite Broadcasting Company, PRIMESTAR
and TCI Satellite Entertainment, the parent company of Tempo Satellite, to give
effect to:
. the merger of our company with U.S. Satellite Broadcasting
Company;
. our acquisition of PRIMESTAR's direct broadcast satellite medium-
power business and related high-power satellite assets of Tempo
Satellite; and
. the proceeds from the issuance of Hughes Series A Preferred Stock.
The unaudited pro forma combined condensed statements of income (loss) from
continuing operations reflect adjustments as if these transactions had each
taken place on January 1, 1998 and 1999. The unaudited pro forma combined
condensed balance sheet reflects adjustments as if these transactions had each
occurred on March 31, 1999. The pro forma adjustments described in the
accompanying notes are based on preliminary estimates and various assumptions
that we believe are reasonable in the circumstances.
The unaudited pro forma combined condensed statements of income (loss) from
continuing operations do not give effect to any cost savings that may be
realized from the PRIMESTAR/Tempo Satellite acquisition and the merger with
U.S. Satellite Broadcasting Company, which savings relate primarily to the
reduction of duplicative operating, general and administrative expenses.
The U.S. Satellite Broadcasting Company Merger and the PRIMESTAR/Tempo
Acquisition have been accounted for as purchases. Under the purchase method of
accounting, the purchase price is allocated to assets acquired and liabilities
assumed based on their estimated fair values. The adjustments included in the
unaudited pro forma combined condensed financial statements reflect a
preliminary allocation of the purchase price for those transactions based upon
information currently available. Adjustments relating to tangible assets (i.e.
satellites, equipment located on customer premises, etc.), intangible assets
(i.e. licenses granted by the Federal Communications Commission, customer
lists, dealer network, etc.), and accrued liabilities for programming contracts
and leases with above-market rates are estimates pending the completion of
independent appraisals currently in process. Additionally, the adjustment to
recognize the benefit of net operating loss carryforwards of U.S. Satellite
Broadcasting Company represents a preliminary estimate pending further review
and analysis by the management of Hughes. These appraisals, valuations and
studies are expected to be completed by December 31, 1999. Accordingly, the
final purchase price allocations may be different from the amounts reflected
herein.
The unaudited pro forma combined condensed financial statements should be
read in conjunction with the financial statements of Hughes Electronics
Corporation, U.S. Satellite Broadcasting Company, PRIMESTAR, which, following
our acquisition of its direct broadcast satellite medium-power business,
changed its name to Phoenixstar, Inc., and TCI Satellite Entertainment,
including the respective notes thereto, which are located in this registration
statement, each as of and for the periods ended March 31, 1999 and December 31,
1998.
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<PAGE>
HUGHES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of March 31, 1999
<TABLE>
<CAPTION>
U.S.
Satellite Primestar/
Historical Broadcasting Tempo
U.S. Merger Pro Pro Acquisition Pro Series A Pro
Historical Satellite Forma Forma Historical Pro Forma Forma Preferred Forma
Hughes Broadcasting Adjustments Combined Primestar/Tempo Adjustments Combined Stock Combined
---------- ------------ ------------ -------- --------------- ----------- -------- --------- --------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash
equivalents.... $ 780 $ 68 $ (358)(a) $ 490 $ 171 $ 1,063 (l) $ 147 $(1,063)(aa) $ 569
(1,577)(m) 1,485 (bb)
Accounts and
notes
receivable,
net............ 849 58 (1)(a) 888 93 981 981
(18)(b)
Contracts in
process (less
advances and
progress
payments)...... 713 713 713 713
Other current
assets......... 875 7 38 (a) 920 5 48 (m) 973 973
------- ---- ------ ------- ------ ------- ------- ------- -------
Total Current
Assets.......... 3,217 133 (339) 3,011 269 (466) 2,814 422 3,236
Satellites, net.. 3,581 35 (c) 3,616 239 (7)(m) 3,848 3,848
Property, net.... 1,061 55 (17)(a) 1,064 1,150 (1,032)(m) 1,182 1,182
(35)(c)
Intangible
assets, net..... 3,733 2,007 (a) 5,740 375 1,400 (m) 7,515 7,515
Investments and
other assets.... 1,820 3 (3) (a) 1,786 32 (27) (m) 1,791 1,791
(34)(b)
------- ---- ------ ------- ------ ------- ------- ------- -------
Total Assets..... $13,412 $191 $1,614 $15,217 $2,065 $ (132) $17,150 $ 422 $17,572
======= ==== ====== ======= ====== ======= ======= ======= =======
LIABILITIES AND
STOCKHOLDER'S
EQUITY
Current
Liabilities
Accounts
payable........ $ 710 $ 75 $ (6)(a) $ 779 $ 231 $ 1,010 $ 1,010
Current portion
of long-term
debt........... 170 170 575 $ (575)(m) 1,233 $(1,063)(aa) 170
1,063 (l)
Other current
liabilities.... 1,018 92 98 (a) 1,190 237 110 (m) 1,537 1,537
(18)(b)
------- ---- ------ ------- ------ ------- ------- ------- -------
Total Current
Liabilities..... 1,898 167 74 2,139 1,043 598 3,780 (1,063) 2,717
Long-term debt... 857 857 1,286 (1,286)(m) 857 857
Other liabilities
and deferred
credits......... 1,068 87 502 (a) 1,623 38 66(m) 1,727 1,727
(34) (b)
Deferred income
taxes........... 652 (250) (a) 402 67 (112)(m) 357 357
Minority
interests....... 486 486 486 486
Stockholder's
Equity.......... 8,451 (63) 1,322 (a) 9,710 (369) 602 (m) 9,943 1,485 (bb) 11,428
------- ---- ------ ------- ------ ------- ------- ------- -------
Total Liabilities
and
Stockholder's
Equity.......... $13,412 $191 $1,614 $15,217 $2,065 $ (132) $17,150 $ 422 $17,572
======= ==== ====== ======= ====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
condensed financial statements.
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<PAGE>
HUGHES
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF INCOME (LOSS) FROM CONTINUING OPERATIONS
For the Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
U.S.
Satellite Primestar/
Historical Broadcasting Tempo
U.S. Merger Pro Pro Historical Acquisition Pro Series A Pro
Historical Satellite Forma Forma Primestar/ Pro Forma Forma Preferred Forma
Hughes Broadcasting Adjustments Combined Tempo Adjustments Combined Stock Combined
---------- ------------ ------------ -------- ---------- ----------- -------- --------- --------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Product sales......... $ 716 $ 716 $ 716 $ 716
Direct broadcast,
leasing and other
services............. 736 $164 $ (4)(b) 896 $ 394 1,290 1,290
------ ---- ---- ------ ----- ------ ------
Total Revenues........ 1,452 164 (4) 1,612 394 2,006 2,006
------ ---- ---- ------ ----- ------ ------
Operating Costs and
Expenses
Cost of products
sold................. 669 669 669 669
Broadcast programming
and other costs...... 292 97 22 (c) 386 203 $24 (n) 605 605
(25)(e) (8)(p)
Selling, general, and
administrative
expenses............. 405 72 (4)(b) 451 105 (24)(n) 532 532
(22)(c)
Depreciation and
amortization......... 128 5 13 (g) 145 139 (6)(q) 178 178
(1)(h) 5 (r)
(105)(s)
------ ---- ---- ------ ----- ---- ------ ------
Total operating costs
and expenses......... 1,494 174 (17) 1,651 447 (114) 1,984 1,984
------ ---- ---- ------ ----- ---- ------ ------
Operating (Loss)
Profit................ (42) (10) 13 (39) (53) 114 22 22
Interest income
(expense), net........ 7 1 (19)(e) (15) (42) (14)(t) (33) $ 14 (cc) (19)
(4)(i) 42 (u)
(4)(v)
Other net.............. 137 137 (84) 84 (w) 137 137
------ ---- ---- ------ ----- ---- ------ ---- ------
Income (Loss) from
Continuing Operations
Before Income Taxes
and Minority
Interests............. 102 (9) (10) 83 (179) 222 126 14 140
Income tax (expense)
benefit............... (36) 3 (j) (33) 8 (8)(x) (50) (6)(dd) (56)
(17)(y)
Minority interests in
net losses of
subsidiaries.......... 7 7 7 7
------ ---- ---- ------ ----- ---- ------ ---- ------
Income (Loss) from
Continuing
Operations............ 73 (9) (7) 57 (171) 197 83 8 91
Adjustments to exclude
the effect of GM
purchase accounting
related to Hughes
Aircraft Company...... 5 5 5 5
Preferred Dividends.... (23)(ee) (23)
------ ---- ---- ------ ----- ---- ------ ---- ------
Earnings (Loss) Used
for Computation of
Available Separate
Consolidated Income
from Continuing
Operations........... $ 78 $ (9) $ (7) $ 62 $(171) $197 $ 88 $(15) $ 73
====== ==== ==== ====== ===== ==== ====== ==== ======
Available Separate
Consolidated Income
from Continuing
Operations
Average number of
shares of GM Class H
Common Stock
outstanding (in
millions)
(numerator).......... 106.3 22.6 (k) 128.9 4.9 (z) 133.8 133.8
Class H dividend base
(in millions)
(denominator)(1)..... 400.2 22.6 (k) 422.8 4.9 (z) 427.7 427.7
Available Separate
Consolidated Income
from Continuing
Operations........... $ 21 $ 19 $ 28 $ 23
Basic Earnings Per
Share from Continuing
Operations............ $ 0.20 $ 0.15 $ 0.21 $ 0.17
====== ====== ====== ======
Diluted Earnings Per
Share from Continuing
Operations............ $ 0.19 $ 0.15 $ 0.21 $ 0.17
====== ====== ====== ======
</TABLE>
- -------
(1) See discussion of Class H Dividend Base in the Notes to the Hughes
Electronics Corporation Financial Statements.
The accompanying notes are an integral part of the unaudited pro forma combined
condensed financial statements.
45
<PAGE>
HUGHES
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF INCOME (LOSS) FROM CONTINUING OPERATIONS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
U.S.
Satellite Primestar/
Historical Broadcasting Tempo
U.S. Merger Pro Pro Historical Acquisition Pro Series A Pro
Historical Satellite Forma Forma Primestar/ Pro Forma Forma Preferred Forma
Hughes Broadcasting Adjustments Combined Tempo Adjustments Combined Stock Combined
---------- ------------ ------------ -------- ---------- ----------- -------- --------- --------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Product sales......... $3,360 $3,360 $3,360 $3,360
Direct broadcast,
leasing and other
services............. 2,604 $551 $ (3)(b) 3,152 $ 1,290 4,442 4,442
------ ---- ---- ------ ------- ------ ------
Total Revenues........ 5,964 551 (3) 6,512 1,290 7,802 7,802
------ ---- ---- ------ ------- ------ ------
Operating Costs and
Expenses
Cost of products
sold................. 2,627 2,627 2,627 2,627
Broadcast programming
and other costs...... 1,176 328 75 (c) 1,491 655 $ 85 (n) 2,204 2,204
(88)(e) (27)(p)
Selling, general, and
administrative
expenses............. 1,457 267 (3)(b) 1,623 486 (85)(n) 2,024 2,024
(75)(c)
(1)(d)
(22)(f)
Impairment of long-
lived assets......... 950 (950)(o)
Depreciation and
amortization......... 455 17 52 (g) 522 543 (28) (q) 649 649
(2)(h) 19 (r)
(407)(s)
------ ---- ---- ------ ------- ------ ------ ------
Total operating costs
and expenses......... 5,715 612 (64) 6,263 2,634 (1,393) 7,504 7,504
------ ---- ---- ------ ------- ------ ------ ------
Operating Profit
(Loss)................ 249 (61) 61 249 (1,344) 1,393 298 298
Interest income
(expense), net........ 95 4 (62)(e) 19 (146) (57)(t) (57) $ 57 (cc)
(18)(i) 146 (u)
(17)(v)
(2)(p)
Other, net............. (153) (153) (8) (161) (161)
------ ---- ---- ------ ------- ------ ------ ---- ------
Income (Loss) from
Continuing Operations
Before Income Taxes
and Minority
Interests............. 191 (57) (19) 115 (1,498) 1,463 80 57 137
Income tax benefit
(expense)............. 45 10 (j) 55 148 (148)(x) 69 (23)(dd) 46
14 (y)
Minority interests in
net losses of
subsidiaries.......... 24 24 24 24
------ ---- ---- ------ ------- ------ ------ ---- ------
Income (Loss) from
Continuing Operations
Before Cumulative
Effect of Accounting
Change................ 260 (57) (9) 194 (1,350) 1,329 173 34 207
Adjustments to exclude
the effect of GM
purchase accounting
related to Hughes
Aircraft Company...... 21 21 21 21
Preferred Dividends.... (94)(ee) (94)
------ ---- ---- ------ ------- ------ ------ ---- ------
Earnings (Loss) Used
for Computation of
Available Separate
Consolidated Income
from Continuing
Operations Before
Cumulative Effect of
Accounting Change..... $ 281 $(57) $ (9) $ 215 $(1,350) $1,329 $ 194 $(60) $ 134
====== ==== ==== ====== ======= ====== ====== ==== ======
Available Separate
Consolidated Income
from Continuing
Operations Before
Cumulative Effect of
Accounting Change:
Average number of
shares of GM Class H
Common Stock
outstanding (in
millions)
(numerator).......... 105.3 22.6 (k) 127.9 4.9 (z) 132.8 132.8
Class H dividend base
(in millions)
(denominator)(1)..... 399.9 22.6 (k) 422.5 4.9 (z) 427.4 427.4
Available Separate
Consolidated Income
from Continuing
Operations Before
Cumulative Effect of
Accounting Change.... $ 74 $ 65 $ 60 $ 42
Basic Earnings Per
Share from Continuing
Operations Before
Cumulative Effect of
Accounting Change..... $ 0.70 $ 0.51 $ 0.45 $ 0.31
====== ====== ====== ======
Diluted Earnings Per
Share From Continuing
Operations Before
Cumulative Effect of
Accounting Change..... $ 0.70 $ 0.51 $ 0.45 $ 0.31
====== ====== ====== ======
</TABLE>
- -------
(1) See discussion of Class H Dividend Base in the Notes to the Hughes
Electronics Corporation Financial Statements.
The accompanying notes are an integral part of the unaudited pro forma combined
condensed financial statements.
46
<PAGE>
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited pro forma combined condensed financial statements
have been derived from the historical consolidated financial statements of
Hughes Electronics Corporation, U.S. Satellite Broadcasting Company, PRIMESTAR
and TCI Satellite Entertainment, the parent of Tempo Satellite, to give effect
to:
. the merger of our company with U.S. Satellite Broadcasting Company;
. our acquisition of PRIMESTAR's direct broadcast satellite medium-
power business and related high-power satellite assets of Tempo
Satellite, Inc.; and
. the proceeds from the issuance of Hughes Series A Preferred Stock.
The unaudited pro forma combined condensed statements of income (loss) from
continuing operations present the historical results of operations of Hughes,
U.S. Satellite Broadcasting Company, PRIMESTAR and TCI Satellite Entertainment
for the periods ended March 31, 1999 and December 31, 1998, as if the above-
mentioned transactions had each occurred on January 1, 1998 and 1999. The
unaudited pro forma combined condensed balance sheet presents the historical
balance sheets of Hughes, U.S. Satellite Broadcasting Company, PRIMESTAR and
TCI Satellite Entertainment as of March 31, 1999, as if the above- mentioned
transactions had each been consummated as of March 31, 1999. The pro forma
adjustments reflected in the accompanying unaudited pro forma combined
condensed financial statements were prepared using the purchase method of
accounting.
The unaudited pro forma combined condensed financial statements do not
purport to present the financial position or results of operations of Hughes
had the transactions and events assumed therein occurred on the dates
specified, nor are they necessarily indicative of the results of operations
that may be achieved in the future. The unaudited pro forma combined condensed
statements of income (loss) from continuing operations do not give effect to
any cost savings that may be realized from the PRIMESTAR/Tempo Satellite
acquisition and the merger with U.S. Satellite Broadcasting Company, which
savings relate primarily to the reduction of duplicative operating, general and
administrative expenses.
The U.S. Satellite Broadcasting Company Merger and the PRIMESTAR/Tempo
Acquisition have been accounted for as purchases. Under the purchase method of
accounting, the purchase price is allocated to assets acquired and liabilities
assumed based on their estimated fair values. The adjustments included in the
unaudited pro forma combined condensed financial statements reflect a
preliminary allocation of the purchase price for those transactions based upon
information currently available. Adjustments relating to tangible assets (i.e.
satellites, equipment located on customer premises, etc.), intangible assets
(i.e. licenses granted by the Federal Communications Commission, customer
lists, dealer network, etc.), and accrued liabilities for programming contracts
and leases with above-market rates are estimates pending the completion of
independent appraisals currently in process. Additionally, the adjustment to
recognize the benefit of net operating loss carryforwards of U.S. Satellite
Broadcasting Company represents a preliminary estimate pending further review
and analysis by the management of Hughes. These appraisals, valuations and
studies are expected to be completed by December 31, 1999. Accordingly, the
final purchase price allocations may be different from the amounts reflected
herein.
The unaudited pro forma combined condensed financial statements should be
read in conjunction with the audited financial statements of Hughes Electronics
Corporation, U.S. Satellite Broadcasting Company, PRIMESTAR and TCI Satellite
Entertainment, including the respective notes thereto, which are included in
this registration statement, each as of and for the periods ended March 31,
1999 and December 31, 1998.
47
<PAGE>
Various reclassifications have been made to the historical financial
statements of U.S. Satellite Broadcasting Company, PRIMESTAR and TCI Satellite
Entertainment to conform to the unaudited pro forma combined condensed
financial statement presentation. As more fully described in Note 3 to
PRIMESTAR's 1998 consolidated financial statements, the historical operating
results of PRIMESTAR reflect the operations of its predecessor, TCI Satellite
Entertainment, prior to the restructuring transaction on April 5, 1998.
U.S. Satellite Broadcasting Company Merger Pro Forma Adjustments
The following adjustments, which are set forth in millions, except per share
amounts, give pro forma effect to the U.S. Satellite Broadcasting Company
merger.
a. To record the exchange consideration at closing and to adjust the
carrying values of the assets acquired and the liabilities assumed to
reflect their estimated fair values.
The total purchase price was based on the average price of Class H
common stock for the 20 consecutive trading days ending on and including
the second trading day before the U.S. Satellite Broadcasting Company
merger was consummated. Based on this price, U.S. Satellite Broadcasting
Company shareholders received $18.00 of consideration for each share of
U.S. Satellite Broadcasting Company stock owned.
The accompanying pro forma combined condensed financial statements
reflect the actual consideration paid to holders of U.S. Satellite
Broadcasting Company stock in the form of Class H common stock ($1,259)
and cash ($358).
For purposes of the accompanying pro forma combined condensed financial
statements, the preliminary purchase price allocation was determined as
follows (in millions except per share amounts):
<TABLE>
<S> <C>
Outstanding shares of U.S. Satellite Broadcasting
Company stock................................................... 89.86
Consideration per share......................................... $18.00
------
Purchase Price................................................ $1,617
======
U.S. Satellite Broadcasting Company net book value at 3/31/99 $ (63)
Adjustments to fair value net assets acquired:
Accounts and notes receivables, net............................. (1)
Other current assets............................................ 38
Property, net................................................... (17)
Intangible assets, net.......................................... 2,007
Investments and other assets.................................... (3)
Accounts payable................................................ 6
Other current liabilities....................................... (98)
Other liabilities and deferred credits.......................... (502)
Deferred income taxes........................................... 250
------
Preliminary allocation of purchase price...................... $1,617
======
</TABLE>
The adjustments included in the unaudited pro forma combined condensed
financial statements reflect a preliminary allocation of the purchase
price for the merger based upon information currently available.
Adjustments relating to intangible assets (i.e. licenses granted by the
Federal Communications Commission and customer lists) and accrued
liabilities for programming contracts with above-market rates are
estimates pending the completion of independent appraisals currently in
process. Additionally, the adjustment to recognize the benefit of net
operating loss carryforwards of U.S. Satellite Broadcasting Company
represents a preliminary estimate pending further review and analysis by
the management of Hughes. These appraisals, valuations and studies are
expected to be completed by December 31, 1999. Accordingly, the final
purchase price allocations may be different from the amounts reflected
herein.
48
<PAGE>
b. To eliminate intercompany transactions between our company and U.S.
Satellite Broadcasting Company.
c. To reclassify certain amounts in the historical financial statements of
U.S. Satellite Broadcasting Company to conform to our presentation.
d To eliminate non-recurring operating expenses.
e. To reflect the amortization of the accrued liability for programming
contracts with above-market rates. The effective interest method was used
to amortize the liability and to impute interest expense thereon.
f. To eliminate a non-recurring loss recorded by U.S. Satellite Broadcasting
Company during 1998 and to provide for the termination of various
contracts as specified in the U.S. Satellite Broadcasting Company merger
agreement.
g. To reflect amortization of the intangible assets consisting of customer
lists, licenses granted by the Federal Communications Commission and
enterprise level goodwill. Amortization of the customer lists was
calculated based on a 5-year useful life, and the amortization of
licenses granted by the Federal Communications Commission and enterprise
level goodwill was calculated based on useful lives of 40 years. The
purchase price adjustments relating to the customer list and licenses
granted by the Federal Communications Commission are preliminary
estimates pending the finalization of independent appraisals currently in
process. These appraisals are expected to be completed by December 31,
1999. Accordingly, the final purchase price allocations and the related
amortization of the intangible assets may be different from the amounts
reflected herein.
h. To reflect reduced depreciation expense resulting from the write down of
fixed assets to fair values.
i. To reduce interest income on cash required for the U.S. Satellite
Broadcasting Company merger assuming our historical interest income rate
of 5.0%.
j. Income taxes associated with the pro forma adjustments discussed above
have been calculated at an assumed combined federal and state rate of
40%, excluding amortization of estimated goodwill which is not deductible
for tax purposes.
The unaudited pro forma combined condensed statements of income (loss)
from continuing operations have also been adjusted to recognize a tax
benefit, at an assumed combined federal and state rate of 40%, for U.S.
Satellite Broadcasting Company's historical losses from continuing
operations for the periods ended March 31, 1999 and December 31, 1998.
This adjustment recognizes that, if the U.S. Satellite Broadcasting
Company merger had taken place on January 1, 1998 and 1999, the tax
benefit of U.S. Satellite Broadcasting Company's losses would have been
realized in the consolidated federal tax return of General Motors.
k. In connection with the U.S. Satellite Broadcasting Company merger,
General Motors contributed to the capital of Hughes sufficient to enable
us to purchase from General Motors, for fair value as determined by the
General Motors board, 22.6 million shares of Class H common stock
delivered to U.S. Satellite Broadcasting Company shareholders in the
merger. In connection therewith, the General Motors board also increased
the Class H dividend base by 22.6 million.
49
<PAGE>
PRIMESTAR/Tempo Satellite Acquisition Pro Forma Adjustments
The following adjustments, which are set forth in millions, except per share
amounts, give pro forma effect to the PRIMESTAR/Tempo Satellite acquisition:
l. To record incremental debt incurred by us to finance the PRIMESTAR/Tempo
Satellite acquisition. For purposes of the accompanying pro forma
combined condensed financial statements, it is assumed that $343 of the
cash consideration was funded through our available cash and $1,063 was
financed through our commercial paper program and a short-term bridge
loan. The remaining consideration was settled through the issuance of 4.9
million shares of Class H common stock.
m. To record the exchange consideration at closing and to adjust the
carrying values of the assets acquired and the liabilities assumed to
reflect the preliminary estimate of their respective fair values.
The total purchase price of $1,833 will be adjusted based upon the final
net working capital of PRIMESTAR (as defined in the PRIMESTAR asset
purchase agreement) at closing. For purposes of this pro forma
calculation, the March 31, 1999 net working capital of PRIMESTAR, a
liability of $194, was used to calculate the exchange consideration of
the PRIMESTAR/Tempo Satellite acquisition ($1,639).
For purposes of the accompanying pro forma combined condensed financial
statements, the preliminary purchase price allocation was determined as
follows (in millions except per share amounts):
<TABLE>
<S> <C> <C>
Cash Consideration....................................... $ 1,406
Stock Consideration...................................... 233
-------
Purchase Price......................................... $ 1,639
=======
PRIMESTAR/Tempo net book value at 3/31/99 $ (369)
Adjustments to fair value net assets acquired and to give
effect to historical PRIMESTAR assets and liabilities
excluded from this transaction:
Cash and cash equivalents................................ (171)
Other current assets..................................... 48
Satellites, net.......................................... (7)
Property, net............................................ (1,032)
Intangible assets, net................................... 1,400
Investments and other assets............................. (27)
Current portion of long-term debt........................ 575
Other current liabilities................................ (110)
Long-term debt........................................... 1,286
Other liabilities and deferred credits................... (66)
Deferred income taxes.................................... 112
-------
Preliminary allocation of purchase price............... $ 1,639
=======
</TABLE>
As defined in the PRIMESTAR asset purchase agreement, excluded assets
include high-power direct broadcast satellite inventory and deferred
loan costs. Excluded liabilities include debt and related interest
payable, deferred income tax liabilities, restructuring accruals and
employee-related liabilities.
50
<PAGE>
The adjustments included in the unaudited pro forma combined
condensed financial statements reflect a preliminary allocation of the
purchase price for the Acquisition based upon information currently
available. Adjustments relating to tangible assets (i.e. satellites,
equipment located on customer premises, etc.), intangible assets (i.e.
licenses granted by the Federal Communications Commission, customer
lists, dealer network, etc.), and accrued liabilities for programming
contracts and leases with above-market rates are estimates pending the
completion of independent appraisals currently in process. These
appraisals are expected to be completed by December 31, 1999.
Accordingly, the final purchase price allocations may be different from
the amounts reflected herein.
n. To reclassify certain amounts in the historical financial statements of
PRIMESTAR to conform to the our presentation.
o. To eliminate a non-recurring impairment loss and related income tax
benefit recorded by PRIMESTAR during 1998 to reduce the carrying amount
of certain assets to their net realizable values.
p. To reflect the amortization of the accrued liability for programming
contracts and leases with above-market rates. The effective interest
method was used to amortize the liability and to calculate the accretion
of interest expense.
q. To reflect amortization of the intangible assets consisting of customer
lists, licenses granted by the Federal Communications Commission,
dealer/install network, and enterprise level goodwill. Amortization of
the customer lists was calculated based on a 5-year useful life, and the
amortization of the dealer/install network was calculated based upon a
15-year useful life. Amortization of licenses granted by the Federal
Communications Commission and enterprise level goodwill was calculated
based on useful lives of 40 years. The purchase price adjustments
relating to the customer list, dealer network, and licenses granted by
the Federal Communications Commission are preliminary estimates pending
the finalization of independent appraisals currently in process. These
appraisals are expected to be completed by December 31, 1999.
Accordingly, the final purchase price allocations and the related
amortization of the intangible assets may be different from the amounts
reflected herein.
r. To record depreciation on the in-orbit satellite acquired by us in
connection with the PRIMESTAR/Tempo Satellite acquisition over the
estimated remaining useful life of 12 years.
s. To reflect reduced depreciation expense resulting from the write down of
fixed assets to fair values.
t. To reflect interest expense associated with the incremental debt incurred
by us to finance the PRIMESTAR/Tempo Satellite acquisition. For purposes
of pro forma calculation, our current interest rate of LIBOR + 0.25%
(5.3% in total) was used to compute interest on the incremental debt
discussed in pro forma adjustment (l) above.
u. To reduce interest expense associated with PRIMESTAR debt not assumed by
us.
v. To reduce interest income on cash required for the Primestar Acquisition
assuming our historical interest income rate of 5%.
w. To eliminate a non-recurring loss recorded by PRIMESTAR during the first
quarter of 1999, in connection with the sale of certain Tempo high power
assets to us.
x. To eliminate PRIMESTAR's historical income tax benefit recorded in
connection with PRIMESTAR's restructuring consummated during 1998.
51
<PAGE>
y. Income taxes associated with the pro forma adjustments discussed above
have been calculated at an assumed combined federal and state rate of
40%. Since the PRIMESTAR/Tempo Satellite acquisition is a taxable
transaction, amortization of goodwill is expected to be deductible over
15 years for income tax purposes.
The unaudited pro forma combined condensed statements of income (loss)
from continuing operations have also been adjusted to recognize a tax
benefit, at an assumed combined federal and state rate of 40%, for
PRIMESTAR's historical losses from continuing operations for the periods
ended March 31, 1999 and December 31, 1998. This adjustment recognizes
that, if the PRIMESTAR/Tempo Satellite acquisition had taken place on
January 1, 1998 and 1999, the tax benefit of PRIMESTAR's and Tempo
Satellite's losses would have been realized in the consolidated federal
tax return of General Motors.
z. Based on the PRIMESTAR asset purchase agreement, 4.9 million shares of
Class H common stock were issued to effect the PRIMESTAR acquisition. We
acquired these shares from General Motors for a cash payment, which was
funded by us with a capital contribution from General Motors. In
connection therewith, the General Motors board also increased the Class H
dividend base by 4.9 million.
Preferred Stock Issuance Adjustments
The following adjustments, which are set forth in millions, give pro forma
effect to the issuance of Hughes Series A Preferred Stock.
aa. To reflect the pay down of short-term debt with proceeds from the
issuance of Hughes Series A preferred stock.
bb. To reflect the net proceeds from the issuance of Hughes Series A
Preferred Stock, in connection with a strategic alliance between Hughes
and AOL.
Under terms of the agreement, AOL invested $1.5 billion in return for
shares of a General Motors convertible, preferred equity security
(General Motors Series H 6.25% Automatically Convertible Preference
Stock). The preferred security will automatically convert to General
Motors Series H common stock in three years, based upon a variable
conversion factor linked to the General Motors Series H common stock
price at the time of conversion, and accrue dividends at a rate of 6.25%
per year payable quarterly. General Motors immediately invested the $1.5
billion into Hughes in consideration for a newly issued Hughes preferred
equity security (Hughes Series A Preferred Stock) with terms designed to
correspond to the financial terms of the General Motors Series H
preference stock.
cc. To reduce interest expense for the result of the pay down of short-term
debt assuming our current interest rate of 5.3%.
dd. To reflect the income tax effects of a reduction in interest expense that
resulted from the pay down of short-term debt at an assumed combined
federal and state tax rate of 40%.
ee. To record dividends on the Hughes Series A Preferred Stock.
Item 3. Properties
As of March 31, 1999, we had approximately 152 locations operating in 20
states and 51 cities in the United States and approximately 28 additional
locations in 19 cities in approximately 17 countries outside the United States.
At such date, we owned approximately 2.8 million square feet of space and
leased an additional 2.8 million square feet of space.
Item 4. Security Ownership of Certain Beneficial Owners and Management
Omitted.
52
<PAGE>
Item 5. Directors and Executive Officers
Omitted.
Item 6. Executive Compensation
Omitted.
Item 7. Certain Relationships and Related Transactions
Omitted.
Item 8. Legal Proceedings
Satellite Contract Dispute. On or about October 25, 1996, an action was
commenced by Comsat Corporation against PanAmSat, News Corporation Limited and
Grupo Televisa, S.A., in the United States District Court for the Central
District of California. The complaint alleges that News Corporation wrongfully
terminated an agreement with Comsat for the lease of transponders on an
Intelsat satellite over the term of a five-year lease, breached certain alleged
promises related to such agreement, and breached its alleged obligations under
a tariff filed by Comsat with the Federal Communications Commission. As to
PanAmSat, the complaint alleges that PanAmSat, alone and in conspiracy with
Grupo Televisa, intentionally interfered with the alleged agreement and with
Comsat's economic relationship with News Corporation. Comsat had previously
filed a similar action in the United States District Court for the District of
Maryland. By order dated October 10, 1996, the Maryland District Court
dismissed without prejudice the complaint in that action on the ground that the
court lacked personal jurisdiction over all of the defendants. The complaint in
the present action seeks actual and consequential damages, and punitive or
exemplary damages in an amount to be determined at trial. PanAmSat believes
this action is without merit. It intends to vigorously contest this matter,
although there can be no assurance that PanAmSat will prevail. Following the
completion of pretrial discovery, all defendants moved for summary judgment
dismissing the case. These motions are awaiting action by the court. If
PanAmSat were not to prevail, the amounts involved could be material to
PanAmSat.
Financing Contract Dispute. General Electric Capital Corporation and
DIRECTV, Inc., a wholly owned subsidiary of Hughes, entered into a contract on
July 31, 1995, in which General Electric Capital Corporation agreed to provide
financing for consumer purchases of DIRECTV programming and related hardware.
Under the contract, General Electric Capital Corporation 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. We guaranteed DIRECTV's performance under the
contract. A complaint and counterclaim have been filed by the parties in the
U.S. District Court for the District of Connecticut concerning General Electric
Capital Corporation's performance and DIRECTV's obligation to act as a surety.
General Electric Capital Corporation claims damages from DIRECTV in excess of
$140 million. DIRECTV is seeking damages from General Electric Capital
Corporation in excess of $70 million. We intend to vigorously contest General
Electric Capital Corporation's allegations and pursue our own contractual
rights and remedies. We do not believe that the litigation will have a material
adverse impact on our results of operations or financial position. Pretrial
discovery is not yet completed in the case and no trial date has been set.
Raytheon Purchase Price Adjustment Dispute. In connection with the 1997
spin-off of the defense electronics business of our predecessor and the
subsequent merger of that business with Raytheon Company, the terms of the
merger agreement provided processes for resolving disputes that might arise in
connection with post-closing financial adjustments that were also called for by
the terms of the merger agreement. Such financial adjustments might require a
cash payment from Raytheon to our company or vice versa. A dispute currently
exists regarding the post-closing adjustments which we and Raytheon have
proposed to one another and related issues regarding the adequacy of
disclosures made by us to Raytheon in the period prior to
53
<PAGE>
consummation of the merger. We 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 our
company making a payment to Raytheon that would be material to us. However, the
amount of any payment that either party might be required to make to the other
cannot be determined at this time. We intend to vigorously pursue resolution of
the disputes through the arbitration processes, opposing the adjustments
proposed by Raytheon, and seeking the payment from Raytheon that we have
proposed.
Personalized Media Patent Dispute. In November 1996, Personalized Media
Communications, Inc. brought an International Trade Commission proceeding
against DIRECTV, U.S. Satellite Broadcasting Company, Hughes Network Systems
and other manufacturers of receivers for the DIRECTV system. Personalized Media
sought to prevent importation of certain receivers manufactured in Mexico,
alleging infringement of one of its patents. During 1997, the International
Trade Commission held for DIRECTV and other respondents on all claims at issue,
finding each to be invalid. Personalized Media appealed these adverse rulings
to the Court of Appeals for the Federal Circuit. During 1998, the Court of
Appeals affirmed the lower holdings as to three of the claims, and remanded to
the International Trade Commission for further deliberation on a remaining
claim. Personalized Media then moved for dismissal of the proceeding, which was
granted, terminating the action. Also in 1996, Personalized Media filed a
related action in the U.S. District Court for the Northern District of
California. This case has been stayed pending outcome of the International
Trade Commission proceeding. The complaint alleges infringement and willful
infringement of three Personalized Media patents, and seeks unspecified
damages, trebling of damages, an injunction and attorneys' fees. We deny that
we engaged in acts of infringement of the asserted patents and intend to
vigorously contest these claims.
Afro-Asian Satellite Communications Contract Dispute. On June 11, 1998,
Afro-Asian Satellite Communications (Gibraltar) Ltd. requested formal
arbitration with the London Court of International Arbitration regarding a
contractual dispute with Hughes Space and Communications International, Inc. We
entered into a contract with Afro-Asian Satellite Communications on May 22,
1995 whereby Hughes Space and Communications International was to design and
provide a geomobile telecommunications system, known as the Agrani System,
consisting of two satellites, associated ground stations and other related
hardware and software. The value of the contract was $671,145,000. In its
request to the London Court, Afro-Asian Satellite Communications is claiming
that Hughes Space and Communications International failed to perform its
obligations under the contract and that Afro-Asian Satellite Communications was
therefore entitled to terminate the contract, which it purported to do by
letter dated January 25, 1996. Afro-Asian Satellite Communications is now
seeking from Hughes Space and Communications International approximately
$45,000,000, which represents repayment of monies paid to us, interest, and
limited reprocurement costs. Our position is that we performed our obligations
under the contract and that we were not fully paid by Afro-Asian Satellite
Communications. As a result, Hughes Space and Communications International
terminated its contract with Afro-Asian Satellite Communications in January
1996, and is seeking to recover its additional costs of $38,774,400 through the
arbitration which is now underway.
National Rural Telecommunications Cooperative. On June 3, 1999, the National
Rural Telecommunications Cooperative filed a lawsuit against DIRECTV, Inc. and
Hughes Communications Galaxy, Inc. (together, "DIRECTV") in the United States
District Court for the Central District of California. The complaint alleges
that DIRECTV breached the DBS Distribution Agreement which the NRTC alleges
provides the NRTC with certain exclusive distribution rights. The NRTC claims
that DIRECTV has wrongfully deprived it of the exclusive, or, in the
alternative, the non-exclusive, right to distribute programming formerly
provided by U.S. Satellite Broadcasting Company to DIRECTV subscribers in the
NRTC territories. DIRECTV denies that the NRTC has exclusive rights under the
DBS Distribution Agreement and intends to vigorously defend the lawsuit.
DIRECTV has filed a motion to dismiss the claim for non-exclusive rights on the
ground that the parties have agreed to binding arbitration of the matter.
DIRECTV has also filed a counterclaim against the NRTC, seeking a declaratory
judgment regarding certain of the terms in the DBS Distribution Agreement
between DIRECTV and the NRTC.
54
<PAGE>
Grand Jury Investigation. There is a pending grand jury investigation into
whether we should be accused of criminal violations of the export control laws
arising out of the participation of two of our employees on a committee formed
to review the findings of Chinese engineers regarding the crash of a Long March
rocket in China in 1996. We are 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. We do not expect the grand jury investigation or State
Department review to result in a material adverse effect upon our business.
However, there can be no assurance as to those conclusions.
Lane and Villalpando. In October 1994, a California jury awarded a total of
$89.5 million in damages against Hughes, which include $9.5 million of actual
damages and punitive damages of $40 million to each of two former Hughes
employees, Lane (race discrimination/retaliation) and Villalpando
(retaliation), based on claims of mistreatment and denials of promotions. The
trial court granted Hughes' motion to set aside the verdicts because of
insufficient evidence. On January 6, 1997, the Court of Appeals reversed the
trial court's decision to set aside the verdicts and reinstated the jury
verdicts, but reduced the two $40 million punitive damage awards to $5 million
and $2.83 million, resulting in an aggregate judgment of $17.33 million.
Hughes' petition for review by the California Supreme Court was granted in
November, 1997. Hughes filed its opening brief in January, 1998. This matter is
now fully briefed, including amicus briefs on behalf of Hughes. The Supreme
Court has not yet established a date for oral argument.
Environmental. We are subject to the requirements of federal, state, local
and foreign environmental and occupational safety and health laws and
regulations. These include laws regulating air emissions, water discharge and
waste management. We have an environmental management structure designed to
facilitate and support our compliance with these requirements. We cannot assure
you, however, that we are at all times in complete compliance with all such
requirements. Although we have made and will continue to make capital and other
expenditures to comply with environmental requirements, we do not expect
capital or other expenditures for environmental compliance to be material in
1999. Environmental requirements are complex, change frequently and have become
more stringent over time. Accordingly, there can be no assurance that these
requirements will not change or become more stringent in the future in a manner
that could have a material adverse effect on our business.
We are also subject to environmental laws requiring the investigation and
cleanup of environmental contamination. We believe our reserve is adequate to
cover environmental investigation and cleanup, although there can be no
assurance that our environmental cleanup costs and liabilities will not exceed
the current amount of our reserve.
In addition, we are involved in routine litigation incidental to the conduct
of our business. We do not believe that any of such litigation will have a
material adverse effect on our business. See also "Other Business Risks--Grand
Jury Investigation/State Department Review Could Result in Sanctions."
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters
All of our common stock, our sole class of common equity, is owned by
General Motors. Accordingly, there is no public trading market for our common
equity. Dividends on the common stock will be paid when and if declared by our
Board of Directors. At present, we have no plans to pay a dividend on our
common stock.
None of our common stock is subject to outstanding options or warrants to
purchase common stock. There are no securities convertible into our common
stock. None of our common stock currently can be sold under Rule 144. We are
not currently publicly offering any of our common stock.
Item 10. Recent Sales of Unregistered Securities
None.
55
<PAGE>
Item 11. Description of Registrant's Securities to be Registered
We are authorized to issue 11,000,000 shares of capital stock of which (1)
1,000,000 shares shall be common stock, $0.01 par value per share and (2)
10,000,000 shares shall be preferred stock, $0.10 par value per share. This
registration statement relates to the registration of our common stock, all of
the outstanding shares of which are owned by General Motors.
Item 12. Indemnification of Directors and Officers
We are a Delaware corporation. Subsection (b)(7) of Section 102 of the
Delaware General Corporation Law (the "DGCL") enables a corporation in its
original certificate of incorporation or an amendment thereto to eliminate or
limit the personal liability of a director to the corporation or its
stockholders for monetary damages for violations of the director's fiduciary
duty, except (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions) or
(iv) for any transaction from which a director derived an improper personal
benefit. Article Seventh of our Amended and Restated Certificate of
Incorporation and Article V of our Amended and Restated Bylaws provides that
our directors and officers shall not be personally liable to the corporation or
its stockholders for monetary damages if a director or officer acts in good
faith and in a manner he reasonably believes to be in or not opposed to our
best interests and provides for indemnification of our officers and directors
to the full extent permitted by applicable law.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that the person is or was a director or officer of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with that action, suit or proceeding provided that the
director or officer acted in good faith in a manner reasonably believed to be
in, or not opposed to, the best interests of the corporation, and, with respect
to any criminal action or proceeding, provided further that the director or
officer has no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that the person acted in any of the capacities set forth
above, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of that action or suit
provided that the director or officer acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, except that no indemnification may be made in respect of any
claim, issue or matter as to which the director or officer shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which the action or suit was brought shall
determine upon application that despite the adjudication of liability but in
view of all of the circumstances of the case, the director or officer is fairly
and reasonably entitled to indemnity for those expenses which the Court of
Chancery or other court shall deem proper.
Section 145 further provides that (i) to the extent a director or officer of
a corporation has been successful in the defense of any action, suit or
proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith; and (ii) indemnification and advancement of expenses
provided for, by, or granted pursuant to, Section 145 shall not be deemed
exclusive of any other rights to which
56
<PAGE>
the indemnified party may be entitled. In addition, Section 145 empowers the
corporation to purchase and maintain insurance on behalf of any person who is
or was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or incurred by him in any of those capacities,
or arising out of his status as such, whether or not the corporation would have
the power to indemnify him against those liabilities under Section 145.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission this indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against those
liabilities (other than the payment by us of expenses incurred or paid by one
of our directors, officers or controlling persons in the successful defense of
any action, suit or proceeding) is asserted by any director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
indemnification by us is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of that issue.
Item 13. Financial Statements and Supplementary Data
This registration statement includes the financial statements described in
Item 15(a).
Item 14. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 15. Financial Statements and Exhibits
(a)Financial Information
Index
Hughes Unaudited Supplemental Pro Forma Financial Data as of March 31, 1999
and for the three months ended March 31, 1999 and 1998:
Introduction
Condensed Statement of Income
Condensed Balance Sheet
Selected Segment Data
Selected Financial Data
Hughes Unaudited Financial Statements as of March 31, 1999 and for the three
months ended March 31, 1999 and 1998:
Statement of Income and Available Separate Consolidated Net Income
Balance Sheet
Condensed Statement of Cash Flows
Notes to Financial Statements
Hughes Unaudited Supplemental Pro Forma Financial Data as of December 31, 1998
and 1997 and for the years ended December 31, 1998, 1997 and 1996:
Condensed Statement of Income
Condensed Balance Sheet
Selected Segment Data
Selected Financial Data
57
<PAGE>
Hughes Financial Statements and Financial Statement Schedule as of December
31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996:
Independent Auditors' Report
Statement of Income and Available Separate Consolidated Net Income
Balance Sheet
Statement of Changes in Owner's Equity
Statement of Cash Flows
Notes to Financial Statements
Schedule II--Valuation and Qualifying Accounts
Phoenixstar, Inc. (formerly known as PRIMESTAR, Inc.) Financial Statements as
of March 31, 1999 and for the three months ended March 31, 1999 and 1998:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Stockholders' Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
PRIMESTAR, Inc. Financial Statements as of December 31, 1998 and for the years
ended December 31, 1998, 1997 and 1996 and Financial Statement Schedule:
Independent Auditors' Report
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedule
TCI Satellite Entertainment Inc. Financial Statements as of March 31, 1999 and
for the three months ended March 31, 1999 and 1998:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Stockholders' Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
TCI Satellite Entertainment, Inc. Financial Statements as of December 31, 1998
and for the years ended December 31, 1998, 1997 and 1996 and Financial
Statement Schedule:
Independent Auditors' Report
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedule
United States Satellite Broadcasting Company, Inc. Financial Statements as of
March 31, 1999 and for the three months ended March 31, 1999 and 1998:
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Interim Financial Statements
58
<PAGE>
United States Satellite Broadcasting, Inc., Financial Statements as of December
31, 1998 and for the years ended December 31, 1998, 1997 and 1996
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1998
Consolidated Statements of Operations for the years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Shareholders' Equity
Consolidated Statement of Cash Flows for the years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
(b)Exhibits
<TABLE>
<C> <S>
*2.1 Agreement and Plan of Merger among General Motors Corporation, Hughes
Electronics Corporation and United States Satellite Broadcasting
Company, Inc. dated December 11, 1998 (incorporated by reference to
Exhibit 2(a) to the Current Report on Form 8-K of General Motors
Corporation filed December 17, 1998 (the "December 8-K")).
*2.2 Shareholders Agreement dated December 11, 1998 among General Motors
Corporation, Hughes Electronics Corporation, Hubbard Broadcasting,
Inc., Stanley S. Hubbard, Stanley E. Hubbard and Robert W. Hubbard
(incorporated by reference to Exhibit 2(b) to the December 8-K).
*2.3 Asset Purchase Agreement among PRIMESTAR, Inc., PRIMESTAR Partners
L.P., PRIMESTAR MDU, Inc., the stockholders of PRIMESTAR, Inc. and
Hughes Electronics Corporation, dated as of January 22, 1999
(incorporated by reference to Exhibit 99.1 to the Current Report on
Form 8-K of General Motors Corporation filed February 2, 1999 (the
"February 8-K")).
*2.4 Asset Purchase Agreement among PRIMESTAR, Inc., PRIMESTAR Partners
L.P., Tempo Satellite, Inc., the stockholders of PRIMESTAR, Inc. and
Hughes Electronics Corporation, dated as of January 22, 1999
(incorporated by reference to Exhibit 99.2 to the February 8-K).
**3.1 Amended and Restated Certificate of Incorporation of Hughes
Electronics Corporation.
**3.2 Bylaws of Hughes Electronics Corporation.
**4.1 Specimen form of certificate representing Common Stock of Hughes
Electronics Corporation.
**10.1 Revolving Credit Agreement (364-day Facility), dated as of December
5, 1997 among Hughes Network Systems, Inc. to be renamed Hughes
Electronics Corporation, the Banks named therein and Bank of America
National Trust and Savings Association as Administrative Agent,
Morgan Guaranty Trust Company of New York, as Syndication Agent,
Citicorp USA, Inc. and The Chase Manhattan Bank as Documentation
Agents (the "364-day Facility").
**10.2 First Amendment to the 364-day Facility, dated as of December 3,
1998.
**10.3 Revolving Credit Agreement (Multi-Year Facility), dated as of
December 5, 1997 among Hughes Network Systems, Inc. to be renamed
Hughes Electronics Corporation, the Banks named therein and Bank of
America National Trust and Savings Association as Administrative
Agent, Morgan Guaranty Trust Company of New York, as Syndication
Agent, Citicorp USA, Inc. and The Chase Manhattan Bank as
Documentation Agents (the "Multi-Year Facility").
**10.4 First Amendment to the Multi-Year Facility, dated as of December 15,
1998.
**10.5 DBS Distribution Agreement between Hughes Communications Galaxy, Inc.
and National Rural Telecommunications Cooperative, dated April 10,
1992 (the "DBS Agreement").+
**10.6 Addendum I to the DBS Agreement.
**10.7 Amendment No. 1 to the DBS Agreement, dated May 11, 1992.
</TABLE>
59
<PAGE>
<TABLE>
<C> <S>
**10.8 Amendment No. 2 to the DBS Agreement, dated May 26, 1992.
**10.9 Amendment No. 3 to the DBS Agreement, Letter of Agreement, dated May
29, 1992.
**10.10 Amendment No. 4 to the DBS Agreement, dated December 1, 1992.
**10.11 Amendment No. 5 to the DBS Agreement, dated December 11, 1992.
**10.12 Amendment No. 6 to the DBS Agreement, dated December 23, 1992.
**10.13 Amendment No. 7 to the DBS Agreement, Letter of Agreement, dated
July 9, 1993.
**10.14 Amendment No. 8 to the DBS Agreement, Letter of Agreement, dated
February 14, 1994.+
**10.15 Amendment No. 9 to the DBS Agreement, Letter of Agreement, dated
June 22, 1994.
*10.16 Loan Agreement, dated May 15, 1997, between Hughes Network Systems,
Inc. and PanAmSat (incorporated by reference to the Annual Report on
Form 10-K for the year ended December 31, 1997 of PanAmSat
Corporation (PanAmSat's "Form 10-K").
*10.17 First Amendment to Loan Agreement, dated December 23, 1997
(incorporated by reference to PanAmSat's Form 10-K).
*10.18 Subordination and Amendment Agreement, dated as of February 20,
1998, among Hughes Electronics Corporation, PanAmSat and Citicorp
USA Inc. (incorporated by reference to PanAmSat's Form 10-K).
*10.19 Subordination Agreement, dated as of January 16, 1998, between
Hughes Electronics and PanAmSat (incorporated by reference to
PanAmSat's Form 10-K).
*10.20 Credit Agreement, dated February 20, 1998, among PanAmSat, certain
lenders and Citicorp USA (incorporated by reference to PanAmSat's
Form 10-K).
</TABLE>
- --------
* Incorporated by reference.
** Previously filed.
+ Confidential treatment requested for certain portions of this exhibit
pursuant to Rule 406 promulgated under the Securities Act.
60
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No. 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
Hughes Electronics Corporation
/s/ Jan L. Williamson
By: _________________________________
Name: Jan L. Williamson
Title: Secretary
August 13, 1999
61
<PAGE>
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Hughes Unaudited Supplemental Pro Forma Financial Data as of March 31,
1999 and for the three months ended March 31, 1999 and 1998:
Introduction............................................................ F-3
Condensed Statement of Income........................................... F-4
Condensed Balance Sheet................................................. F-4
Selected Segment Data................................................... F-5
Selected Financial Data................................................. F-7
Hughes Unaudited Financial Statements as of March 31, 1999 and for the
three months ended March 31, 1999 and 1998:
Statement of Income and Available Separate Consolidated Net Income...... F-8
Balance Sheet........................................................... F-9
Condensed Statement of Cash Flows....................................... F-10
Notes to Financial Statements........................................... F-11
Hughes Unaudited Supplemental Pro Forma Financial Data as of December 31,
1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996:
Condensed Statement of Income........................................... F-16
Condensed Balance Sheet................................................. F-16
Selected Segment Data................................................... F-17
Selected Financial Data................................................. F-18
Hughes Financial Statements and Financial Statement Schedule as of
December 31, 1998 and 1997 and for the years ended December 31, 1998,
1997 and 1996:
Independent Auditors' Report............................................ F-19
Statement of Income and Available Separate Consolidated Net Income...... F-20
Balance Sheet........................................................... F-21
Statement of Changes in Owner's Equity.................................. F-22
Statement of Cash Flows ................................................ F-23
Notes to Financial Statements........................................... F-24
Schedule II--Valuation and Qualifying Accounts.......................... F-48
Phoenixstar, Inc. (formerly known as PRIMESTAR, Inc.) Financial
Statements as of March 31, 1999 and for the three months ended March 31,
1999 and 1998:
Consolidated Balance Sheets............................................. F-49
Consolidated Statements of Operations .................................. F-51
Consolidated Statement of Stockholders' Deficit ........................ F-52
Consolidated Statements of Cash Flows................................... F-53
Notes to Consolidated Financial Statements.............................. F-54
PRIMESTAR, Inc. Financial Statements as of December 31, 1998 and 1997 and
for the years ended December 31, 1998, 1997 and 1996 and Financial
Statement Schedule:
Independent Auditors' Report............................................ F-61
Consolidated Balance Sheet as of December 31, 1998 and 1997 ............ F-62
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996 ................................................... F-64
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 ...................................... F-65
Consolidated Statement of Cash Flows for the years ended December 31,
1998, 1997 and 1996 ................................................... F-66
Notes to Consolidated Financial Statements.............................. F-67
Financial Statement Schedule............................................ F-88
TCI Satellite Entertainment Inc. Financial Statements as of March 31,
1999 and for the three months ended March 31, 1999 and 1998:
Consolidated Balance Sheets ............................................ F-89
Consolidated Statements of Operations .................................. F-90
Consolidated Statement of Stockholders' Deficit ........................ F-91
Consolidated Statements of Cash Flows .................................. F-92
Notes to Consolidated Financial Statements.............................. F-93
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
TCI Satellite Entertainment, Inc. Financial Statements as of December 31,
1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996
and Financial Statement Schedule:
Independent Auditors' Report............................................ F-99
Consolidated Balance Sheet as of December 31, 1998 and 1997 ............ F-100
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.................................................... F-101
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996....................................... F-102
Consolidated Statement of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................................... F-103
Notes to Consolidated Financial Statements.............................. F-104
Financial Statement Schedule............................................ F-120
United States Satellite Broadcasting Company, Inc. Financial Statements
as of March 31, 1999 and for the three months ended March 31, 1999 and
1998:
Consolidated Statements of Operations .................................. F-121
Consolidated Balance Sheets ............................................ F-122
Consolidated Statements of Cash Flows .................................. F-124
Notes to Consolidated Interim Financial Statements...................... F-125
United States Satellite Broadcasting, Inc. Financial Statements as of
December 31, 1998 and 1997 and for the years ended December 31, 1998,
1997 and 1996:
Report of Independent Public Accountants................................ F-129
Consolidated Balance Sheets as of December 31, 1998 and 1997............ F-130
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.................................................... F-131
Consolidated Statements of Shareholders' Equity......................... F-132
Consolidated Statement of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................................... F-133
Notes to Consolidated Financial Statements.............................. F-134
</TABLE>
F-2
<PAGE>
HUGHES UNAUDITED SUPPLEMENTAL PRO FORMA FINANCIAL DATA
Hughes' financial statements reflect the application of purchase accounting
adjustments as described in Note 1 to the financial statements, which follow
the unaudited supplemental pro forma financial data. However, as provided in
GM's restated certificate of incorporation, the earnings attributable to Class
H common stock for purposes of determining the amount available for the payment
of dividends on Class H common stock specifically excludes such adjustments.
More specifically, amortization of the intangible assets associated with GM's
1985 purchase of Hughes amounted to $5.3 million in the three months ended
March 31, 1999 and 1998 and $21.0 million in 1998, 1997 and 1996. Such amounts
are excluded from the earnings available for the payment of dividends on Class
H common stock and are charged against earnings available for the payment of
dividends on GM's $1 2/3 par value common stock. Unamortized purchase
accounting adjustments associated with GM's purchase of Hughes were
$421.3 million and $442.3 million at March 31, 1999 and 1998, respectively and
$426.6 million, $447.6 million and $468.6 million at December 31, 1998, 1997
and 1996, respectively.
In order to provide additional analytical data to the users of Hughes'
financial information, supplemental data in the form of unaudited summary pro
forma financial data are provided. Consistent with the basis on which earnings
of Hughes available for the payment of dividends on the GM Class H common stock
is determined, the pro forma data exclude purchase accounting adjustments
related to General Motors' acquisition of Hughes. Included in the supplemental
data are certain financial ratios which provide measures of financial returns
excluding the impact of purchase accounting adjustments. The pro forma data are
not presented as a measure of GM's total return on its investment in Hughes.
F-3
<PAGE>
HUGHES ELECTRONICS CORPORATION
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA*
PRO FORMA CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended March
31,
--------------------------
1999 1998
------------ ------------
(Dollars in Millions
Except per Share Amounts)
<S> <C> <C>
Total revenues.................................... $1,451.8 $1,291.0
Total operating costs and expenses................ 1,488.6 1,207.4
------------ ------------
Operating (loss) profit........................... (36.8) 83.6
Non-operating income.............................. 144.4 0.2
Income taxes...................................... 35.8 31.4
Minority interests in net losses of subsidiaries.. 6.5 1.3
Cumulative effect of accounting change............ (9.2)
------------ ------------
Earnings Used for Computation of Available
Separate Consolidated Net Income................. $ 78.3 $ 44.5
============ ============
Earnings Attributable to General Motors Class H
Common Stock on a Per Share Basis:
Basic........................................... $ 0.20 $ 0.11
============ ============
Diluted......................................... $ 0.19 $ 0.11
============ ============
</TABLE>
PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Total Current Assets................................... $3,216.7 $3,846.4
Satellites, net........................................ 3,580.5 3,197.5
Property, net.......................................... 1,061.2 1,059.2
Net Investment in Sales-type Leases.................... 167.9 173.4
Intangible Assets, Investments and Other Assets, net... 4,964.1 4,731.9
--------- ---------
Total Assets....................................... $12,990.4 $13,008.4
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Total Current Liabilities.............................. $ 1,898.2 $ 2,009.5
Long-Term Debt......................................... 856.6 778.7
Postretirement Benefits Other Than Pensions, Other
Liabilities and Deferred Credits...................... 1,720.2 1,783.2
Minority Interests..................................... 485.6 481.7
Total Stockholder's Equity (1)..................... 8,029.8 7,955.3
--------- ---------
Total Liabilities and Stockholder's Equity (1)..... $12,990.4 $13,008.4
========= =========
</TABLE>
- --------
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1) General Motors' equity in its wholly-owned subsidiary, Hughes. Holders of
GM Class H common stock have no direct rights in the equity or assets of
Hughes, but rather have rights in the equity and assets of GM (which
includes 100% of the stock of Hughes).
F-4
<PAGE>
HUGHES ELECTRONICS CORPORATION
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA*--Continued
PRO FORMA SELECTED SEGMENT DATA
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
1999 1998
-------- --------
(Dollars in
Millions)
<S> <C> <C>
Direct-To-Home Broadcast
Total Revenues............................................. $ 556.6 $ 387.9
Operating (Loss) (3)....................................... (23.4) (31.6)
EBITDA (3)(4) ............................................. 3.9 (9.1)
EBITDA Margin (4) ......................................... 0.7% --
Depreciation and Amortization.............................. 27.3 22.5
Segment Assets............................................. 2,247.5 1,452.6
Capital Expenditures (1)................................... 77.6 13.7
Satellite Services
Total Revenues............................................. $ 193.5 $ 193.0
Operating Profit (3)....................................... 79.1 85.7
Operating Profit Margin.................................... 40.9% 44.4%
EBITDA (3)(4).............................................. 145.9 140.2
EBITDA Margin (4).......................................... 75.4% 72.6%
Depreciation and Amortization.............................. 66.8 54.5
Segment Assets............................................. 5,830.1 5,806.8
Capital Expenditures (2)................................... 339.8 249.6
Network Systems
Total Revenues............................................. $ 230.9 $ 184.7
Operating (Loss) (3)....................................... (17.8) (11.9)
EBITDA (3)(4).............................................. (5.9) (3.4)
Depreciation and Amortization.............................. 11.9 8.5
Segment Assets............................................. 1,283.0 1,168.9
Capital Expenditures....................................... 2.2 4.8
Satellite Systems
Total Revenues............................................. $ 630.3 $ 624.3
Operating (Loss) Profit (3)................................ (14.4) 55.1
Operating Profit Margin.................................... 8.8%
EBITDA (3)(4).............................................. (1.4) 65.8
EBITDA Margin (4).......................................... 10.5%
Depreciation and Amortization.............................. 13.0 10.7
Segment Assets............................................. 1,593.4 1,415.3
Capital Expenditures....................................... 12.3 10.7
Eliminations and Other
Total Revenues............................................. $ (159.5) $ (98.9)
Operating (Loss) (3)....................................... (60.3) (13.7)
EBITDA (3)(4).............................................. (56.3) (12.2)
Depreciation and Amortization.............................. 4.0 1.5
Segment Assets............................................. 2,036.4 2,617.7
Capital Expenditures....................................... (32.2) 125.9
Total
Total Revenues............................................. $1,451.8 $1,291.0
Operating (Loss) Profit (3)................................ (36.8) 83.6
Operating Profit Margin.................................... 6.5%
EBITDA (3)(4).............................................. 86.2 181.3
EBITDA Margin (4).......................................... 5.9% 14.0%
Depreciation and Amortization.............................. 123.0 97.7
Segment Assets............................................. 12,990.4 12,461.3
Capital Expenditures....................................... 399.7 404.7
</TABLE>
See notes on next page.
F-5
<PAGE>
- --------
*The Financial Statements reflect the application of purchase accounting
adjustments related to GM's acquisition of Hughes. However, as provided in
the General Motors' Restated Certificate of Incorporation, the earnings
attributable to GM Class H common stock for purposes of determining the
amount available for the payment of dividends on GM Class H common stock
specifically excludes such adjustments. In order to provide additional
analytical data, the above unaudited pro forma selected segment data, which
exclude the purchase accounting adjustments related to GM's acquisition of
Hughes, are presented.
(1) Includes expenditures related to satellites amounting to $53.0 million in
the first quarter of 1999.
(2) Includes expenditures related to satellites amounting to $189.7 million and
$145.6 million in 1999 and 1998, respectively. Also included in the 1999
and 1998 amounts are $141.3 million and $96.6 million, respectively,
related to the early buy-out of satellite sale-leasebacks.
(3) First quarter 1999 includes a charge of $81.0 million and $11.0 million at
Satellite Systems and Network Systems, respectively, for the termination of
the Asia-Pacific Mobile Telecommunications satellite systems contract due
to export licenses not being issued.
(4) EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of
operating results or cash flow from operations, as determined in accordance
with generally accepted accounting principles. See discussion in "Item 2.
Financial Information--Management's Discussion and Analysis."
F-6
<PAGE>
HUGHES ELECTRONICS CORPORATION
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA*--Concluded
PRO FORMA SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months
Ended March
31,
--------------
1999 1998
------ ------
(Dollars in
Millions)
<S> <C> <C>
Operating (loss) profit........................................ $ (37) $ 84
EBITDA (1)..................................................... $ 86 $ 181
EBITDA margin (2).............................................. 5.9% 14.0%
Income before income taxes, minority interests and cumulative
effect of accounting change................................... $ 108 $ 84
Earnings used for computation of available separate
consolidated net income....................................... $ 78 $ 45
Average Number of GM Class H dividend base shares (3).......... 400.2 399.9
Stockholder's equity........................................... $8,030 $7,911
Working capital................................................ $1,319 $3,258
Operating profit as a percent of revenues...................... 6.5%
Income from continuing operations before income taxes, minority
interests and cumulative effect of accounting change as a
percent of revenues........................................... 7.4% 6.5%
Net income as a percent of revenues............................ 5.4% 3.4%
</TABLE>
- --------
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1) EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of
operating results or cash flow from operations, as determined in accordance
with generally accepted accounting principles. See discussion in "Item 2.
Financial Information--Management's Discussion and Analysis."
(2) EBITDA margin is calculated by dividing EBITDA by total revenues.
(3) Class H dividend base is used in calculating earnings attributable to GM
Class H common stock on a per share basis. This is not the same as the
average number of GM Class H shares outstanding, which was 106.3 million
for the first quarter of 1999 and 104.1 million for the first quarter of
1998.
F-7
<PAGE>
HUGHES ELECTRONICS CORPORATION
STATEMENT OF INCOME AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March
31,
----------------------------
1999 1998
------------- -------------
(Dollars in Millions Except
Per Share Amounts)
<S> <C> <C>
Revenues
Product sales................................. $ 716.1 $ 692.1
Direct broadcast, leasing and other services.. 735.7 598.9
------------- -------------
Total Revenues.................................. 1,451.8 1,291.0
------------- -------------
Operating Costs and Expenses
Cost of products sold......................... 669.2 542.3
Broadcast programming and other costs......... 291.6 264.8
Selling, general and administrative expenses.. 404.8 302.6
Depreciation and amortization................. 123.0 97.7
Amortization of GM purchase accounting
adjustments.................................. 5.3 5.3
------------- -------------
Total Operating Costs and Expenses.............. 1,493.9 1,212.7
------------- -------------
Operating (Loss) Profit......................... (42.1) 78.3
Interest income................................. 13.6 37.5
Interest expense................................ (6.9) (3.0)
Other, net...................................... 137.7 (34.3)
------------- -------------
Income Before Income Taxes, Minority Interests
and Cumulative Effect of Accounting Change..... 102.3 78.5
Income taxes.................................... 35.8 31.4
Minority interests in net losses of
subsidiaries................................... 6.5 1.3
------------- -------------
Income before cumulative effect of accounting
change......................................... 73.0 48.4
Cumulative effect of accounting change, net of
taxes.......................................... -- (9.2)
------------- -------------
Net Income...................................... 73.0 39.2
Adjustments to exclude the effect of GM purchase
accounting adjustments......................... 5.3 5.3
------------- -------------
Earnings Used for Computation of Available
Separate Consolidated Net Income............... $ 78.3 $ 44.5
============= =============
Available Separate Consolidated Net Income
Average number of shares of General Motors Class
H Common Stock outstanding (in millions)
(Numerator).................................... 106.3 104.1
Class H dividend base (in millions)
(Denominator).................................. 400.2 399.9
Available Separate Consolidated Net Income...... $ 20.8 $ 11.5
============= =============
Earnings Attributable to General Motors Class H
Common Stock on a Per Share Basis
Basic........................................... $ 0.20 $ 0.11
============= =============
Diluted......................................... $ 0.19 $ 0.11
============= =============
</TABLE>
- --------
Reference should be made to the Notes to Financial Statements.
F-8
<PAGE>
HUGHES ELECTRONICS CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
------ --------- ------------
(Unaudited)
(Dollars in Millions)
<S> <C> <C>
Current Assets
Cash and cash equivalents............................ $ 780.0 $ 1,342.1
Accounts and notes receivable (less allowances)...... 849.3 922.4
Contracts in process, less advances and progress
payments of $25.2 and $27.0......................... 713.2 783.5
Inventories.......................................... 578.8 471.5
Prepaid expenses and other, including deferred income
taxes of $17.3 and $33.6............................ 295.4 326.9
--------- ---------
Total Current Assets................................... 3,216.7 3,846.4
Satellites, net........................................ 3,580.5 3,197.5
Property, net.......................................... 1,061.2 1,059.2
Net Investment in Sales-type Leases.................... 167.9 173.4
Intangible Assets, net of accumulated amortization of
$441.6 and $413.2..................................... 3,732.9 3,552.2
Investments and Other Assets........................... 1,652.5 1,606.3
--------- ---------
Total Assets....................................... $13,411.7 $13,435.0
========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable..................................... $ 710.2 $ 764.1
Advances on contracts................................ 302.0 291.8
Deferred revenues.................................... 51.7 43.8
Current portion of long-term debt.................... 170.3 156.1
Accrued liabilities.................................. 664.0 753.7
--------- ---------
Total Current Liabilities.............................. 1,898.2 2,009.5
--------- ---------
Long-Term Debt......................................... 856.6 778.7
Deferred Gains on Sales and Leasebacks................. 65.0 121.5
Accrued Operating Leaseback Expense.................... 6.1 56.0
Postretirement Benefits Other Than Pensions............ 151.2 150.7
Other Liabilities and Deferred Credits................. 846.0 811.1
Deferred Income Taxes.................................. 651.9 643.9
Commitments and Contingencies..........................
Minority Interests..................................... 485.6 481.7
Stockholder's Equity
Capital stock and additional paid-in capital......... 8,150.4 8,146.1
Net income retained for use in the business.......... 330.8 257.8
--------- ---------
Subtotal Stockholder's Equity.......................... 8,481.2 8,403.9
--------- ---------
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment................ (37.1) (37.1)
Accumulated unrealized gains on securities.......... 11.5 16.1
Accumulated foreign currency translation
adjustments........................................ (4.5) (1.0)
--------- ---------
Accumulated other comprehensive loss................. (30.1) (22.0)
--------- ---------
Total Stockholder's Equity............................. 8,451.1 8,381.9
--------- ---------
Total Liabilities and Stockholder's Equity............. $13,411.7 $13,435.0
========= =========
</TABLE>
- --------
Reference should be made to the Notes to Financial Statements.
F-9
<PAGE>
HUGHES ELECTRONICS CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
1999 1998
-------- --------
(Dollars in
Millions)
<S> <C> <C>
Cash Flows from Operating Activities
Net Cash Provided by (Used in) Operating Activities..... $ 6.5 $ (38.7)
-------- --------
Cash Flows from Investing Activities
Investment in companies, net of cash acquired............... (242.1) (8.4)
Expenditures for property................................... (47.1) (38.1)
Increase in satellites...................................... (230.2) (270.1)
Early buy-out of satellite under sale and leaseback......... (141.3) (96.6)
Proceeds from disposal of property.......................... -- 17.6
-------- --------
Net Cash Used in Investing Activities................... (660.7) (395.6)
-------- --------
Cash Flows from Financing Activities
Net increase in notes and loans payable..................... 14.2 --
Long-term debt borrowings................................... 405.0 875.0
Repayment of long-term debt................................. (327.1) (725.0)
-------- --------
Net Cash Provided by Financing Activities............... 92.1 150.0
-------- --------
Net decrease in cash and cash equivalents................... (562.1) (284.3)
Cash and cash equivalents at beginning of the period........ 1,342.1 2,783.8
-------- --------
Cash and cash equivalents at end of the period.............. $ 780.0 $2,499.5
======== ========
</TABLE>
- --------
Reference should be made to the Notes to Financial Statements.
F-10
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting. In the opinion of management, all adjustments (consisting only of
normal recurring items) which are necessary for a fair presentation have been
included. The results for interim periods are not necessarily indicative of
results that may be expected for any other interim period or for the full year.
For further information, refer to the financial statements and notes thereto
included in the General Motors ("GM") 1998 Annual Report on Form 10-K.
The financial statements include the applicable portion of intangible
assets, including goodwill, and related amortization resulting from purchase
accounting adjustments associated with GM's purchase of Hughes in 1985.
In 1998, Hughes adopted American Institute of Certified Public Accountants
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that all start-up costs previously capitalized be
written off and recognized as a cumulative effect of accounting change, net of
taxes, as of the beginning of the year of adoption. On a prospective basis,
these types of costs are required to be expensed as incurred. The unfavorable
cumulative effect of this accounting change was $9.2 million after-tax, or
$0.02 per share of GM Class H common stock in the first quarter of 1998.
Note 2. Inventories
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(Dollars in Millions)
<S> <C> <C>
Major Classes of Inventories
Productive material and supplies................... $ 72.2 $ 73.4
Work in process.................................... 390.0 285.1
Finished goods..................................... 116.6 113.0
------ ------
Total.......................................... $578.8 $471.5
====== ======
</TABLE>
Note 3. Comprehensive Income
Hughes' total comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
---------- ----------
(Dollars in Millions)
<S> <C> <C>
Net income........................................ $ 73.0 $ 39.2
Other comprehensive loss:
Foreign currency translation adjustments........ (3.5) (0.3)
Unrealized loss on securities................... (4.6) (0.6)
---------- ----------
Other comprehensive loss....................... (8.1) (0.9)
---------- ----------
Total comprehensive income.................... $ 64.9 $ 38.3
========== ==========
</TABLE>
Note 4. Earnings Per Share Attributable to GM Class H Common Stock and
Available Separate Consolidated Net Income
Earnings per share attributable to GM Class H common stock is determined
based on the relative amounts available for the payment of dividends to holders
of GM Class H common stock. Holders of GM Class H common stock have no direct
rights in the equity or assets of Hughes, but rather have rights in the equity
and assets of GM (which includes 100% of the stock of Hughes).
F-11
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 4. Earnings Per Share Attributable to GM Class H Common Stock and
Available Separate Consolidated Net Income--Concluded
Amounts available for the payment of dividends on GM Class H common stock
are based on the Available Separate Consolidated Net Income ("ASCNI") of
Hughes. The ASCNI of Hughes is determined quarterly and is equal to the
separate consolidated net income of Hughes, excluding the effects of GM
purchase accounting adjustments arising from GM's acquisition of Hughes
(earnings used for computation of ASCNI), multiplied by a fraction, the
numerator of which is a number equal to the weighted-average number of shares
of GM Class H common stock outstanding during the period (106.3 million and
104.1 million during the first quarters of 1999 and 1998, respectively) and the
denominator of which was 400.2 and 399.9 million during the first quarters of
1999 and 1998, respectively. The denominator used in determining the ASCNI of
Hughes may be adjusted from time-to-time as deemed appropriate by the GM Board
of Directors ("GM Board") to reflect subdivisions or combinations of the GM
Class H common stock, certain transfers of capital to or from Hughes, the
contribution of shares of capital stock of GM to or for the benefit of Hughes
employees and the retirement of GM Class H common stock purchased by Hughes.
The GM Board's discretion to make such adjustments is limited by criteria set
forth in GM's Restated Certificate of Incorporation.
Effective January 1, 1999, shares of Class H common stock delivered by GM in
connection with the award of such shares to and the exercise of stock options
by employees of Hughes will increase the denominator of the fraction referred
to above. Prior to January 1, 1999, there was no dilutive effect resulting from
the assumed exercise of stock options, because the exercise of stock options
did not affect the GM Class H dividend base (denominator). The basic and
diluted earnings per share for Class H common stock for the period ended March
31, 1999 (in millions except per share amounts) is as follows:
<TABLE>
<CAPTION>
Per Share
ASCNI Shares Amount
------ ------ ---------
<S> <C> <C> <C>
Basic EPS........................................ $ 20.8 106.3 $0.20
Effect of Dilutive Securities.................... 0.8 5.9 0.01
------ ----- -----
Diluted EPS...................................... $21.6 112.2 $0.19
====== ===== =====
</TABLE>
Basic and diluted earnings attributable to Class H common stock on a per
share basis were $0.11 at March 31, 1998.
Note 5. Other Postretirement Benefits
Hughes has disclosed in the financial statements certain amounts associated
with estimated future postretirement benefits other than pensions and
characterized such amounts as "accumulated postretirement benefit obligations,"
"liabilities" or "obligations." Notwithstanding the recording of such amounts
and the use of these terms, Hughes does not admit or otherwise acknowledge that
such amounts or existing postretirement benefit plans of Hughes (other than
pensions) represent legally enforceable liabilities of Hughes.
Note 6. Acquisitions
On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million
subscriber medium-power direct-to-home satellite business and the high-power
satellite assets and direct-broadcast satellite orbital frequencies of Tempo
Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. The
transactions will be accounted for using the purchase method of accounting. On
April 28, 1999, the acquisition of
F-12
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
PRIMESTAR's direct-to-home business was completed. The purchase price consisted
of $1.1 billion in cash and 4,871,448 shares of GM Class H common stock, for a
total purchase price of $1.33 billion, based on the average market price of
$47.87 per share of Class H common stock at the time the acquisition agreement
was signed. The purchase price for the Tempo Satellite assets consists of
$500.0 million in cash. Of this purchase price, $150.0 million was paid on
March 10, 1999 for a satellite that has not yet been launched. The remaining
$350.0 million is for an in-orbit satellite and related satellite orbital
frequencies. Such amount is payable upon Federal Communications Commission
approval of the transfer of the 11 frequencies, which is expected in mid-1999.
There can be no assurance that the Federal Communications Commission will
approve this transfer or that this portion of the Tempo Satellite transaction
will be consummated.
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB
provides direct-to-home premium satellite programming in conjunction with
DIRECTV's basic programming service. USSB launched its service in June 1994
and, as of March 31, 1999, had more than 2.2 million subscribers nationwide,
over 90% of whom are also DIRECTV subscribers. The acquisition will be
accounted for using the purchase method of accounting. The purchase price,
consisting of cash and GM Class H common stock, will be determined at closing
based upon an agreed-upon formula and will not exceed $1.62 billion in the
aggregate. Subject to certain limitations in the merger agreement, USSB
shareholders will be entitled to elect to receive cash or shares of GM Class H
common stock. The amount of cash to be paid in the merger cannot be less than
30% or greater than 50% of the aggregate purchase price with the remaining
consideration consisting of GM Class H common stock. The merger, which is
subject to USSB shareholder approval, is expected to close in the second
quarter of 1999.
In October 1998, Hughes agreed to acquire, pending regulatory approval in
Mexico, an additional ownership interest in Grupo Galaxy Mexicana, S.A. de C.V.
("GGM"), a Galaxy Latin America, LLC local operating company located in Mexico,
from Grupo MVS, S.A. de C.V. The GGM transaction was completed in February 1999
upon receipt of government regulatory approval in Mexico. Hughes' equity
ownership represents 49.0% of the voting equity and all of the non-voting
equity of GGM. The GGM transaction was accounted for using the purchase method
of accounting. The increased ownership resulted in GGM's consolidation since
the date of acquisition.
Note 7. Segment Reporting
Hughes' segments, which are differentiated by their products and services,
include Direct-To-Home Broadcast, Satellite Services, Satellite Systems and
Network Systems. Direct-To-Home Broadcast is engaged in acquiring, promoting,
selling and/or distributing digital programming via satellite to residential
and commercial customers. Satellite Services is engaged in the selling, leasing
and operating of satellite transponders and providing services for cable
television systems, news companies, Internet service providers and private
business networks. Satellite Systems designs, manufactures and markets
satellites and satellite components. Network Systems products include
satellite-based business networks and Internet access service, cellular-based
fixed wireless telephony systems, mobile cellular digital packet data systems
and DIRECTV(TM) receiver equipment. Other includes the corporate office and
other entities.
F-13
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Operating Segments:
<TABLE>
<CAPTION>
Direct-
To-Home Satellite Satellite Network
Broadcast Services Systems Systems Other Eliminations Total
--------- --------- --------- ------- ------ ------------ --------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
For the Three Months
Ended:
March 31, 1999
External Revenues....... $556.0 $159.7 $535.6 $200.5 -- -- $1,451.8
Intersegment Revenues... 0.6 33.8 94.7 30.4 $ 0.2 $(159.7) --
------ ------ ------ ------ ------ ------- --------
Total Revenues.......... $556.6 $193.5 $630.3 $230.9 $ 0.2 $(159.7) $1,451.8
------ ------ ------ ------ ------ ------- --------
Operating (Loss)
Profit(1).............. $(23.4) $ 78.3 $(14.4) $(17.8) $(13.4) $ (51.4) $ (42.1)
------ ------ ------ ------ ------ ------- --------
March 31, 1998
External Revenues....... $387.9 $167.1 $553.7 $179.1 $ 3.2 -- $1,291.0
Intersegment Revenues... -- 25.9 70.6 5.6 0.3 $(102.4) --
------ ------ ------ ------ ------ ------- --------
Total Revenues.......... $387.9 $193.0 $624.3 $184.7 $ 3.5 $(102.4) $1,291.0
------ ------ ------ ------ ------ ------- --------
Operating (Loss)
Profit(1).............. $(31.6) $ 84.9 $ 55.1 $(11.9) $(10.8) $ (7.4) $ 78.3
------ ------ ------ ------ ------ ------- --------
</TABLE>
- --------
(1) Includes amortization arising from purchase accounting adjustments related
to GM's acquisition of Hughes amounting to $0.8 million in each of the
three-month periods for the Satellite Services segment and $4.5 million in
each of the three-month periods for Other.
Note 8. Contingencies
In connection with the 1997 spin-off of the defense electronics business of
Hughes' predecessor and the subsequent merger of that business with Raytheon
Company, the terms of the merger agreement provided a process for resolving
disputes that might arise in connection with post-closing financial adjustments
that were also called for by the terms of the merger agreement. Such financial
adjustments might require a cash payment from Raytheon to Hughes or vice versa.
A dispute currently exists regarding the post-closing adjustments which Hughes
and Raytheon have proposed to one another and related issues regarding the
adequacy of disclosures made by Hughes to Raytheon in the period prior to
consummation of the merger. In an attempt to resolve the dispute, Hughes gave
notice to Raytheon to commence an arbitration process pursuant to the
procedures under the merger agreement. Raytheon responded by filing an action
in Delaware Chancery Court which seeks to enjoin the arbitration as premature.
That litigation is now inactive and Raytheon and Hughes are now proceeding with
the dispute resolution process. It is possible that the ultimate resolution of
the post-closing financial adjustment and of related disclosure issues may
result in Hughes making a payment to Raytheon that would be material to Hughes.
However, the amount of any payment that either party might be required to make
to the other cannot be determined at this time. Hughes intends to vigorously
pursue resolution of the disputes through the arbitration processes, opposing
the adjustments proposed by Raytheon, and seeking the payment from Raytheon
that it has proposed.
On February 24, 1999, the Department of Commerce notified Hughes that it
intended to deny a U.S. government export license Hughes was required to obtain
in connection with a contract with Asia-Pacific Mobile Telecommunications
Satellite Pte. Ltd. ("APMT") for the provision of a satellite-based mobile
telecommunications system. As a result, APMT and Hughes terminated the contract
on April 9, 1999, resulting in a pre-tax charge to Hughes' earnings of $92
million in the first quarter of 1999.
Hughes had maintained a suit against the U.S. government since September
1973 regarding the U.S. government's infringement and use of a Hughes patent
covering "Velocity Control and Orientation of a Spin
F-14
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Concluded)
(Unaudited)
Stabilized Body," principally satellites (the "Williams Patent"). In April
1998, the U.S. Court of Appeals for the Federal Circuit reaffirmed earlier
decisions in the Williams Patent case including the award of $114.0 million in
damages, plus interest. In March 1999, Hughes received and recognized as income
a $154.6 million payment from the U.S. government as a final settlement of the
suit.
F-15
<PAGE>
HUGHES ELECTRONICS CORPORATION
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA*
PRO FORMA CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in Millions Except Per
Share Amounts)
<S> <C> <C> <C>
Total revenues............................. $ 5,963.9 $ 5,128.3 $ 4,008.7
Total costs and expenses................... 5,693.8 4,821.9 3,798.6
---------- ---------- ----------
Operating profit........................... 270.1 306.4 210.1
Non-operating (expense) income............. (58.3) 332.8 33.0
Income taxes............................... (44.7) 236.7 104.8
Minority interests in net losses of
subsidiaries.............................. 24.4 24.8 52.6
Income (loss) from discontinued
operations................................ 64.0 (7.4)
Extraordinary item......................... (20.6)
Cumulative effect of accounting change..... (9.2)
---------- ---------- ----------
Earnings Used for Computation of Available
Separate Consolidated Net Income.......... $ 271.7 $ 470.7 $ 183.5
========== ========== ==========
Earnings Attributable to General Motors
Class H Common Stock on a Per Share
Basis:
Income from continuing operations before
extraordinary item and cumulative effect
of accounting change.................... $ 0.70 $ 1.07 $ 0.48
Discontinued operations.................. 0.16 (0.02)
Extraordinary item....................... (0.05)
Cumulative effect of accounting change... (0.02)
---------- ---------- ----------
Earnings Attributable to General Motors
Class H Common Stock..................... $ 0.68 $ 1.18 $ 0.46
========== ========== ==========
</TABLE>
HUGHES ELECTRONICS CORPORATION
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA*
PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Total Current Assets.................................... $ 3,846.4 $ 4,773.1
Satellites, net......................................... 3,197.5 2,643.4
Property, net........................................... 1,059.2 889.7
Net Investment in Sales-type Leases..................... 173.4 337.6
Intangible Assets, Investments and Other Assets, net.... 4,731.9 3,639.6
---------- ----------
Total Assets........................................ $ 13,008.4 $ 12,283.4
========== ==========
LIABILITIES AND OWNER'S EQUITY
Total Current Liabilities............................... $ 2,009.5 $ 1,449.8
Long-Term Debt.......................................... 778.7 637.6
Postretirement Benefits Other Than Pensions, Other
Liabilities and Deferred Credits....................... 1,783.2 1,724.1
Minority Interests...................................... 481.7 607.8
Total Owner's Equity (1)................................ 7,955.3 7,864.1
---------- ----------
Total Liabilities and Owner's Equity (1)................ $ 13,008.4 $ 12,283.4
========== ==========
</TABLE>
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
- --------
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1) General Motors' equity in its wholly-owned subsidiary, Hughes. Holders of
GM Class H common stock have no direct rights in the equity or assets of
Hughes, but rather have rights in the equity and assets of GM (which
includes 100% of the stock of Hughes).
F-16
<PAGE>
HUGHES ELECTRONICS CORPORATION
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA*--Continued
PRO FORMA SELECTED SEGMENT DATA
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Millions)
<S> <C> <C> <C>
Direct-To-Home Broadcast
Total Revenues................................... $1,816.1 $1,276.9 $ 621.0
Operating Loss................................... (228.1) (254.6) (319.8)
Depreciation and Amortization.................... 102.3 86.1 67.3
Segment Assets................................... 2,190.4 1,408.7 1,023.4
Capital Expenditures(1).......................... 230.8 105.6 63.5
Satellite Services
Total Revenues................................... $ 767.3 $ 629.9 $ 482.8
Operating Profit................................. 321.6 296.2 242.4
Operating Profit Margin.......................... 41.9% 47.0% 50.2%
Depreciation and Amortization.................... 231.7 141.9 55.2
Segment Assets................................... 5,824.2 5,612.8 1,202.6
Capital Expenditures(2).......................... 921.7 625.7 308.7
Satellite Systems
Total Revenues................................... $2,831.1 $2,491.9 $2,056.4
Operating Profit................................. 246.3 226.3 183.3
Operating Profit Margin.......................... 8.7% 9.1% 8.9%
Depreciation and Amortization.................... 49.2 39.4 34.4
Segment Assets................................... 1,491.2 1,312.6 757.8
Capital Expenditures............................. 99.7 113.9 87.8
Network Systems
Total Revenues................................... $1,076.7 $1,011.3 $1,070.0
Operating Profit................................. 10.9 74.1 107.7
Operating Profit Margin.......................... 1.0% 7.3% 10.1%
Depreciation and Amortization.................... 41.7 32.0 28.3
Segment Assets................................... 1,299.0 1,215.6 964.0
Capital Expenditures............................. 40.0 43.1 45.3
Eliminations and Other
Total Revenues................................... $ (527.3) $ (281.7) $ (221.5)
Operating (Loss)................................. (80.6) (35.6) (3.5)
Depreciation and Amortization.................... 8.9 (3.0) 9.4
Segment Assets................................... 2,203.6 2,733.7 (43.8)
Capital Expenditures............................. 136.3 (61.7) (55.9)
Total
Total Revenues................................... $5,963.9 $5,128.3 $4,008.7
Operating Profit................................. 270.1 306.4 210.1
Operating Profit Margin.......................... 4.5% 6.0% 5.2%
Depreciation and Amortization.................... 433.8 296.4 194.6
Segment Assets................................... 13,008.4 12,283.4 3,904.0
Capital Expenditures............................. 1,428.5 826.6 449.4
</TABLE>
Certain 1997 and 1996 amounts have been reclassified to conform with 1998
classifications.
- --------
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1) Includes expenditures related to satellites amounting to $70.2 million in
1998.
(2) Includes expenditures related to satellites amounting to $726.3 million,
$606.1 million and $259.2 million, respectively. Also included in the 1998
amount is $155.5 million related to the early buy-out of satellite sale-
leasebacks.
F-17
<PAGE>
HUGHES ELECTRONICS CORPORATION
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA*--Concluded
PRO FORMA SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C>
Operating profit...................... $ 270 $ 306 $ 210 $ 172 $ 235
Income from continuing operations
before income taxes, minority
interests, extraordinary item and
cumulative effect of accounting
change............................... $ 212 $ 639 $ 243 $ 119 $ 174
Earnings used for computation of
available separate consolidated net
income............................... $ 272 $ 471 $ 184 $ 27 $ 62
Average number of GM Class H dividend
base shares
(in millions)(1)..................... 399.9 399.9 399.9 399.9 399.9
Owner's equity........................ $7,955 $7,864 $2,023 $2,119 $1,790
Working capital....................... $1,837 $3,323 $ 278 $ 312 $ 274
Operating profit as a percent of
revenues............................. 4.5% 6.0% 5.2% 5.4% 8.7%
Income from continuing operations
before income taxes, minority
interests, extraordinary item and
cumulative effect of accounting
change as a percent of revenues...... 3.6% 12.5% 6.1% 3.8% 6.5%
Net income as a percent of revenues... 4.6% 9.2% 4.6% 0.9% 2.3%
Return on equity(2)................... 3.4% 9.5% 8.9% 1.4% 3.8%
Income before interest expense and
income taxes as a percent of
capitalization(3).................... 3.2% 14.3% 16.3% 9.4% 14.0%
Pre-tax return on total assets(4)..... 1.9% 8.2% 8.0% 3.8% 6.0%
</TABLE>
- --------
* The summary excludes purchase accounting adjustments related to GM's
acquisition of Hughes.
(1) Class H dividend base shares is used in calculating earnings attributable
to GM Class H common stock on a per share basis. This is not the same as
the average number of GM Class H shares outstanding, which was 105.3
million in 1998.
(2) Earnings used for computation of available separate consolidated net income
divided by average owner's equity (General Motors' equity in its wholly-
owned subsidiary, Hughes). Holders of GM Class H common stock have no
direct rights in the equity or assets of Hughes, but rather have rights in
the equity and assets of GM (which includes 100% of the stock of Hughes).
(3) Income from continuing operations before interest expense, income taxes,
extraordinary item and cumulative effect of accounting change divided by
average owner's equity plus average total debt.
(4) Income from continuing operations before income taxes, extraordinary item
and cumulative effect of accounting change divided by average total assets.
F-18
<PAGE>
HUGHES ELECTRONICS CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Hughes Electronics Corporation:
We have audited the accompanying Balance Sheet of Hughes Electronics
Corporation (as more fully described in Note 1 to the financial statements) as
of December 31, 1998 and 1997 and the related Statement of Income and Available
Separate Consolidated Net Income, Statement of Changes in Owner's Equity and
Statement of Cash Flows for each of the three years in the period ended
December 31, 1998. Our audits also included the financial statement schedule
listed in the index on Page F-1. These financial statements and the financial
statement schedule are the responsibility of Hughes Electronics Corporation's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Hughes Electronics Corporation at December
31, 1998 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material reports, the
information set forth therein.
As discussed in Note 2 to the accompanying financial statements, effective
January 1, 1998, Hughes Electronics Corporation changed its method of
accounting for costs of start-up activities by adopting American Institute of
Certified Public Accountants Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities.
/s/ Deloitte & Touche LLP
_____________________________________
Deloitte & Touche LLP
Los Angeles, California
January 20, 1999
(March 1, 1999 as to Note 19)
F-19
<PAGE>
HUGHES ELECTRONICS CORPORATION
STATEMENT OF INCOME AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Millions Except
Per Share Amounts)
<S> <C> <C> <C>
Revenues
Product sales................................ $ 3,360.3 $ 3,143.6 $ 3,009.0
Direct broadcast, leasing and other
services.................................... 2,603.6 1,984.7 999.7
--------- --------- ---------
Total Revenues................................ 5,963.9 5,128.3 4,008.7
--------- --------- ---------
Operating Costs and Expenses
Cost of products sold........................ 2,627.3 2,493.3 2,183.7
Broadcast programming and other costs........ 1,175.7 912.3 631.8
Selling, general and administrative
expenses.................................... 1,457.0 1,119.9 788.5
Depreciation and amortization................ 433.8 296.4 194.6
Amortization of GM purchase accounting
adjustments................................. 21.0 21.0 21.0
--------- --------- ---------
Total Operating Costs and Expenses............ 5,714.8 4,842.9 3,819.6
--------- --------- ---------
Operating Profit.............................. 249.1 285.4 189.1
Interest income............................... 112.3 33.1 6.8
Interest expense.............................. (17.5) (91.0) (42.9)
Other, net.................................... (153.1) 390.7 69.1
--------- --------- ---------
Income From Continuing Operations Before
Income Taxes, Minority Interests,
Extraordinary Item and Cumulative Effect of
Accounting Change............................ 190.8 618.2 222.1
Income taxes.................................. (44.7) 236.7 104.8
Minority interests in net losses of
subsidiaries................................. 24.4 24.8 52.6
--------- --------- ---------
Income from continuing operations before
extraordinary item and cumulative effect of
accounting change............................ 259.9 406.3 169.9
Income (Loss) from discontinued operations,
net of taxes................................. -- 1.2 (7.4)
Gain on sale of discontinued operations, net
of taxes..................................... -- 62.8 --
--------- --------- ---------
Income before extraordinary item and
cumulative effect of accounting change....... 259.9 470.3 162.5
Extraordinary item, net of taxes.............. -- (20.6) --
Cumulative effect of accounting change, net of
taxes........................................ (9.2) -- --
--------- --------- ---------
Net Income.................................... 250.7 449.7 162.5
Adjustments to exclude the effect of GM
purchase accounting adjustments.............. 21.0 21.0 21.0
--------- --------- ---------
Earnings Used for Computation of Available
Separate Consolidated Net Income............. $ 271.7 $ 470.7 $ 183.5
========= ========= =========
Available Separate Consolidated Net Income
Average number of shares of General Motors
Class H Common Stock outstanding (in
millions) (Numerator)........................ 105.3 101.5 98.4
Class H dividend base (in millions)
(Denominator)................................ 399.9 399.9 399.9
Available Separate Consolidated Net Income.... $ 71.5 $ 119.4 $ 45.2
========= ========= =========
Earnings Attributable to General Motors Class
H Common Stock on a Per Share Basis
Income from continuing operations before
extraordinary item and cumulative effect of
accounting change............................ $ 0.70 $ 1.07 $ 0.48
Discontinued operations...................... -- 0.16 (0.02)
Extraordinary item........................... -- (0.05) --
Cumulative effect of accounting change....... (0.02) -- --
--------- --------- ---------
Earnings Attributable to General Motors Class
H Common Stock............................... $ 0.68 $ 1.18 $ 0.46
========= ========= =========
</TABLE>
Reference should be made to the Notes to Financial Statements.
F-20
<PAGE>
HUGHES ELECTRONICS CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
(Dollars in Millions)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................. $ 1,342.1 $ 2,783.8
Accounts and notes receivable, net of allowances of
$23.9 and $15.2...................................... 922.4 630.0
Contracts in process, less advances and progress
payments of $27.0 and $50.2.......................... 783.5 575.6
Inventories........................................... 471.5 486.4
Prepaid expenses and other, including deferred income
taxes of $33.6 and $93.2............................. 326.9 297.3
---------- ----------
Total Current Assets................................... 3,846.4 4,773.1
Satellites, net........................................ 3,197.5 2,643.4
Property, net.......................................... 1,059.2 889.7
Net Investment in Sales-type Leases.................... 173.4 337.6
Intangible Assets, net of accumulated amortization of
$413.2 and $318.3..................................... 3,552.2 2,954.8
Investments and Other Assets........................... 1,606.3 1,132.4
---------- ----------
Total Assets........................................... $ 13,435.0 $ 12,731.0
========== ==========
LIABILITIES AND OWNER'S EQUITY
Current Liabilities
Accounts payable...................................... $ 764.1 $ 472.8
Advances on contracts................................. 291.8 209.8
Deferred revenues..................................... 43.8 77.8
Current portion of long-term debt..................... 156.1 --
Accrued liabilities................................... 753.7 689.4
---------- ----------
Total Current Liabilities.............................. 2,009.5 1,449.8
---------- ----------
Long-Term Debt......................................... 778.7 637.6
Deferred Gains on Sales and Leasebacks................. 121.5 191.9
Accrued Operating Leaseback Expense.................... 56.0 100.2
Postretirement Benefits Other Than Pensions............ 150.7 154.8
Other Liabilities and Deferred Credits................. 811.1 706.4
Deferred Income Taxes.................................. 643.9 570.8
Commitments and Contingencies
Minority Interests..................................... 481.7 607.8
Owner's Equity
Capital stock and additional paid-in capital.......... 8,146.1 8,322.8
Net income retained for use in the business........... 257.8 7.1
---------- ----------
Subtotal Owner's Equity................................ 8,403.9 8,329.9
---------- ----------
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment................ (37.1) (34.8)
Accumulated unrealized gains on securities.......... 16.1 21.4
Accumulated foreign currency translation
adjustments........................................ (1.0) (4.8)
---------- ----------
Accumulated other comprehensive loss.................. (22.0) (18.2)
---------- ----------
Total Owner's Equity................................... 8,381.9 8,311.7
---------- ----------
Total Liabilities and Owner's Equity................... $ 13,435.0 $ 12,731.0
========== ==========
</TABLE>
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
Reference should be made to the Notes to Financial Statements.
F-21
<PAGE>
HUGHES ELECTRONICS CORPORATION
STATEMENT OF CHANGES IN OWNER'S EQUITY
(Dollars in Millions)
<TABLE>
<CAPTION>
Net Accumulated
Capital Income Other
Parent Stock and Retained Compre-
Company's Additional for Use hensive Total Compre-
Net Paid-In in the Income Owner's hensive
Investment Capital Business (loss) Equity Income
---------- ---------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... $ 2,615.1 $ (6.2) $2,608.9
Net distribution to
Parent Company......... (280.6) (280.6)
Net income.............. 162.5 162.5 $162.5
Foreign currency
translation
adjustments............ 0.8 0.8 0.8
------
Comprehensive income.... $163.3
--------- ------ -------- ======
Balance at December 31,
1996................... 2,497.0 (5.4) 2,491.6
Net contribution from
Parent Company......... 1,124.2 1,124.2
Transfer of capital from
Parent Company's net
investment............. (4,063.8) $4,063.8 --
Capital contribution
resulting from the
Hughes Transactions.... 4,259.0 4,259.0
Minimum pension
liability adjustment
resulting from the
Hughes Transactions.... (34.8) (34.8)
Unrealized gains on
securities resulting
from the Hughes
Transactions........... 21.4 21.4
Net income.............. 442.6 $ 7.1 449.7 $449.7
Foreign currency
translation
adjustments............ 0.6 0.6 0.6
------
Comprehensive income.... $450.3
--------- -------- ------ ------ -------- ======
Balance at December 31,
1997................... -- 8,322.8 7.1 (18.2) 8,311.7
Net income.............. 250.7 250.7 $250.7
Delco post-closing price
adjustment............. (199.7) (199.7)
Tax benefit from
exercise of GM Class H
common stock options... 23.0 23.0
Minimum pension
liability adjustment... (2.3) (2.3) (2.3)
Foreign currency
translation
adjustments............ 3.8 3.8 3.8
Unrealized gains on
securities:
Unrealized holding
gains................ 1.8 1.8 1.8
Less: reclassification
adjustment for gains
included in net
income............... (7.1) (7.1) (7.1)
------
Comprehensive income.... $246.9
--------- -------- ------ ------ -------- ======
Balance at December 31,
1998................... $ $8,146.1 $257.8 $(22.0) $8,381.9
========= ======== ====== ====== ========
</TABLE>
Reference should be made to the Notes to Financial Statements.
F-22
<PAGE>
HUGHES ELECTRONICS CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
--------- --------- -------
(Dollars in Millions)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income..................................... $ 250.7 $ 449.7 $ 162.5
Adjustments to reconcile net income to net cash
provided by continuing operations
(Income) Loss from discontinued operations,
net of taxes................................. -- (1.2) 7.4
Gain on sale of discontinued operations, net
of taxes..................................... -- (62.8) --
Extraordinary item, net of taxes.............. -- 20.6 --
Cumulative effect of accounting change, net of
taxes........................................ 9.2 -- --
Depreciation and amortization................. 433.8 296.4 194.6
Amortization of GM purchase accounting
adjustments.................................. 21.0 21.0 21.0
Net gain on sale of investments and businesses
sold......................................... (13.7) (489.7) (120.3)
Gross profit on sales-type leases............. -- (33.6) (51.8)
Deferred income taxes and other............... 153.2 285.5 91.9
Change in other operating assets and
liabilities
Accounts and notes receivable................. (97.5) (239.0) (87.0)
Contracts in process.......................... (230.9) (174.2) 54.1
Inventories................................... 20.2 (60.7) (121.5)
Collections of principal on net investment in
sales-type leases............................ 40.6 22.0 31.2
Accounts payable.............................. 277.3 (184.1) 116.8
Advances on contracts......................... 82.0 (95.6) 97.6
Deferred revenues............................. (34.0) (21.2) 80.6
Accrued liabilities........................... 66.8 217.8 22.4
Deferred gains on sales and leasebacks........ (36.2) (42.9) (41.6)
Other......................................... (67.3) 102.5 (90.5)
--------- --------- -------
Net Cash Provided by Continuing Operations.... 875.2 10.5 367.4
Net cash used by discontinued operations...... -- (15.9) (8.0)
--------- --------- -------
Net Cash Provided by (Used in) Operating
Activities................................... 875.2 (5.4) 359.4
--------- --------- -------
Cash Flows from Investing Activities
Investment in companies, net of cash acquired.. (1,240.3) (1,798.8) (32.2)
Expenditures for property...................... (343.6) (251.3) (261.5)
Increase in satellites......................... (945.2) (633.5) (191.6)
Proceeds from sale of investments.............. 12.4 242.0 --
Proceeds from the sale and leaseback of
satellite transponders with General Motors
Acceptance Corporation........................ -- -- 252.0
Proceeds from the sale of minority interest in
subsidiary.................................... -- -- 137.5
Early buy-out of satellite under sale and
leaseback..................................... (155.5) -- --
Proceeds from sale of discontinued operations.. -- 155.0 --
Proceeds from disposal of property............. 20.0 55.1 15.3
Proceeds from insurance claims................. 398.9 -- --
--------- --------- -------
Net Cash Used in Investing Activities......... (2,253.3) (2,231.5) (80.5)
--------- --------- -------
Cash Flows from Financing Activities
Long-term debt borrowings...................... 1,165.2 2,383.3 --
Repayment of long-term debt.................... (1,024.1) (2,851.9) --
Premium paid to retire debt.................... -- (34.4) --
Contributions from (distributions to) Parent
Company....................................... -- 1,124.2 (279.8)
Payment to General Motors for Delco post-
closing price adjustment...................... (204.7) -- --
Capital infusion resulting from Hughes
Transactions.................................. -- 4,392.8 --
--------- --------- -------
Net Cash (Used in) Provided by Financing
Activities................................... (63.6) 5,014.0 (279.8)
--------- --------- -------
Net (decrease) increase in cash and cash
equivalents................................... (1,441.7) 2,777.1 (0.9)
Cash and cash equivalents at beginning of the
year.......................................... 2,783.8 6.7 7.6
--------- --------- -------
Cash and cash equivalents at end of the year... $ 1,342.1 $ 2,783.8 $ 6.7
========= ========= =======
</TABLE>
Certain 1997 and 1996 amounts have been reclassified to conform with the 1998
presentation.
Reference should be made to the Notes to Financial Statements.
F-23
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1: Basis of Presentation and Description of Business
On December 17, 1997, Hughes Electronics Corporation ("Hughes Electronics")
and General Motors Corporation ("GM"), the parent of Hughes Electronics,
completed a series of transactions (the "Hughes Transactions") designed to
address strategic challenges facing the three principal businesses of Hughes
Electronics and unlock stockholder value in GM. The Hughes Transactions
included the tax-free spin-off of the defense electronics business ("Hughes
Defense") to holders of GM $1 2/3 par value and Class H common stocks, the
transfer of Delco Electronics Corporation ("Delco"), the automotive electronics
business, to GM's Delphi Automotive Systems unit and the recapitalization of GM
Class H common stock into a new tracking stock, GM Class H common stock, that
is linked to the remaining telecommunications and space business. The Hughes
Transactions were followed immediately by the merger of Hughes Defense with
Raytheon Company ("Raytheon"). For the periods prior to the consummation of the
Hughes Transactions on December 17, 1997, Hughes Electronics, consisting of its
defense electronics, automotive electronics and telecommunications and space
businesses, is hereinafter referred to as former Hughes or Parent Company.
In connection with the recapitalization of Hughes Electronics on December
17, 1997, the telecommunications and space business of former Hughes,
consisting principally of its direct-to-home broadcast, satellite services,
satellite systems and network systems businesses, was contributed to the
recapitalized Hughes Electronics. Such telecommunications and space business,
both before and after the recapitalization, is hereinafter referred to as
Hughes. The accompanying financial statements and footnotes pertain only to
Hughes and do not include balances of former Hughes related to Hughes Defense
or Delco.
Prior to the Hughes Transactions, the Hughes businesses were effectively
operated as divisions of former Hughes. For the period prior to December 18,
1997, these financial statements include allocations of corporate expenses from
former Hughes, including research and development, general management, human
resources, financial, legal, tax, quality, communications, marketing,
international, employee benefits and other miscellaneous services. These costs
and expenses have been charged to Hughes based either on usage or using
allocation methodologies primarily based upon total revenues, certain tangible
assets and payroll expenses. Management believes the allocations were made on a
reasonable basis; however, they may not necessarily reflect the financial
position, results of operations or cash flows of Hughes on a stand-alone basis
in the future. Also, prior to December 18, 1997, interest expense in the
Statement of Income and Available Separate Consolidated Net Income included an
allocated share of total former Hughes' interest expense.
The Hughes Transactions had a significant impact on the Hughes balance
sheet. Prior to the consummation of the Hughes Transactions, Hughes
participated in the centralized cash management system of former Hughes,
wherein cash receipts were transferred to and cash disbursements were funded by
former Hughes on a daily basis. Accordingly, Hughes' balance sheet included
only cash and cash equivalents held directly by the telecommunications and
space business. In conjunction with the completion of the Hughes Transactions,
certain assets and liabilities were contributed by former Hughes to Hughes. The
contributed assets and liabilities consisted principally of cash, pension
assets and liabilities, liabilities for other postretirement benefits, deferred
taxes, property and equipment, and other miscellaneous items. In addition,
Hughes received $4.0 billion of cash proceeds from the borrowings incurred by
Hughes Defense prior to its spin-off to GM.
The accompanying financial statements include the applicable portion of
intangible assets, including goodwill, and related amortization resulting from
purchase accounting adjustments associated with GM's purchase of Hughes in
1985.
Hughes is a leading manufacturer of communications satellites and provider
of satellite-based services. It owns and operates one of the world's largest
private fleets of geostationary communications satellites and is the world's
leading supplier of satellite-based private business networks. Hughes is also a
leader in the direct
F-24
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
broadcast satellite market with its programming distribution service known as
DIRECTV(R), which was introduced in the U.S. in 1994 and was the first high-
powered, all digital, Direct-To-Home ("DTH") television distribution service in
North America. DIRECTV began service in Latin America in 1996 and Japan in
1997. Hughes also provides communications equipment and services in the mobile
communications and packet switching markets. Its equipment and services are
applied in, among other things, data, video and audio transmission, cable and
network television distribution, private business networks, digital cellular
communications and DTH satellite broadcast distribution of television
programming.
Note 2: Summary of Significant Accounting Policies
Principles of Combination and Consolidation
Prior to December 18, 1997, the financial statements present the financial
position, results of operations and cash flows of the telecommunications and
space business owned and operated by former Hughes on a combined basis.
Subsequent to the Hughes Transactions, the accompanying financial statements
are presented on a consolidated basis. The financial statements include the
accounts of Hughes and its domestic and foreign subsidiaries that are more than
50% owned or controlled by Hughes, with investments in associated companies in
which Hughes owns at least 20% of the voting securities or has significant
influence accounted for under the equity method of accounting.
Use of Estimates in the Preparation of the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported therein. Due to the inherent
uncertainty involved in making estimates, actual results reported in future
periods may be based upon amounts which differ from those estimates.
Revenue Recognition
Revenues are generated from sales of satellites and telecommunications
equipment, DTH broadcast subscriptions, and the sale of transponder capacity
and related services through outright sales, sales-type leases and operating
lease contracts.
Sales under long-term contracts are recognized primarily using the
percentage-of-completion (cost-to-cost) method of accounting. Under this
method, sales are recorded equivalent to costs incurred plus a portion of the
profit expected to be realized, determined based on the ratio of costs incurred
to estimated total costs at completion. Profits expected to be realized on
long-term contracts are based on estimates of total sales value and costs at
completion. These estimates are reviewed and revised periodically throughout
the lives of the contracts, and adjustments to profits resulting from such
revisions are recorded in the accounting period in which the revisions are
made. Estimated losses on contracts are recorded in the period in which they
are identified.
Certain contracts contain cost or performance incentives which provide for
increases in profits for surpassing stated objectives and decreases in profits
for failure to achieve such objectives. Amounts associated with incentives are
included in estimates of total sales values when there is sufficient
information to relate actual performance to the objectives.
Sales which are not pursuant to long-term contracts are generally recognized
as products are shipped or services are rendered. DTH subscription revenues are
recognized when programming is viewed by subscribers. Programming payments
received from subscribers in advance of viewing are recorded as deferred
revenue until earned.
F-25
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Satellite transponder lease contracts qualifying for capital lease
treatment (typically based on the term of the lease) are accounted for as
sales-type leases, with revenues recognized equal to the net present value of
the future minimum lease payments. Upon entering into a sales-type lease, the
cost basis of the transponder is removed and charged to cost of products sold.
The portion of each periodic lease payment deemed to be attributable to
interest income is recognized in each respective period. Contracts for sales
of transponders typically include telemetry, tracking and control ("TT&C")
service agreements. Revenues related to TT&C service agreements are recognized
as the services are performed.
Transponder and other lease contracts that do not qualify as sales-type
leases are accounted for as operating leases. Operating lease revenues are
recognized on a straight-line basis over the respective lease term.
Differences between operating lease payments received and revenues recognized
are deferred and included in accounts and notes receivable or investments and
other assets.
Hughes has entered into agreements for the sale and leaseback of certain of
its satellite transponders. The leaseback transactions have been classified as
operating leases and, therefore, the capitalized cost and associated
depreciation related to satellite transponders sold are not included in the
accompanying financial statements. Gains resulting from such transactions are
deferred and amortized over the leaseback period. Leaseback expense is
recorded using the straight-line method over the term of the lease, net of
amortization of the deferred gains. Differences between operating leaseback
payments made and expense recognized are deferred and included in accrued
operating leaseback expense.
Cash Flows
Cash equivalents consist of highly liquid investments purchased with
original maturities of 90 days or less.
Net cash from operating activities includes cash payments made for interest
of $53.2 million, $156.8 million and $55.8 million in 1998, 1997 and 1996,
respectively. Net cash refunds received by Hughes for prior year income taxes
amounted to $59.9 million in 1998. Cash payments for income taxes amounted to
$24.0 million and $36.5 million in 1997 and 1996, respectively.
Certain non-cash transactions occurred in connection with the consummation
of the Hughes Transactions on December 17, 1997, resulting in a contribution
of a net liability of $133.8 million.
In 1997, in a separate non-cash transaction, Hughes' subsidiary, PanAmSat
Corporation ("PanAmSat"), converted its outstanding preferred stock into debt
amounting to $438.5 million.
Contracts in Process
Contracts in process are stated at costs incurred plus estimated profit,
less amounts billed to customers and advances and progress payments applied.
Engineering, tooling, manufacturing, and applicable overhead costs, including
administrative, research and development and selling expenses, are charged to
costs and expenses when incurred. Contracts in process include amounts
relating to contracts with long production cycles, with $151.0 million of the
1998 amount expected to be billed after one year. Amounts billed under
retainage provisions of contracts are not significant, and substantially all
amounts are collectible within one year. Under certain contracts with the U.S.
Government, progress payments are received based on costs incurred on the
respective contracts. Title to the inventories related to such contracts
(included in contracts in process) vests with the U.S. Government.
F-26
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories are stated at the lower of cost or market principally using the
average cost method.
<TABLE>
<CAPTION>
1998 1997
------ ------
(Dollars in
Millions)
<S> <C> <C>
Major Classes of Inventories
Productive material and supplies.............................. $ 73.4 $ 57.5
Work in process............................................... 285.1 328.5
Finished goods................................................ 113.0 100.4
------ ------
Total....................................................... $471.5 $486.4
====== ======
</TABLE>
Property, Satellites and Depreciation
Property and satellites are carried at cost. Satellite costs include
construction costs, launch costs, launch insurance and capitalized interest.
Capitalized satellite costs represent the costs of successful satellite
launches. Satellite costs related to unsuccessful launches, net of insurance
proceeds, are recognized in the period of failure. Depreciation is computed
generally using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lesser of the life of the
asset or term of the lease.
Intangible Assets
Intangible assets, a majority of which is goodwill, are amortized using the
straight-line method over periods not exceeding 40 years.
Software Development Costs
Other assets include certain software development costs capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. Capitalized software development costs at December 31, 1998 and 1997,
net of accumulated amortization of $70.6 million and $107.7 million,
respectively, totaled $104.1 million and $99.0 million. The software is
amortized using the greater of the units of revenue method or the straight-line
method over its useful life, not in excess of five years. Software program
reviews are conducted to ensure that capitalized software development costs are
properly treated and costs associated with programs that are not generating
revenues are appropriately written off.
Valuation of Long-Lived Assets
Hughes periodically evaluates the carrying value of long-lived assets to be
held and used, including goodwill and other intangible assets, when events and
circumstances warrant such a review. The carrying value of a long-lived asset
is considered impaired when the anticipated undiscounted cash flow from such
asset is separately identifiable and is less than its carrying value. In that
event, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the long-lived asset. Fair market value is
determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be disposed
of are determined in a similar manner, except that fair market values are
reduced for the cost of disposal.
Research and Development
Expenditures for research and development are charged to costs and expenses
as incurred and amounted to $121.4 million in 1998, $120.4 million in 1997 and
$94.6 million in 1996.
F-27
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Foreign Currency
Substantially all of Hughes' foreign operations have determined the local
currency to be their functional currency. Accordingly, these foreign entities
translate assets and liabilities from their local currencies to U.S. dollars
using year-end exchange rates while income and expense accounts are translated
at the average rates in effect during the year. The resulting translation
adjustment is recorded as part of accumulated other comprehensive income
(loss), a separate component of owner's equity. Gains and losses resulting from
remeasurement into the functional currency of transactions denominated in non-
functional currencies are recognized in earnings. Net foreign currency
transaction gains and losses included in the operating results were not
material for all years presented.
Financial Instruments and Investments
Hughes maintains investments in equity securities of unaffiliated companies.
These investments are considered available-for-sale and carried at current fair
value with unrealized gains or losses, net of taxes, reported as part of
accumulated other comprehensive income (loss), a separate component of owner's
equity. Fair value is determined by market quotes, when available, or by
management estimate.
Market values of financial instruments, other than debt and derivative
instruments, are based upon management estimates. Market values of debt and
derivative instruments are determined by quotes from financial institutions.
The carrying value of cash and cash equivalents, accounts and notes
receivable, investments and other assets, accounts payable, amounts included in
accrued liabilities meeting the definition of a financial instrument and debt
approximated fair value at December 31, 1998.
Hughes' derivative contracts primarily consist of foreign exchange-forward
contracts. Hughes enters into these contracts to reduce its exposure to
fluctuations in foreign exchange rates. Foreign exchange-forward contracts are
accounted for as hedges to the extent they are designated as, and are effective
as, hedges of firm foreign currency commitments. Gains and losses on foreign
exchange-forward contracts designated as hedges of firm foreign currency
commitments are recognized in income in the same period as gains and losses on
the underlying transactions are recognized.
Stock Compensation
Hughes issues stock options to employees with grant prices equal to the fair
value of the underlying security at the date of grant. No compensation cost has
been recognized for options in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. See Note 10 for information regarding the pro forma effect on
earnings of recognizing compensation cost based on the estimated fair value of
the stock options granted, as required by SFAS No. 123, Accounting for Stock-
Based Compensation.
Compensation related to stock awards is recognized ratably over the vesting
period and, where required, periodically adjusted to reflect changes in the
stock price of the underlying security.
Market Concentrations and Credit Risk
Sales under U.S. Government contracts were 12.4%, 15.3% and 22.5% of total
revenues in 1998, 1997 and 1996, respectively. Hughes provides services and
extends credit to a large number of customers in the
F-28
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
commercial satellite communications market and to a large number of residential
consumers. Management monitors its exposure to credit losses and maintains
allowances for anticipated losses.
Accounting Change
In 1998, Hughes adopted American Institute of Certified Pubic Accountants
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that all start-up costs previously capitalized be
written off and recognized as a cumulative effect of accounting change, net of
taxes, as of the beginning of the year of adoption. On a prospective basis,
these types of costs are required to be expensed as incurred. The unfavorable
cumulative effect of this accounting change at January 1, 1998 was $9.2 million
after-tax, or $0.02 per share of GM Class H common stock.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 requires all derivatives to be recorded as either assets or liabilities and
the instruments to be measured at fair value. Gains or losses resulting from
changes in the values of those derivatives are to be recognized immediately or
deferred depending on the use of the derivative and whether or not it qualifies
as a hedge. Hughes plans to adopt SFAS No. 133 by January 1, 2000, as required.
Management is currently assessing the impact of this statement on Hughes'
results of operations and financial position.
Note 3: Property and Satellites, Net
<TABLE>
<CAPTION>
Estimated
Useful Lives
(years) 1998 1997
------------ ---------- ----------
(Dollars in Millions)
<S> <C> <C> <C>
Land and improvements................... 5-25 $ 51.7 $ 51.2
Buildings and unamortized leasehold
improvements........................... 2-45 321.8 305.8
Machinery and equipment................. 3-12 1,163.1 1,015.4
Furniture, fixtures and office
machines............................... 3-10 80.2 83.2
Construction in progress................ -- 285.3 169.9
---------- ----------
Total................................... 1,902.1 1,625.5
Less accumulated depreciation........... 842.9 735.8
---------- ----------
Property, net........................... $ 1,059.2 $ 889.7
========== ==========
Satellites.............................. 9-16 $ 3,783.2 $ 3,051.9
Less accumulated depreciation........... 585.7 408.5
---------- ----------
Satellites, net......................... $ 3,197.5 $ 2,643.4
========== ==========
</TABLE>
Hughes capitalized interest of $55.3 million, $64.5 million and $12.9
million for 1998, 1997 and 1996, respectively, as part of the cost of its
satellites under construction.
Note 4: Leasing Activities
Future minimum lease payments due from customers under noncancelable
satellite transponder operating leases, exclusive of amounts due from subleases
reported below, are $550.5 million in 1999, $498.9 million in 2000, $477.6
million in 2001, $462.5 million in 2002, $440.7 million in 2003 and $2,031.7
million thereafter.
F-29
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of the net investment in sales-type leases are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(Dollars in
Millions)
<S> <C> <C>
Total minimum lease payments................................. $301.9 $662.5
Less unearned interest income and allowance for doubtful
accounts.................................................... 106.0 297.1
------ ------
Total net investment in sales-type leases.................... 195.9 365.4
Less current portion......................................... 22.5 27.8
------ ------
Total...................................................... $173.4 $337.6
====== ======
</TABLE>
Future minimum payments due from customers under sales-type leases and
related service agreements as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Minimum Service
Lease Agreement
Payments Payments
----------- -----------
(Dollars in Millions)
<S> <C> <C>
1999............................................... $ 46.1 $ 4.5
2000............................................... 44.7 5.7
2001............................................... 45.8 5.7
2002............................................... 44.9 5.7
2003............................................... 43.4 5.7
Thereafter......................................... 77.0 10.4
----------- ----------
Total............................................ $ 301.9 $ 37.7
=========== ==========
</TABLE>
In February 1996, Hughes entered into a sale-leaseback agreement for certain
satellite transponders on Galaxy III-R with General Motors Acceptance
Corporation ("GMAC"), a subsidiary of GM. Proceeds from the sale were $252.0
million, and the sale resulted in a deferred gain of $108.8 million. In 1992
and 1991, Hughes entered into sale-leaseback agreements for certain
transponders on Galaxy VII and SBS-6, respectively, resulting in deferred gains
of $180.0 million in 1992 and $96.1 million in 1991. Deferred gains from sale-
leaseback agreements are amortized over the expected term of leaseback period.
In 1998, PanAmSat exercised certain early buy-out options on the SBS-6
transaction and repurchased the transponders for a total payment of $155.5
million. In January 1999, PanAmSat exercised early buy-out options for $141.3
million related to certain transponders on Galaxy VII, and has remaining early
buy-out options of approximately $227.0 million on Galaxy III-R and Galaxy VII
that can be exercised later in 1999.
As of December 31, 1998, the future minimum leaseback amounts payable to
lessors under the operating leasebacks and the future minimum sublease amounts
due from subleases under noncancelable subleases are as follows:
<TABLE>
<CAPTION>
Minimum Leaseback
Payments Sublease Amounts
----------------- ----------------
<S> <C> <C>
1999...................................... $ 90.9 $ 57.5
2000...................................... 120.3 58.2
2001...................................... 71.9 53.2
2002...................................... 110.9 49.5
2003...................................... 26.6 34.2
------ ------
Total................................... $420.6 $252.6
====== ======
</TABLE>
F-30
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 5: Accrued Liabilities
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(Dollars in Millions)
<S> <C> <C>
Payroll and other compensation........................ $ 196.5 $ 200.2
Contract-related provisions........................... 138.0 76.0
Reserve for consumer finance and rebate programs...... 93.0 86.9
Other................................................. 326.2 326.3
---------- ----------
Total............................................... $ 753.7 $ 689.4
========== ==========
Note 6: Long-Term Debt
<CAPTION>
1998 1997
---------- ----------
(Dollars in Millions)
<S> <C> <C>
Notes payable......................................... $ 750.0 $ --
Revolving credit facilities........................... 155.9 500.0
Bridge loan........................................... -- 100.0
Other................................................. 28.9 37.6
---------- ----------
Total debt............................................ 934.8 637.6
Less current portion.................................. 156.1 --
---------- ----------
Total long-term debt................................ $ 778.7 $ 637.6
========== ==========
</TABLE>
Notes payable consisted of five, seven, ten and thirty-year notes totaling
$750.0 million issued by PanAmSat in January 1998. The proceeds received were
used by PanAmSat to repay the revolving credit facility of $500.0 million and
bridge loan of $100.0 million outstanding at December 31, 1997. The outstanding
principal balances and interest rates for the five, seven, ten and thirty-year
notes as of December 31, 1998 were $200.0 million at 6.00%, $275.0 million at
6.13%, $150.0 million at 6.38% and $125.0 million at 6.88%, respectively.
Principal on the notes is payable at maturity, while interest is payable semi-
annually.
At December 31, 1998, Hughes' 59.1% owned subsidiary, SurFin Ltd.
("SurFin"), had a total of $155.9 million outstanding under two separate $150.0
million unsecured revolving credit facilities. The first matures on April 30,
1999 and the second matures on July 31, 1999. Both credit facilities, which are
expected to be renewed, are subject to a facility fee of 0.10% per annum.
Borrowings under these credit facilities bear interest at the Eurodollar Rate
plus 0.15% and were included in current portion of long-term debt.
Other long-term debt at December 31, 1998 and 1997 consisted primarily of
notes bearing fixed rates of interest of 9.61% to 11.11%. Principal is payable
at maturity in April 2007 while interest is payable semi-annually. Also
included in other long-term debt at December 31, 1997 was $9.1 million of
PanAmSat Senior Notes which were repaid in 1998.
As part of a debt refinancing program undertaken by PanAmSat in 1997, an
extraordinary charge of $20.6 million ($34.4 million before taxes) was
recorded, related to the excess of the price paid for the debt over its
carrying value, net of deferred financing costs.
The aggregate maturities of long-term debt for the five years subsequent to
December 31, 1998 are $156.1 million in 1999, $200.0 million in 2003 and $578.7
million thereafter.
Hughes has $1.0 billion of unused credit available under two unsecured
revolving credit facilities, consisting of a $750.0 million multi-year facility
and a $250.0 million 364-day facility. The multi-year credit
F-31
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
facility provides for a commitment of $750.0 million through December 5, 2002,
subject to a facility fee of 0.07% per annum. Borrowings bear interest at a
rate which approximates the London Interbank Offered Rate ("LIBOR") plus
0.155%. The 364-day credit facility provides for a commitment of $250.0 million
through December 1, 1999, subject to a facility fee of 0.05% per annum.
Borrowings bear interest at a rate which approximates LIBOR plus 0.25%, with an
additional 0.125% utilization fee when borrowings exceed 50% of the commitment.
No amounts were outstanding under either facility at December 31, 1998. These
facilities provide backup capacity for Hughes' $1.0 billion commercial paper
program. No amounts were outstanding under the commercial paper program at
December 31, 1998.
PanAmSat maintains a $500.0 million multi-year revolving credit facility
that provides for short-term and long-term borrowings and a $500.0 million
commercial paper program that provides for short-term borrowings. The multi-
year revolving credit facility provides for a commitment through December 24,
2002, subject to a facility fee of 0.10% per annum. Borrowings bear interest at
a rate which approximates LIBOR plus 0.30%. Borrowings under the credit
facility and commercial paper program are limited to $500.0 million in the
aggregate. No amounts were outstanding under either agreement at December 31,
1998.
Note 7: Income Taxes
The provision for income taxes is based on reported income from continuing
operations before income taxes, minority interests, extraordinary item and
cumulative effect of accounting change. Deferred income tax assets and
liabilities reflect the impact of temporary differences between the amounts of
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes, as measured by applying currently enacted
tax laws.
Hughes and former Hughes (prior to December 18, 1997), and their domestic
subsidiaries join with General Motors in filing a consolidated U.S. Federal
income tax return. The portion of the consolidated income tax liability
recorded by Hughes is generally equivalent to the liability it would have
incurred on a separate return basis.
Prior to December 18, 1997, certain income tax assets and liabilities were
maintained by former Hughes. Income tax expense was allocated to Hughes as if
Hughes filed a separate income tax return. In connection with the Hughes
Transactions, certain income tax assets and liabilities were contributed to and
assumed by Hughes on December 17, 1997 and are included in the accompanying
balance sheet.
The income tax provision consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
(Dollars in Millions)
<S> <C> <C> <C>
U.S. Federal, state and foreign taxes currently
(refundable) payable.............................. $(177.3) $ 24.0 $ 36.5
U.S. Federal, state and foreign deferred tax
liabilities, net.................................. 132.6 212.7 68.3
------- ------ ------
Total income tax (benefit) provision............. $ (44.7) $236.7 $104.8
======= ====== ======
</TABLE>
Income from continuing operations before income taxes, minority interests,
extraordinary item and cumulative effect of accounting change included the
following components:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C>
U.S. income........................................ $ 283.8 $ 659.4 $ 218.4
Foreign (loss) income.............................. (93.0) (41.2) 3.7
------- ------- -------
Total............................................ $ 190.8 $ 618.2 $ 222.1
======= ======= =======
</TABLE>
F-32
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The combined income tax provision was different than the amount computed
using the U.S. Federal statutory income tax rate for the reasons set forth in
the following table:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
(Dollars in Millions)
<S> <C> <C> <C>
Expected tax at U.S. Federal statutory income tax
rate............................................ $ 66.8 $216.4 $ 77.7
Research and experimentation tax benefits........ (183.6) (39.3) --
Foreign sales corporation tax benefit............ (30.1) (25.5) (24.0)
U.S. state and local income taxes................ 13.7 24.8 9.4
Purchase accounting adjustments.................. 7.3 7.3 7.3
Losses of equity method investees................ 36.7 18.7 14.8
Minority interests in losses of partnership...... 19.3 17.5 17.7
Non-deductible goodwill amortization............. 20.1 9.7 --
Other............................................ 5.1 7.1 1.9
------- ------ ------
Total income tax (benefit) provision........... $ (44.7) $236.7 $104.8
======= ====== ======
</TABLE>
Temporary differences and carryforwards which gave rise to deferred tax
assets and liabilities at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Profits on long-term contracts... $145.5 $ 155.5 $156.0 $ 142.8
Sales and leasebacks............. 65.4 -- 85.8 --
Employee benefit programs........ 68.3 101.3 64.3 114.0
Postretirement benefits other
than pensions................... 72.3 -- 72.9 --
Customer deposits and rebates.... 52.9 -- 61.9 --
State taxes...................... 38.8 -- 50.0 --
Gain on PanAmSat merger.......... -- 191.1 -- 195.0
Satellite launch insurance
costs........................... -- 103.1 -- 43.7
Depreciation..................... -- 470.9 -- 438.6
Net operating loss and tax credit
carryforwards................... 77.8 -- -- --
Sale of equity interest in
DIRECTV......................... -- 47.5 -- 48.7
Other............................ 32.8 30.5 63.9 35.4
------ -------- ------ --------
Subtotal....................... 553.8 1,099.9 554.8 1,018.2
Valuation allowance.............. (64.2) -- (14.2) --
------ -------- ------ --------
Total deferred taxes........... $489.6 $1,099.9 $540.6 $1,018.2
====== ======== ====== ========
</TABLE>
No income tax provision has been made for the portion of undistributed
earnings of foreign subsidiaries deemed permanently reinvested that amounted to
approximately $18.5 million and $18.2 million at December 31, 1998 and 1997,
respectively. Repatriation of all accumulated earnings would have resulted in
tax liabilities of $6.4 million in 1998 and $5.4 million in 1997.
At December 31, 1998, Hughes has $63.9 million of foreign operating loss
carryforwards expiring in varying amounts between 1999 and 2003. A valuation
allowance was provided for all of the foreign operating loss carryforwards.
F-33
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Hughes has an agreement with Raytheon which governs Hughes' rights and
obligations with respect to U.S. Federal and state income taxes for all periods
prior to the merger of Hughes Defense with Raytheon. Hughes is responsible for
any income taxes pertaining to those periods prior to the merger, including any
additional income taxes resulting from U.S. Federal and state tax audits.
Hughes is also entitled to any U.S. Federal and state income tax refunds
relating to those years.
The U.S. Federal income tax returns of former Hughes have been examined
through 1990. All years prior to 1983 are closed. Issues relating to the years
1983 through 1990 are being contested through various stages of administrative
appeal. The Internal Revenue Service ("IRS") is currently examining former
Hughes' U.S. Federal tax returns for years 1991 through 1994. Management
believes that adequate provision has been made for any adjustment which might
be assessed for open years.
Hughes reached an agreement with the IRS regarding a claim for refund of
U.S. Federal income taxes related to the treatment of research and
experimentation costs for the years 1983 through 1995. Hughes recorded a total
of $183.6 million of research and experimentation tax benefits during 1998, a
substantial portion of which related to the above noted agreement with the IRS
and covered prior years.
Note 8: Retirement Programs and Other Postretirement Benefits
Hughes adopted SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits. SFAS No. 132 required changes in disclosure of certain
information about pensions and other postretirement benefits.
Substantially all of Hughes' employees participate in Hughes' contributory
and non-contributory defined benefit retirement plans. Benefits are based on
years of service and compensation earned during a specified period of time
before retirement. Additionally, an unfunded, nonqualified pension plan covers
certain employees. Hughes also maintains a program for eligible retirees to
participate in health care and life insurance benefits generally until they
reach age 65. Qualified employees who elected to participate in the Hughes
contributory defined benefit pension plans may become eligible for these health
care and life insurance benefits if they retire from Hughes between the ages of
55 and 65.
Prior to December 18, 1997, the pension-related assets and liabilities and
the postretirement benefit plans were maintained by former Hughes for its non-
automotive businesses and were not included in the Hughes balance sheet. A
portion of former Hughes' net pension expense or income and postretirement
benefit cost was allocated to Hughes and is included in the Statement of Income
and Available Separate Consolidated Net Income. The net pension expense
allocation was $12.3 million and $12.2 million for 1997 and 1996, respectively.
For 1997 and 1996, the pension expense components including benefits earned
during the year, interest accrued on benefits earned in prior years, actual
return on assets and net amortization and deferral, were not determined
separately for the Hughes participants. The postretirement benefit cost
allocated to Hughes was $11.2 million and $10.4 million for 1997 and 1996,
respectively. For 1997 and 1996, the postretirement benefit cost components,
including benefits earned during the year, interest accrued on benefits earned
in prior years and net amortization, were not determined separately for the
Hughes employees. The 1997 information presented below is based on pro rata
allocations from former Hughes for each pension and postretirement benefit
component.
F-34
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of the pension benefit obligation and the other
postretirement benefit obligation, as well as the net benefit obligation
recognized in the balance sheet, are shown below:
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
------------------ ----------------
1998 1997 1998 1997
-------- -------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Net benefit obligation at beginning of
year...................................... $1,556.4 $1,490.5 $ 135.6 $ 132.3
Service cost............................... 57.5 47.9 3.6 3.6
Interest cost.............................. 110.8 110.3 9.3 9.1
Plan participants' contributions........... 14.1 13.7 -- --
Actuarial loss............................. 66.6 32.4 35.1 4.1
Acquisitions/divestitures.................. -- (17.6) -- --
Benefits paid.............................. (151.3) (120.8) (12.0) (13.5)
-------- -------- ------- -------
Net benefit obligation at end of year...... $1,654.1 $1,556.4 $ 171.6 $ 135.6
-------- -------- ------- -------
Change in Plan Assets
Fair value of plan assets at beginning of
year...................................... $1,906.1 $1,716.4 $ -- $ --
Actual return on plan assets............... 165.0 302.4 -- --
Employer contributions..................... 20.3 12.0 12.0 13.5
Plan participants' contributions........... 14.1 13.7 -- --
Acquisitions/divestitures.................. -- (17.6) -- --
Benefits paid.............................. (151.3) (120.8) (12.0) (13.5)
Transfers.................................. 4.7 -- -- --
-------- -------- ------- -------
Fair value of plan assets at end of year... 1,958.9 1,906.1 -- --
-------- -------- ------- -------
Funded status at end of year............. 304.8 349.7 (171.6) (135.6)
Unamortized asset at date of adoption.... -- (12.8) -- --
Unamortized amount resulting from changes
in plan provision....................... 4.4 5.1 -- --
Unamortized net amount resulting from
changes in plan experience and actuarial
assumptions............................. (80.8) (122.3) 4.9 (31.0)
-------- -------- ------- -------
Net amount recognized at end of year....... $ 228.4 $ 219.7 $(166.7) $(166.6)
======== ======== ======= =======
Amounts recognized in the balance sheet
consist of:
Prepaid benefit cost..................... $ 248.1 $ 227.0
Accrued benefit cost..................... (89.3) (83.8) $(166.7) $(166.6)
Intangible asset......................... 7.4 18.0 N/A N/A
Deferred tax assets...................... 25.1 23.7 N/A N/A
Accumulated other comprehensive loss..... 37.1 34.8 N/A N/A
-------- -------- ------- -------
Net amount recognized at end of year....... $ 228.4 $ 219.7 $(166.7) $(166.6)
======== ======== ======= =======
</TABLE>
Included in the pension plan assets at December 31, 1998 are GM Class H
common stock of $2.3 million, GM $1 2/3 common stock of $7.1 million and GMAC
bonds of $3.3 million.
F-35
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
----------------- ----------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Weighted-average assumptions as of
December 31
Discount rate......................... 6.75% 7.25% 6.50% 6.75%
Expected return on plan assets........ 9.50% 9.50% N/A N/A
Rate of compensation increase......... 5.00% 5.00% N/A N/A
</TABLE>
For measurement purposes, a 9.5% annual rate of increase per capita cost of
covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually 0.5% per year to 6.0% in 2006.
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
------------------ ----------------
1998 1997 1998 1997
-------- -------- ------- -------
(Dollars in Millions)
<S> <C> <C> <C> <C>
Components of net periodic benefit
cost
Benefits earned during the year....... $ 57.5 $ 47.9 $ 3.6 $ 3.6
Interest accrued on benefits earned in
prior years.......................... 110.8 110.3 9.3 9.1
Expected return on assets............. (144.5) (135.7) -- --
Amortization components
Unamortized asset at date of
adoption........................... (12.8) (14.2) -- --
Unamortized amount resulting from
changes in plan provisions......... 0.7 0.7 -- --
Unamortized net amount resulting
from changes in plan experience and
actuarial assumptions.............. 4.6 3.3 (0.8) (1.5)
-------- -------- ------- -------
Net periodic benefit cost............. $ 16.3 $ 12.3 $ 12.1 $ 11.2
======== ======== ======= =======
</TABLE>
The projected benefit obligation and accumulated benefit obligation for the
pension plans with accumulated benefit obligations in excess of plan assets
were $114.3 and $89.3, respectively, as of December 31, 1998, and $93.5 and
$83.8, respectively, as of December 31, 1997. The pension plans with
accumulated benefit obligations in excess of plan assets do not have any
underlying assets.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
(Dollars in Millions)
<S> <C> <C>
Effect on total of service and interest
cost components.......................... $ 1.5 $ (1.2)
Effect on postretirement benefit
obligation............................... 14.0 (12.2)
</TABLE>
Hughes maintains 401(k) plans for qualified employees. A portion of employee
contributions are matched by Hughes and amounted to $30.6 million, $26.3
million and $16.7 million in 1998, 1997 and 1996, respectively.
Hughes has disclosed in the financial statements certain amounts associated
with estimated future postretirement benefits other than pensions and
characterized such amounts as "other postretirement benefit obligation."
Notwithstanding the recording of such amounts and the use of these terms,
Hughes does not admit or otherwise acknowledge that such amounts or existing
postretirement benefit plans of Hughes (other than pensions) represent legally
enforceable liabilities of Hughes.
F-36
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 9: Owner's Equity
In connection with the Hughes Transactions, Hughes was recapitalized on
December 17, 1997 at which time 1,000 shares of $1.00 par value common stock,
representing all of the authorized and outstanding common stock of Hughes, were
issued to GM. Prior to December 17, 1997, the equity of Hughes was comprised of
Parent Company's net investment in its telecommunications and space business.
The following represents changes in the components of accumulated other
comprehensive income (loss), net of income taxes, as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- --------------------- ---------------------
Pre- Tax Pre- Pre-
tax (Credit) Net tax Tax Net tax Tax Net
Amount Expense Amount Amount Expense Amount Amount Expense Amount
------ -------- ------ ------ ------- ------ ------ ------- ------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Minimum pension
liability adjustments.. $ (3.9) $(1.6) $(2.3) -- -- -- -- -- --
Foreign currency
translation
adjustments............ $ 6.4 $ 2.6 $ 3.8 $1.0 $0.4 $0.6 $1.3 $0.5 $0.8
Unrealized holding
losses................. $ 3.0 $ 1.2 $ 1.8 -- -- -- -- -- --
Reclassification
adjustment for gains
included in net
income................. $(11.8) $(4.7) $(7.1) -- -- -- -- -- --
</TABLE>
Note 10: Incentive Plans
Under the Hughes Electronics Corporation Incentive Plan ("the Plan"), as
approved by the GM Board of Directors in 1998, shares, rights or options to
acquire up to 35.6 million shares of GM Class H common stock on a cumulative
basis were available for grant through December 31, 1998.
The GM Executive Compensation Committee may grant options and other rights
to acquire shares of GM Class H common stock under the provisions of the Plan.
The option price is equal to 100% of the fair market value of GM Class H common
stock on the date the options are granted. These nonqualified options generally
vest over two to four years, expire ten years from date of grant and are
subject to earlier termination under certain conditions.
As part of the Hughes Transactions, the outstanding options of former Hughes
employees who continued as Hughes employees were converted on December 18, 1997
into options to purchase recapitalized GM Class H common stock. Recognition of
compensation expense was not required in connection with the conversion.
Changes in the status of outstanding options were as follows:
<TABLE>
<CAPTION>
Weighted-
Shares Under Average
Option Exercise Price
------------ --------------
<S> <C> <C>
GM Class H Common Stock
Outstanding at December 31, 1997............. 13,961,615 $29.08
Granted...................................... 4,180,525 51.02
Exercised.................................... (1,506,241) 23.22
Terminated................................... (937,179) 31.79
---------- ------
Outstanding at December 31, 1998............. 15,698,720 $35.32
========== ======
</TABLE>
F-37
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the Plan stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average Weighted Weighted-
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (years) Price Exercisable Price
----------------- ----------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$9.86 to $20.00 833,203 3.7 $14.70 833,203 $14.70
20.01 to 30.00 1,056,354 5.9 22.18 1,056,354 22.18
30.01 to 40.00 9,800,388 8.2 32.08 3,344,007 32.64
40.01 to 50.00 1,372,700 9.6 43.71 -- --
50.01 to 54.79 2,636,075 9.3 54.79 -- --
---------- --- ------ --------- ------
$9.86 to $54.79 15,698,720 8.1 $35.32 5,233,564 $27.67
========== === ====== ========= ======
</TABLE>
At December 31, 1998, 5,373,522 shares were available for grant under the
Plan subject to GM Executive Compensation Committee approval.
On May 5, 1997, PanAmSat adopted a stock option incentive plan with terms
similar to the Plan. As of December 31, 1998, PanAmSat had issued 1,493,319
options to purchase its common stock with exercise prices ranging from $29.00
per share to $59.75 per share. The options vest ratably over three years and
have a remaining life of approximately nine years on the 1998 options and
eight and one-half years on the 1997 options. At December 31, 1998, 113,590
options were exercisable. The PanAmSat options have been considered in the
following pro forma analysis.
The following table presents pro forma information as if Hughes recorded
compensation cost using the fair value of issued options on their grant date:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(Dollars in Millions Except
Per Share Amounts)
<S> <C> <C> <C>
Reported earnings used for computation of
available separate consolidated net
income..................................... $ 271.7 $ 470.7 $ 183.5
Assumed stock compensation cost, net of
tax........................................ 85.0 43.5 8.8
--------- --------- ---------
Adjusted earnings used for computation of
available separate consolidated net
income..................................... $ 186.7 $ 427.2 $ 174.7
========= ========= =========
Reported earnings per share attributable to
GM Class H common stock.................... $ 0.68 $ 1.18 $ 0.46
Adjusted earnings per share attributable to
GM Class H common stock.................... $ 0.47 $ 1.07 $ 0.44
========= ========= =========
</TABLE>
For stock options granted prior to the Hughes Transactions, the estimated
compensation cost was based upon an allocation from former Hughes which was
calculated using the Black-Scholes valuation model for estimation of the fair
value of its options. The following table presents the estimated weighted-
average fair value of options granted and the assumptions used for the 1998
and 1997 calculations (stock volatility has been estimated based upon a three-
year average derived from a study of a Hughes determined peer group and may
not be indicative of actual volatility for future periods):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Estimated fair value per option granted...................... $22.78 $26.90
Average exercise price per option granted.................... 51.02 31.71
Stock volatility............................................. 32.8% 32.5%
Average risk-free interest rate.............................. 5.63% 5.87%
Average option life in years................................. 6.2 7.0
</TABLE>
F-38
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 11: Other Income and Expenses
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
(Dollars in Millions)
<S> <C> <C> <C>
Gain on PanAmSat merger............................. $489.7
Gain on sale of DIRECTV interest to AT&T............ -- $120.3
Equity losses from unconsolidated affiliates........ $(128.3) (72.2) (42.2)
Other............................................... (24.8) (26.8) (9.0)
------- ------ ------
Total other, net.................................. $(153.1) $390.7 $ 69.1
======= ====== ======
</TABLE>
Equity losses from unconsolidated affiliates at December 31, 1998, are
primarily comprised of losses at DIRECTV Japan, of which Hughes owns 31.6%, and
American Mobile Satellite Corporation, of which Hughes owns 20.7%.
Note 12: Related-Party Transactions
In the ordinary course of its operations, Hughes provides telecommunications
services and sells electronic components to, and purchases sub-components from,
related parties. In addition, prior to December 18, 1997, Hughes received
allocations of corporate expenses and interest costs from former Hughes and GM.
The following table summarizes significant related-party transactions:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------
(Dollars in Millions)
<S> <C> <C> <C>
Revenues............................................. $ 40.5 $ 45.2 $ 50.8
Costs and expenses
Purchases.......................................... 29.0 275.4 241.5
Allocation of corporate expenses................... -- 77.5 75.6
Allocated interest................................. -- 55.6 53.2
</TABLE>
Note 13: Earnings Per Share Attributable to GM Class H Common Stock and
Available Separate Consolidated Net Income
Earnings per share attributable to GM Class H common stock is determined
based on the relative amounts available for the payment of dividends to holders
of GM Class H common stock. Holders of GM Class H common stock have no direct
rights in the equity or assets of Hughes, but rather have rights in the equity
and assets of GM (which includes 100% of the stock of Hughes).
Amounts available for the payment of dividends on GM Class H common stock
are based on the Available Separate Consolidated Net Income ("ASCNI") of
Hughes. The ASCNI of Hughes is determined quarterly and is equal to the
separate consolidated net income of Hughes, excluding the effects of GM
purchase accounting adjustments arising from GM's acquisition of Hughes
(earnings used for computation of ASCNI), multiplied by a fraction, the
numerator of which is a number equal to the weighted-average number of shares
of GM Class H common stock outstanding during the period and the denominator of
which was 399.9 million during 1998, 1997 and 1996. The denominator used in
determining the ASCNI of Hughes may be adjusted from time-to-time as deemed
appropriate by the GM Board of Directors to reflect subdivisions or
combinations of the GM Class H common stock and to reflect certain transfers of
capital to or from Hughes. The GM Board's discretion to make such adjustments
is limited by criteria set forth in GM's Restated Certificate of Incorporation.
For 1997 and 1996, ASCNI and earnings attributable to GM Class H common
stock are presented on a pro forma basis. Prior to the Hughes Transactions,
such amounts were calculated based on the financial
F-39
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
performance of former Hughes. Since the 1997 and 1996 financial statements
relate only to the telecommunications and space business of former Hughes prior
to the consummation of the Hughes Transactions, they do not reflect the
earnings attributable to the GM Class H common stock on a historical basis. The
pro forma presentation is used, therefore, to present the financial results
which would have been achieved for 1997 and 1996 relative to the GM Class H
common stock had they been calculated based on the performance of the
telecommunication and space business of former Hughes.
Earnings per share represent basic earnings per share. The assumed exercise
of stock options does not have a dilutive effect since such exercises do not
currently result in a change to the GM Class H dividend base (denominator) used
in calculating earnings per share. As Hughes has no other common stock
equivalents that may impact the calculation, diluted earnings per share are not
presented.
Dividends may be paid on the GM Class H common stock only when, as, and if
declared by GM's Board of Directors in its sole discretion. Dividends may be
paid on GM Class H common stock to the extent of the amount initially
determined to be available for the payment of dividends on Class H common
stock, plus the portion of earnings of GM after the closing of the Hughes
Transactions attributed to GM Class H common stock. The GM Board determined
that the amount initially available for the payment of dividends on shares of
the recapitalized GM Class H common stock was the cumulative amount available
for the payment of dividends on GM Class H common stock immediately prior to
the closing of the Hughes Transactions, reduced by a pro rata portion of the
net reduction in GM's total stockholders' equity resulting from the Hughes
Transactions. As of December 31, 1998, the amount available for the payment of
dividends on GM Class H common stock was $3.8 billion. The GM Board does not
currently intend to pay cash dividends on the recapitalized GM Class H common
stock.
Note 14: Acquisitions
In December 1998, Hughes agreed to acquire all of the outstanding capital
stock of United States Satellite Broadcasting Company, Inc. ("USSB"). USSB
provides DTH premium satellite programming in conjunction with DIRECTV's basic
programming service. USSB launched its service in June 1994 and, as of December
31, 1998, had more than two million subscribers nationwide. The acquisition
will be accounted for using the purchase method of accounting. The purchase
price, consisting of cash and GM Class H common stock, will be determined at
closing based upon an agreed-upon formula and will not exceed $1.6 billion in
the aggregate. Subject to certain limitations in the merger agreement, USSB
shareholders will be entitled to elect to receive cash or shares of GM Class H
common stock. The amount of cash to be paid in the merger cannot be less than
30% or greater than 50% of the aggregate purchase price with the remaining
consideration consisting of GM Class H common stock. The merger, which is
subject to USSB shareholder approval and the receipt of appropriate regulatory
approval, is expected to close in early to mid-1999.
In October 1998, Hughes agreed to acquire, pending regulatory approval in
Mexico, an additional ownership interest in Grupo Galaxy Mexicana, S.A. de C.V.
("GGM"), a Galaxy Latin America, LLC ("GLA") local operating company located in
Mexico, from Grupo MVS, S.A. de C.V. ("MVS"). Hughes' equity ownership will
represent 49.0% of the voting equity and all of the non-voting equity of GGM.
The GGM transaction will be accounted for using the purchase method of
accounting. As part of the GGM transaction, in October 1998 Hughes acquired
from MVS an additional 10.0% interest in GLA, increasing its ownership interest
to 70.0%, as well as an additional 19.8% interest in SurFin, a company
providing financing of subscriber receiver equipment for certain GLA local
operating companies located in Latin America and Mexico, increasing its
ownership percentage from 39.3% to 59.1%. The GLA and SurFin transactions were
accounted for using the purchase method of accounting. The increased ownership
in SurFin resulted in its consolidation since the date of acquisition. The
aggregate purchase price for the transactions was $197.0 million in cash.
F-40
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for
$851.4 million in cash, increasing Hughes' ownership interest in PanAmSat from
71.5% to 81.0%.
In December 1997, Hughes repurchased from AT&T, a 2.5% equity interest in
DIRECTV, ending AT&T's marketing agreement to distribute the DIRECTV direct
broadcast satellite television service and DIRECTV(TM) receiver equipment. The
$161.8 million repurchase resulted in goodwill of approximately $156.1 million.
In May 1997, Hughes and PanAmSat, a leading provider of international
satellite services, merged their respective satellite service operations into a
new publicly-held company, which retained the name PanAmSat Corporation. Hughes
contributed its Galaxy(R) satellite services business in exchange for a 71.5%
interest in the new company. PanAmSat stockholders received a 28.5% interest in
the new company and $1.5 billion in cash. Such cash consideration and other
funds required to consummate the merger were funded by new debt financing
totaling $1,725.0 million provided by Hughes, which borrowed such funds from
GM.
For accounting purposes, the merger was treated by Hughes as an acquisition
of 71.5% of PanAmSat and was accounted for using the purchase method.
Accordingly, the purchase price was allocated to the net assets acquired,
including intangible assets, based on estimated fair values at the date of
acquisition. The purchase price exceeded the fair value of net assets acquired
by $2.4 billion. In addition, the merger was treated as a partial sale of the
Galaxy business by Hughes and resulted in a one-time pre-tax gain of $489.7
million ($318.3 million after-tax).
As the Hughes 1997 financial statements include only PanAmSat's results of
operations since the date of acquisition, the following selected unaudited pro
forma information is being provided to present a summary of the combined
results of Hughes and PanAmSat as if the acquisition had occurred as of the
beginning of the respective periods, giving effect to purchase accounting
adjustments. The pro forma data is presented for informational purposes only
and may not necessarily reflect the results of operations of Hughes had
PanAmSat operated as part of Hughes for the years ended December 31, 1997 and
1996, nor are they necessarily indicative of the results of future operations.
The pro forma information excludes the effect of non-recurring charges.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(Dollars in Millions
Except Per Share
Amounts)
<S> <C> <C>
Total Revenues....................................... $ 5,247.9 $ 4,189.8
Income before extraordinary item..................... 164.1 42.1
Net income........................................... 143.5 42.1
Pro forma available separate consolidated net
income.............................................. 41.8 15.5
Pro forma earnings per share attributable to GM Class
H common stock...................................... $ 0.41 $ 0.16
</TABLE>
Note 15: Derivative Financial Instruments and Risk Management
In the normal course of business, Hughes enters into transactions that
expose it to risks associated with foreign exchange rates. Hughes utilizes
derivative instruments in an effort to mitigate these risks. Hughes' policy
does not allow speculation in derivative instruments for profit or execution of
derivative instrument contracts for which there are no underlying exposures.
Instruments used as hedges must be effective at reducing the risk associated
with the exposure being hedged and designated as a hedge at the inception of
the contract. Accordingly, changes in market values of hedge instruments are
highly correlated with changes in market values of the underlying transactions,
both at the inception of the hedge and over the life of the hedge contract.
F-41
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Hughes primarily uses foreign exchange-forward contracts to hedge firm
commitments denominated in foreign currencies. Foreign exchange-forward
contracts are legal agreements between two parties to purchase and sell a
foreign currency, for a price specified at the contract date, with delivery and
settlement in the future. The total notional amounts of contracts afforded
hedge accounting treatment at December 31, 1998 and 1997 were not significant.
Hughes is exposed to credit risk in the event of non-performance by the
counterparties to its foreign exchange-forward contracts. While Hughes believes
this risk is remote, credit risk is managed through the periodic monitoring and
approval of financially sound counterparties.
In connection with debt refinancing activities by PanAmSat in 1997, PanAmSat
entered into certain U.S. Treasury rate lock contracts to reduce its exposure
to fluctuations in interest rates. The aggregate notional value of these
contracts was $375.0 million and these contracts were accounted for as hedges.
The cost to settle these instruments in 1998 was $9.1 million and is being
amortized to interest expense over the term of the related debt securities.
Note 16: Discontinued Operations
On December 15, 1997, Hughes sold substantially all of the assets and
liabilities of Hughes Avicom International, Inc. ("Hughes Avicom") to Rockwell
Collins, Inc. for cash. Hughes Avicom is a supplier of products and services to
the commercial airline market. Hughes recorded an after-tax gain of $62.8
million on the sale. The net operating results of Hughes Avicom have been
reported, net of applicable income taxes, as "Income (Loss) from discontinued
operations, net of taxes" and the net cash flows as "Net cash used by
discontinued operations."
Summarized financial information for Hughes Avicom follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
(Dollars in Millions)
<S> <C> <C>
Revenues............................................. $ 102.5 $ 89.9
Net income (loss).................................... 1.2 (7.4)
</TABLE>
- --------
* Includes the results of Hughes Avicom through December 15, 1997.
Note 17: Segment Reporting
Hughes' segments, which are differentiated by their products and services,
include Direct-To-Home Broadcast, Satellite Services, Satellite Systems and
Network Systems. Direct-To-Home Broadcast is engaged in acquiring, promoting,
selling and/or distributing digital programming via satellite to residential
and commercial customers. Satellite Services is engaged in the selling, leasing
and operating of satellite transponders and providing services for cable
television systems, news companies, Internet service providers and private
business networks. Satellite Systems designs, manufactures and markets
satellites and satellite components. Network Systems products include
satellite-based business networks and Internet access service, cellular-based
fixed wireless telephone systems and mobile cellular digital packet data
systems. Other includes the corporate office and other entities.
F-42
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Direct-
To-Home Satellite Satellite Network
Broadcast Services Systems Systems Other Eliminations Total
--------- --------- --------- -------- -------- ------------ ---------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
1998
External Revenues....... $1,813.7 $ 643.8 $2,493.4 $1,000.6 $ 12.4 $ 5,963.9
Intersegment Revenues... 2.4 123.5 337.7 76.1 0.8 $(540.5) --
-------- -------- -------- -------- -------- ------- ---------
Total Revenues.......... $1,816.1 $ 767.3 $2,831.1 $1,076.7 $ 13.2 $(540.5) $ 5,963.9
-------- -------- -------- -------- -------- ------- ---------
Operating Profit (1).... $ (228.1) $ 318.3 $ 246.3 $ 10.9 $ (68.2) $ (30.1) $ 249.1
Depreciation and
Amortization (1)....... 102.3 235.0 49.2 41.7 31.6 (5.0) 454.8
Intangibles, net........ -- 2,433.5 -- 53.6 1,065.1 -- 3,552.2
Segment Assets (2)...... 2,190.4 5,890.5 1,491.2 1,299.0 2,856.8 (292.9) 13,435.0
Capital Expenditures
(3).................... 230.8 921.7 99.7 40.0 3.3 133.0 1,428.5
-------- -------- -------- -------- -------- ------- ---------
1997
External Revenues....... $1,276.9 $ 537.3 $2,290.0 $ 998.3 $ 25.8 $ 5,128.3
Intersegment Revenues... -- 92.6 201.9 13.0 2.7 $(310.2) --
-------- -------- -------- -------- -------- ------- ---------
Total Revenues.......... $1,276.9 $ 629.9 $2,491.9 $1,011.3 $ 28.5 $(310.2) $ 5,128.3
-------- -------- -------- -------- -------- ------- ---------
Operating Profit (1).... $ (254.6) $ 292.9 $ 226.3 $ 74.1 $ (47.9) $ (5.4) $ 285.4
Depreciation and
Amortization (1)....... 86.1 145.2 39.4 32.0 14.7 -- 317.4
Intangibles, net........ -- 2,498.5 -- -- 456.3 -- 2,954.8
Segment Assets (2)...... 1,408.7 5,682.4 1,312.6 1,215.6 3,298.1 (186.4) 12,731.0
Capital Expenditures
(3).................... 105.6 625.7 113.9 43.1 0.4 (62.1) 826.6
-------- -------- -------- -------- -------- ------- ---------
1996
External Revenues....... $ 621.0 $ 381.7 $1,950.4 $1,049.6 $ 6.0 $ 4,008.7
Intersegment Revenues... -- 101.1 106.0 20.4 1.7 $(229.2) --
-------- -------- -------- -------- -------- ------- ---------
Total Revenues.......... $ 621.0 $ 482.8 $2,056.4 $1,070.0 $ 7.7 $(229.2) $ 4,008.7
-------- -------- -------- -------- -------- ------- ---------
Operating Profit (1).... $ (319.8) $ 239.1 $ 183.3 $ 107.7 $ (13.5) $ (7.7) $ 189.1
Depreciation and
Amortization (1)....... 67.3 58.5 34.4 28.3 27.1 -- 215.6
Intangibles, net........ -- 72.9 -- -- 395.1 -- 468.0
Segment Assets (2)...... 1,023.4 1,275.5 757.8 964.0 457.1 (105.2) 4,372.6
Capital Expenditures
(3).................... 63.5 308.7 87.8 45.3 -- (55.9) 449.4
-------- -------- -------- -------- -------- ------- ---------
</TABLE>
Certain 1997 and 1996 amounts have been reclassified to conform with the
1998 presentation.
(1) Includes amortization arising from purchase accounting adjustments related
to GM's acquisition of Hughes amounting to $3.3 million in each of the
years for the Satellite Services segment and $17.7 million in each of the
years in Other.
(2) Assets of the Satellite Services segment and Other include the unamortized
purchase accounting adjustments associated with GM's acquisition of Hughes.
Satellite Services includes unamortized purchase accounting adjustments of
$66.3 million in 1998, $69.6 million in 1997 and $72.9 million in 1996.
Other includes unamortized purchase accounting adjustments of $360.3
million in 1998, $378.0 million in 1997 and $395.7 million in 1996.
(3) Includes expenditures related to satellites in segments as follows: $70.2
million in 1998 for Direct-To-Home Broadcast segment and $726.3 million,
$606.1 million and $259.2 million in 1998, 1997 and 1996, respectively, for
Satellite Services segment. Satellite Services segment also includes $155.5
million in 1998 related to the early buy-out of satellite sale-leasebacks.
F-43
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
A reconciliation of operating profit to income from continuing operations
before income taxes, minority interests, extraordinary item and cumulative
effect of accounting change, as shown in the Statement of Income and Available
Separate Consolidated Net Income, follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
(Dollars in Millions)
<S> <C> <C> <C>
Operating profit................................... $ 249.1 $285.4 $189.1
Interest income.................................... 112.3 33.1 6.8
Interest expense................................... (17.5) (91.0) (42.9)
Other, net......................................... (153.1) 390.7 69.1
------- ------ ------
Income from continuing operations before income
taxes, minority interests, extraordinary item and
cumulative effect of accounting change............ $ 190.8 $618.2 $222.1
======= ====== ======
</TABLE>
The following table presents revenues earned from customers located in
different geographic areas. Property and satellites are grouped by their
physical location. All satellites are reported as United States assets.
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
Net Net Net
Total Property & Total Property & Total Property &
Revenues Satellites Revenues Satellites Revenues Satellites
-------- ---------- -------- ---------- -------- ----------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C>
North America
United States......... $3,534.3 $4,206.3 $2,851.1 $3,507.1 $2,613.1 $1,725.1
Canada and Mexico..... 136.7 2.0 101.3 -- 27.4 --
-------- -------- -------- -------- -------- --------
Total North America..... 3,671.0 4,208.3 2,952.4 3,507.1 2,640.5 1,725.1
-------- -------- -------- -------- -------- --------
Europe
United Kingdom........ 842.4 14.1 583.3 10.4 336.2 8.0
Other................. 275.5 0.6 419.0 0.4 290.0 0.3
-------- -------- -------- -------- -------- --------
Total Europe............ 1,117.9 14.7 1,002.3 10.8 626.2 8.3
-------- -------- -------- -------- -------- --------
Latin America
Brazil................ 184.9 4.6 131.2 -- 48.6 --
Other................. 104.2 11.2 90.4 -- 23.1 --
-------- -------- -------- -------- -------- --------
Total Latin America..... 289.1 15.8 221.6 -- 71.7 --
-------- -------- -------- -------- -------- --------
Asia
Japan................. 185.9 0.6 147.9 0.5 119.7 0.4
India................. 83.4 14.7 46.5 12.7 8.0 11.7
China................. 63.4 1.7 154.5 1.5 125.2 1.4
Other................. 214.7 0.6 477.8 0.5 387.3 0.5
-------- -------- -------- -------- -------- --------
Total Asia.............. 547.4 17.6 826.7 15.2 640.2 14.0
-------- -------- -------- -------- -------- --------
Total Middle East....... 284.3 -- 77.7 -- 1.2 --
Total Africa............ 54.2 0.3 47.6 -- 28.9 --
-------- -------- -------- -------- -------- --------
Total................... $5,963.9 $4,256.7 $5,128.3 $3,533.1 $4,008.7 $1,747.4
======== ======== ======== ======== ======== ========
</TABLE>
F-44
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 18: Commitments and Contingencies
In connection with the 1997 spin-off of Hughes Defense and its subsequent
merger with Raytheon, a process was agreed to among GM, Hughes and Raytheon for
resolving disputes that might arise in connection with post-closing adjustments
called for by the terms of the merger agreement. Such adjustments might call
for a cash payment between Hughes and Raytheon. A dispute currently exists
regarding the post-closing adjustments which Hughes and Raytheon have proposed
to one another. In an attempt to resolve the dispute, Hughes gave notice to
Raytheon to commence the arbitration process. Raytheon responded by filing an
action in Delaware Chancery Court which seeks to enjoin the arbitration as
premature. It is possible that the ultimate resolution of the post-closing
financial adjustment provision of the merger agreement may result in Hughes
making a payment to Raytheon that could be material to Hughes. However, the
amount of any payment that either party might be required to make to the other
is not determinable at this time. Hughes intends to vigorously pursue
resolution of the dispute through the arbitration process, opposing the
adjustments Raytheon seeks and seeking the payment from Raytheon that it has
proposed.
Hughes has entered into agreements to procure commercial satellite launches,
a significant number of which are expected to be used in connection with
satellites ordered by outside customers. The agreements provide for launches
beginning in 1999 and also contain options for additional launch vehicles. The
total amount of the commitments, which is dependent upon the number of options
exercised, market conditions and other factors, could exceed $2.0 billion.
Hughes has a long-term agreement for multiple launch services aboard
expendable launch vehicles using the Sea Launch ocean-based commercial launch
system. Hughes plans to use options under this agreement to deliver
communications satellites in-orbit. Sea Launch is scheduled to demonstrate the
capabilities of its ocean-based commercial launch system with its first launch
in March 1999. The first launch will carry a demonstration payload having the
same mission and physical characteristics (weight, size, etc.) as an HS 702
commercial communications satellite. If the first launch is not successful or
delayed, Hughes could be required by customers to procure other launch vehicles
to satisfy its contractual obligations, which may lead to higher operating
costs.
DIRECTV has an agreement with General Electric Capital Corporation ("GECC")
under which GECC agreed to provide an open-end revolving credit program for
consumer purchases of DIRECTV receiver equipment, installations and ancillary
items at selected retail establishments. Funding under this program was
discontinued effective September 10, 1996. The aggregate outstanding balance
under this agreement at December 31, 1998 was approximately $190.0 million.
Hughes has certain rights regarding the administration of the program, and the
losses from qualifying accounts under this program accrue to Hughes, subject to
certain indemnity obligations of GECC. Hughes has established allowances to
provide for expected losses under the program. The allowances are subject to
periodic review based on information regarding the status of the program. A
complaint and counterclaim have been filed by the parties in the U.S. District
Court for the District of Connecticut concerning GECC's performance and
DIRECTV's obligation to act as a surety. GECC claims damages from DIRECTV in
excess of $140.0 million. DIRECTV seeks damages from GECC in excess of $70.0
million. Hughes intends to vigorously contest GECC's allegations and pursue its
own contractual rights and remedies. Hughes does not believe that the
litigation will have a material adverse impact on Hughes' results of operations
or financial position. Discovery is not yet completed in the case and no trial
date has been set.
In December 1994, former Hughes entered into an agreement with Computer
Sciences Corporation ("CSC") whereby CSC provides a significant amount of data
processing services required by the non-automotive businesses of former Hughes.
Baseline service payments to CSC are expected to aggregate approximately $1.5
billion over the term of the eight-year agreement for former Hughes. Based on
historical
F-45
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
usage, approximately 17% of the costs incurred under the agreement are
attributable to Hughes. The contract is cancelable by Hughes with early
termination penalties.
At December 31, 1998, minimum future commitments under noncancelable
operating leases having lease terms in excess of one year, exclusive of
satellite transponders leaseback payments disclosed in Note 4, are primarily
for real property and aggregated $323.8 million, payable as follows: $56.6
million in 1999, $53.3 million in 2000, $52.3 million in 2001, $50.3 million in
2002, $29.4 million in 2003 and $81.9 million thereafter. Certain of these
leases contain escalation clauses and renewal or purchase options. Rental
expenses under operating leases were $62.0 million in 1998, $72.2 million in
1997 and $52.7 million in 1996.
In conjunction with its performance on long-term contracts, Hughes is
contingently liable under standby letters of credit and bonds in the amount of
$294.3 million at December 31, 1998. In Hughes' past experience, no material
claims have been made against these financial instruments. In addition, Hughes
has guaranteed up to $204.6 million of bank debt, including $150.0 million
related to American Mobile Satellite Corporation, and up to $22.1 million of
capital lease obligations. $150.0 million of bank debt matures in March 2003;
the remaining $54.6 million of bank debt matures in September 2007. The capital
lease obligations are due in variable amounts over the next five years.
In connection with the DTH broadcast businesses, Hughes has commitments
related to certain programming agreements which are variable based upon the
number of underlying subscribers and market penetration rates. Minimum payments
over the terms of applicable contracts are anticipated to be approximately
$700.0 million to $800.0 million.
Hughes is subject to potential liability under government regulations and
various claims and legal actions which are pending or may be asserted against
it. The aggregate ultimate liability of Hughes under these claims and actions
was not determinable at December 31, 1998. In the opinion of Hughes management,
such liability is not expected to have a material adverse effect on Hughes'
results of operations or financial position.
Note 19: Subsequent Events
Hughes entered into a contract with Asia-Pacific Mobile Telecommunications
Satellite Pte. Ltd. ("APMT") effective May 15, 1998, whereby Hughes was to
provide to APMT a satellite-based mobile telecommunications system consisting
of two satellites, a ground segment, user terminals and associated equipment
and software. As part of the contract, Hughes was required to obtain all
necessary U.S. Government export licenses for the APMT system by February 15,
1999. On February 24, 1999, the Department of Commerce notified Hughes that it
intends to deny the export licenses required by Hughes to fulfill its
contractual obligation to APMT. Hughes has until March 16, 1999 to request
reconsideration of the decision. As a result of Hughes failing to obtain the
export licenses, APMT has the right to terminate the contract. At this time,
there are ongoing discussions between Hughes and APMT regarding the contract,
and between Hughes and the U.S. Government regarding the export licenses. If
the U.S. Government ultimately denies the required export licenses or APMT
terminates the contract, Hughes could be required to refund $45.0 million to
APMT and record a pre-tax charge to earnings of approximately $100 million in
1999.
On January 22, 1999, Hughes agreed to acquire Primestar, Inc.'s
("Primestar") 2.3 million-subscriber medium-power DTH business. In a related
transaction, Hughes also agreed to acquire the high-power satellite assets and
direct broadcast satellite ("DBS") orbital frequencies of Tempo, a wholly-owned
subsidiary of TCI Satellite Entertainment, Inc. The acquisitions will be
accounted for using the purchase method of accounting. The purchase price for
the DTH business will be comprised of $1.1 billion in cash and 4,871,448 shares
of GM Class H common stock, for a total purchase price of $1,325.0 million. The
DTH transaction, pending regulatory and Primestar lender approval, is expected
to close in early to mid-1999. The purchase price for the Tempo
F-46
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
assets consists of $500.0 million in cash, $150.0 million of which is expected
to be paid in early to mid-1999 and $350.0 million of which is payable upon
Federal Communications Commission approval of the transfer of the DBS orbital
frequencies, which is expected in mid to late-1999.
Hughes has maintained a suit against the U.S. Government since September
1973 regarding the Government's infringement and use of a Hughes patent (the
"Williams Patent") covering "Velocity Control and Orientation of a Spin
Stabilized Body," principally satellites. On April 7, 1998, the U.S. Court of
Appeals for the Federal Circuit ("CAFC") reaffirmed earlier decisions in the
Williams case including the award of $114.0 million in damages. The CAFC ruled
that the conclusions previously reached in the Williams case were consistent
with the U.S. Supreme Court's findings in the Warner-Jenkinson case. The U.S.
Government petitioned the CAFC for a rehearing, was denied the request, and
thereafter applied for certiorari to the U.S. Supreme Court.
On March 1, 1999, the U.S. Supreme Court denied the U.S. Government's
petition for certiorari. The case will be remanded back to the trial court
(Court of Claims) for entry of the final judgment. While no amount has been
recorded in the financial statements of Hughes to reflect the $114.0 million
award or the interest accumulating thereon as of December 31, 1998, it is
expected that resolution of this matter will result in the recognition of a
pre-tax gain of approximately $150 million during 1999.
The GGM transaction (discussed in Note 14) received regulatory approval and
closed in February 1999.
F-47
<PAGE>
HUGHES ELECTRONICS CORPORATION
SCHEDULE II--VALUATION & QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at charged to Additions
beginning of costs and charged to Balance at end
Description year expenses other accounts Deductions of year
- ----------- ------------ ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
For the Year Ended
December 31, 1998
Allowances Deducted
from Assets
Accounts and notes
receivable (for
doubtful
receivables)......... $(15,160.3) $(37,523.6) $(22,142.1)a $50,929.8 b $(23,896.2)
Net investment in
sales-type leases
(for doubtful
receivables)......... (12,896.7) -- -- 2,335.1 a (10,561.6)
Inventories
(principally for
obsolescence of
service parts)....... (4,933.0) (6,584.6) -- 2,284.4 c (9,233.2)
---------- ---------- ---------- --------- ----------
Total Allowances
Deducted from
Assets............. $(32,990.0) $(44,108.2) $(22,142.1) $55,549.3 $(43,691.0)
========== ========== ========== ========= ==========
For the Year Ended
December 31, 1997
Allowances Deducted
from Assets
Accounts and notes
receivable (for
doubtful
receivables)......... $ (7,704.2) $(19,405.9) $(24,218.1)a,d $36,167.9 b $(15,160.3)
Net investment in
sales-type leases
(for doubtful
receivables)......... -- -- (13,434.1)d 537.4 a (12,896.7)
Inventories
(principally for
obsolescence of
service parts)....... (3,501.4) (1,694.0) -- 262.4 c (4,933.0)
---------- ---------- ---------- --------- ----------
Total Allowances
Deducted from
Assets............. $(11,205.6) $(21,099.9) $(37,652.2) $36,967.7 $(32,990.0)
========== ========== ========== ========= ==========
For the Year Ended
December 31, 1996
Allowances Deducted
from Assets
Accounts and notes
receivable (for
doubtful
receivables)......... $ (1,621.1) $(20,317.6) $(11,440.7)a $25,675.2 b $ (7,704.2)
Inventories
(principally for
obsolescence of
service parts)....... (2,768.8) (3,237.1) -- 2,504.5 c (3,501.4)
---------- ---------- ---------- --------- ----------
Total Allowances
Deducted from
Assets............. $ (4,389.9) $(23,554.7) $(11,440.7) $28,179.7 $(11,205.6)
========== ========== ========== ========= ==========
</TABLE>
- --------
a Primarily reflects the recovery of accounts previously written-off or
reserved.
b Relates to accounts written-off.
c Relates to obsolete parts written-off.
d Resulting from the PanAmSat merger in May 1997, $1,023.7 for allowance for
doubtful accounts and notes receivable and $13,434.1 for allowance for
doubtful sales-type lease receivables were added.
F-48
<PAGE>
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
amounts in thousands
<S> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 170,380 --
Accounts receivable................................. 94,738 117,655
Other receivables................................... 6,836 29,387
---------- ----------
101,574 147,042
Less allowance for doubtful accounts................ 8,804 7,442
---------- ----------
92,770 139,600
---------- ----------
Prepaid expenses...................................... 4,855 3,967
Property and equipment, at cost:
Satellite reception equipment....................... 1,228,718 1,198,376
Subscriber installation costs....................... 284,134 270,384
Support equipment................................... 93,660 93,698
---------- ----------
1,606,512 1,562,458
Less accumulated depreciation....................... 456,915 413,868
---------- ----------
1,149,597 1,148,590
---------- ----------
Intangible assets, net of accumulated amortization.... 615,568 786,373
Deferred financing costs and other assets, net of
accumulated amortization............................. 32,307 33,557
---------- ----------
$2,065,477 $2,112,087
========== ==========
</TABLE>
(continued)
F-49
<PAGE>
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
CONSOLIDATED BALANCE SHEETS, CONTINUED
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
amounts in thousands
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable..................................... $ 230,822 195,873
Accrued expenses..................................... 108,713 136,901
Accrued charges from related parties................. 22,172 14,792
Deferred revenue..................................... 106,364 100,948
Debt (note 7)........................................ 1,860,717 1,833,195
Deferred income taxes................................ 66,786 75,057
Other liabilities.................................... 38,402 40,095
----------- ----------
Total liabilities................................ 2,433,976 2,396,861
----------- ----------
Stockholders' Deficit:
Preferred stock, $.01 par value; authorized
350,000,000 shares; none issued .................. -- --
Class A common stock, $.01 par value; authorized
850,000,000 shares; issued 179,143,934 in 1999 and
1998 ............................................. 1,791 1,791
Class B common stock, $.01 par value; authorized
50,000,000 shares; issued 8,465,324 in 1999 and
1998 ............................................. 85 85
Class C common stock, $.01 par value; authorized
30,000,000 shares; issued 13,332,365 in 1999 and
1998 ............................................. 133 133
Class D common stock, $.01 par value; authorized
150,000,000 shares; none issued .................. -- --
Additional paid-in capital .......................... 1,511,041 1,511,041
Accumulated deficit ................................. (1,881,549) (1,797,824)
----------- ----------
Total stockholders' deficit...................... (368,499) (284,774)
----------- ----------
Commitments and contingencies (notes 2 and 9)........ $ 2,065,477 2,112,087
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-50
<PAGE>
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months
ended March 31,
-----------------
1999 1998
-------- -------
amounts in
thousands,
except per share
amounts
<S> <C> <C>
Revenue:
Programming and equipment rental.......................... $385,266 154,257
Installation.............................................. 8,598 14,243
-------- -------
393,864 168,500
-------- -------
Operating costs and expenses:
Charges from PRIMESTAR Partners L.P. (the "Partnership")
(note 8) ................................................ -- 82,235
Operating (note 8)........................................ 199,664 9,847
Selling, general and administrative (note 8).............. 104,934 55,341
Stock compensation (note 8)............................... 271 4,869
Depreciation.............................................. 114,461 65,105
Amortization.............................................. 24,375 --
-------- -------
443,705 217,397
-------- -------
Operating loss.......................................... (49,841) (48,897)
Other income (expense):
Interest expense.......................................... (42,428) (14,177)
Share of losses of the Partnership........................ -- (5,822)
Other, net................................................ 273 (621)
-------- -------
(42,155) (20,620)
-------- -------
Loss before income taxes................................ (91,996) (69,517)
Income tax benefit.......................................... 8,271 --
-------- -------
Net loss................................................ (83,725) (69,517)
======== =======
Basic and diluted loss per common share (note 5)............ $ (.42) $ (1.03)
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-51
<PAGE>
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Three months ended March 31, 1999
(unaudited)
<TABLE>
<CAPTION>
Common stock
------------------------------ Additional Total
Class paid-in Accumulated stockholders'
A Class B Class C Class D capital deficit deficit
------ ------- ------- ------- ---------- ----------- -------------
amounts in thousands
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1999................... $1,791 85 133 -- 1,511,041 (1,797,824) (284,774)
Net loss ............. -- -- -- -- -- (83,725) (83,725)
------ --- --- ---- --------- ---------- --------
Balance at March 31,
1999................... $1,791 85 133 -- 1,511,041 (1,881,549) (368,499)
====== === === ==== ========= ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-52
<PAGE>
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months
ended March 31,
------------------
1999 1998
--------- -------
amounts in
thousands
(see note 6)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (83,725) (69,517)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 138,836 65,105
Share of losses of the Partnership..................... -- 5,822
Accretion of debt discount............................. 5,644 4,682
Stock compensation..................................... 271 4,869
Payments related to stock appreciation rights.......... (1,625) --
Payments related to restructuring charges.............. (10,231) --
Deferred tax benefit................................... (8,271) --
Other non-cash charges................................. 421 7,956
Changes in operating assets and liabilities:
Change in receivables................................ 46,830 10,845
Change in prepaid expenses and other assets.......... (888) (736)
Change in accruals and payables...................... 27,653 (10,209)
Change in deferred revenue........................... 5,416 (3,114)
--------- -------
Net cash provided by operating activities.......... 120,331 15,703
--------- -------
Cash flows from investing activities:
Capital expended for property and equipment.............. (118,221) (73,966)
Proceeds from First Closing of Hughes High Power
Transaction............................................. 149,250 --
Other investing activities............................... (2,820) (75)
--------- -------
Net cash provided (used) by investing activities... 28,209 (74,041)
--------- -------
Cash flows from financing activities:
Borrowings of debt....................................... 22,000 113,000
Repayments of debt....................................... (160) (61,735)
Proceeds from issuance of common stock................... -- 989
--------- -------
Net cash provided by financing activities.......... 21,840 52,254
--------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 170,380 (6,084)
Cash and cash equivalents:
Beginning of period...................................... -- 6,084
--------- -------
End of period............................................ $ 170,380 --
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-53
<PAGE>
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
(1) Organization and Basis of Presentation
The accompanying consolidated financial statements of Phoenixstar, Inc.
(formerly PRIMESTAR, Inc.) ("Phoenixstar" or the "Company") include the
historical financial information of TCI Satellite Entertainment, Inc. ("TSAT")
and its consolidated subsidiaries for the period prior to March 31, 1998 and
Phoenixstar and its consolidated subsidiaries for the period subsequent to
March 31, 1998. All significant intercompany transactions have been eliminated.
Phoenixstar was incorporated on August 27, 1997. Through the Hughes Closing
Date, as defined below, the Company owned and operated the PRIMESTAR (R) direct
to home satellite service throughout the continental U.S. The PRIMESTAR (R)
service is transmitted via a satellite ("GE-2") owned and operated by GE
American Communications ("GE Americom") at the 85 West Longitude ("W.L.")
orbital position. As a result of the consummation of the Hughes Medium Power
Transaction, as defined below, the Company is no longer engaged in the digital
satellite-based television services industry. The Company is in the process of
satisfying its remaining liabilities, terminating any remaining contracts and
winding up its business affairs.
(2) The Hughes Transactions
Effective April 28, 1999 (the "Hughes Closing Date") and pursuant to an
asset purchase agreement dated January 22, 1999 (the "Hughes Medium Power
Agreement"), the Company sold its medium-power direct broadcast satellite
business to Hughes Electronics Corporation ("Hughes"), a subsidiary of General
Motors Corporation, for aggregate consideration of $1,358.2 million (the
"Hughes Medium Power Transaction"). Such consideration was comprised of $1,100
million in cash (before working capital adjustments and transaction costs) and
4.871 million shares of General Motors Class H common stock ("GMH Stock")
valued at $258.2 million on the Hughes Closing Date. The Company recognized a
gain of approximately $97 million, before income tax effects, upon consummation
of the Hughes Medium Power Transaction. The purchase price is subject to
working capital adjustments to be settled within 90 days after the Hughes
Closing Date.
Concurrently with the Hughes Medium Power Transaction, Phoenixstar reached
an agreement (the "Lock-up Agreement") with holders of approximately 84% of the
aggregate principal amount of its 10 7/8% Senior Subordinated Notes due 2007
(the "Senior Subordinated Notes"), 12 1/4% Senior Subordinated Discount Notes
due 2007 (the "Senior Subordinated Discount Notes" and, together with the
Senior Subordinated Notes, the "Notes"), and notes issued under its Senior
Subordinated Credit Facility dated as of April 1, 1998 (the "Bridge Loans").
Holders participating in the privately negotiated transaction agreed to sell
their Notes and Bridge Loans to the Company for cash equal to 85.6% of the
aggregate principal amount thereof, plus stock appreciation rights ("SARs") on
the shares of GMH Stock received by Phoenixstar in the Hughes Medium Power
Transaction. Each SAR issued in the transaction entitles the holder to receive
a payment from Phoenixstar at the end of one year from the date of issuance in
the amount, if any, by which the market price per share of GMH Stock at such
time exceeds $47.00 per share. Participating Note holders and bridge lenders
received approximately 7.8 SARs per $1,000 principal amount of debt sold to
Phoenixstar pursuant to the Lock-up Agreement. Participating Note holders and
bridge lenders also agreed to (i) consent to the transaction with Hughes and
(ii) amend the indentures and credit agreement governing such debt obligations
to remove substantially all covenants, other than covenants to pay interest on
and principal of the Notes and Bridge Loan when due and covenants relating to
certain required purchase offerings.
F-54
<PAGE>
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the terms of the indentures and credit agreement governing
Phoenixstar's subordinated debt, Phoenixstar is required to make an offer to
purchase the remainder of the outstanding publicly traded Notes at a purchase
price equal to 101% of par. In that connection, the Company has commenced an
offer to purchase the remaining Notes (the "Offer to Purchase").
In connection with the Hughes Medium Power Transaction and pursuant to a
funding agreement, dated as of March 31, 1999 (the "Funding Agreement"),
affiliates of the stockholders of the Company, other than TSAT, and an
affiliate of Tele-Communications, Inc. (collectively, the "Stockholder
Affiliates") committed to make funds available to the Company, either in the
form of capital contributions or loans, up to an aggregate of $1,013 million,
subject to certain conditions and triggering events set forth in the Funding
Agreement (the "Stockholder Commitment"). Pursuant to such commitment, the
Stockholder Affiliates contributed to the Company $307.7 million on the Hughes
Closing Date (the "Initial Funding Amount"). On the Hughes Closing Date, the
Company used a portion of the cash proceeds from the Hughes Medium Power
Transaction and the Initial Funding Amount to (i) repay principal, interest and
fees due under the Company's senior bank credit facility ($537.5 million) and
(ii) fund amounts due pursuant to the Lock-up Agreement ($543.5 million) and
(iii) fund amounts to holders of Bridge Loans who were not party to the Lock-up
Agreement ($10.1 million).
Pursuant to the indentures governing the notes (the "Indentures"), on May
13, 1999, the Company commenced a tender offer to purchase all Notes not
purchased pursuant to the Lock-up Agreement (the "Remaining Notes"), on the
terms required by the Indentures. The terms and conditions of such tender offer
are set forth in the Offer to Purchase, dated May 13, 1999, sent by the Company
to the holders of the Remaining Notes. In connection with therewith, the
Company also sent to the holders of the Remaining Notes notice informing them
that a "change of control" had occurred and informing them of the effectiveness
of the Supplemental Indentures, as required by the Indentures.
In connection with their approval of the Hughes Medium Power Transaction,
the stockholders of Phoenixstar also approved the payment to TSAT of
consideration in the form of 1.407 million shares of GMH Stock (the
"Phoenixstar Payment"), subject to the terms and conditions set forth in an
agreement dated as of January 22, 1999 (the "Phoenixstar Payment Agreement").
In consideration of the Phoenixstar Payment, TSAT agreed to approve the Hughes
Medium Power Transaction and Hughes High Power Transaction (as defined below)
as a stockholder of Phoenixstar, to modify certain agreements to facilitate the
Hughes High Power Transaction, and to issue the Company a share appreciation
right with respect to the shares of GMH Stock received as the Phoenixstar
Payment, granting the Company the right to any market price appreciation in
such GMH Stock over the one year period following the date of issuance, over an
agreed strike price of $47.00. Pursuant to the Phoenixstar Payment Agreement,
TSAT has also agreed to forego any liquidating distribution or other payment
that may be made in respect of the outstanding shares of Phoenixstar upon any
dissolution and winding-up of Phoenixstar, or otherwise in respect of
Phoenixstar's existing equity. On the Hughes Closing Date, the Company issued
to TSAT 1.407 million shares of GMH Stock in satisfaction of the Phoenixstar
Payment.
Subsequent to the Hughes Closing Date, the Company is responsible for (i)
the payment of certain obligations not assumed by Hughes, (ii) the payment of
costs, currently estimated to range from $270 million to $340 million,
associated with the termination of certain vendor and service contracts and
lease agreements not assumed by Hughes, (iii) the payment to all Note holders
who accept the Offer to Purchase, the purchase price for each Note tendered,
and the repayment of principal and interest due pursuant to the Notes not paid
as part of the Lock-up Agreement or the Offer to Purchase and (iv) the
repayment of amounts due under the Company's Partnership Credit Facility. The
Company currently expects to fund such obligations with available cash,
additional advances and/or contributions from the Stockholder Affiliates
pursuant to the Stockholder Commitment and additional proceeds from the Hughes
High Power Transaction, if any.
F-55
<PAGE>
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In a separate transaction, the Company announced that TSAT and the Company
had reached an agreement with Hughes to sell (i) TSAT's authorizations granted
by the Federal Communications Commission (the "FCC") and other assets and
liabilities relating to a proposed DBS system being constructed by Tempo
Satellite, Inc. ("Tempo"), a subsidiary of TSAT, at 119 degrees W.L.
(collectively, the "Tempo DBS Assets") and (ii) Phoenixstar's rights relating
to the Tempo DBS Assets ("Tempo Rights") to Hughes, for aggregate consideration
valued at $500 million (the "Hughes High Power Transaction"). Pursuant to the
agreement, Hughes would assume $465 million of TSAT's liability to the
Partnership, pay TSAT $2.5 million in cash and pay Phoenixstar and the
Partnership $32.5 million in cash. In addition, the Partnership and Phoenixstar
have agreed to forgive amounts due from TSAT in excess of the $465 million to
be assumed by Hughes. To facilitate such transaction, the Partnership would
terminate and relinquish the Tempo Rights. Due to the fact that regulatory
approval is required to transfer certain of the Tempo DBS Assets to Hughes, the
Hughes High Power Transaction will be completed in two steps.
Effective March 10, 1999, the first closing of the Hughes High Power
Transaction (the "First Closing") was consummated whereby Hughes acquired one
of Tempo's high power satellites ("Tempo DBS-2") and Phoenixstar's option to
acquire Tempo DBS-2 (the "Tempo DBS-2 Option") for aggregate consideration of
$150 million. Such consideration was comprised of the following: (i) $9,750,000
paid to Phoenixstar and the Partnership for the Tempo DBS-2 Option and the
termination of the Partnership's rights under the Tempo Capacity Option, (ii)
$750,000 paid to TSAT to exercise the Tempo DBS-2 Option and (iii) the
assumption by Hughes of $139,500,000 due to the Partnership from TSAT in
exchange for Tempo DBS-2. Simultaneously with the First Closing, Hughes repaid
the liability to the Partnership that Hughes assumed.
The sale of the remaining assets contemplated by the Hughes High Power
Agreement (the "Second Closing") is subject to the receipt of appropriate
regulatory approvals and other customary closing conditions and is expected to
be consummated in mid-1999. In the event the Second Closing is not consummated
and the Hughes High Power Agreement is abandoned, there can be no assurance
that the Company will be able to recover the carrying amount of its satellite
rights. Tempo has been notified that its in-orbit satellite ("Tempo DBS-1")
experienced power reductions which occurred on March 29, 1999 and April 2,
1999. Although the Company does not believe the extent of such power reductions
is significant, a definitive assessment of the impact on Tempo DBS-1 is not yet
complete.
(3) The Restructuring
Effective April 1, 1998 (the "Restructuring Closing Date") and pursuant to
(i) a Merger and Contribution Agreement dated as of February 6, 1998 (the
"Restructuring Agreement"), among TSAT, the Company, Time Warner Entertainment
Company, L.P. ("TWE"), Advance/Newhouse Partnership ("Newhouse"), Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox"), MediaOne of
Delaware, Inc. ("MediaOne"), and GE Americom, and (ii) an Asset Transfer
Agreement dated as of February 6, 1998, between TSAT and the Company, a
business combination (the "Restructuring") was consummated. In connection with
the Restructuring, TSAT contributed and transferred to the Company (the "TSAT
Asset Transfer") all of TSAT's assets and liabilities except (i) the capital
stock of Tempo, (ii) the consideration received by TSAT in the Restructuring
and (iii) the rights and obligations of TSAT under agreements with the Company
and others. In addition, (i) the business of the Partnership, (ii) the business
of distributing the PRIMESTAR(R) programming service ("PRIMESTAR(R)"),
including certain related assets and liabilities of each of TWE, Newhouse,
Comcast, Cox and affiliates of MediaOne, and (iii) the interest in the
Partnership of each of TWE, Newhouse, Comcast, Cox, affiliates of MediaOne and
GE Americom (collectively, the "Non-TSAT Parties") were consolidated into the
Company.
F-56
<PAGE>
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the Restructuring, each of TSAT, Comcast, Cox, MediaOne,
Newhouse, TWE and GE Americom received from the Company (i) cash or an
assumption of indebtedness, (ii) shares of Class A Common Stock, $.01 par value
per share, of the Company, (iii) in the case of TSAT only, shares of Class B
Common Stock, $.01 par value per share, of the Company, and (iv) except in the
case of TSAT and GE Americom, shares of Class C Common Stock, $.01 par value
per share, of the Company, in each case in an amount determined pursuant to the
Restructuring Agreement. The total consideration paid by Phoenixstar to the
Non-TSAT Parties (including assumed liabilities) aggregated approximately $2.2
billion comprising $1.3 billion of cash and assumed liabilities and $900
million of common stock.
As of March 31, 1999, the approximate ownership of Phoenixstar's common
stock was as follows:
<TABLE>
<CAPTION>
Ownership
Name of Beneficial Owner Percentage
- ------------------------ ----------
<S> <C>
TSAT................................................................. 37.23%
TWE and Newhouse (collectively)...................................... 30.02%
Comcast.............................................................. 9.50%
MediaOne............................................................. 9.69%
Cox.................................................................. 9.43%
GE Americom.......................................................... 4.13%
</TABLE>
The TSAT Asset Transfer was recorded at TSAT's historical cost, and the
remaining elements of the Restructuring, as set forth above, were accounted for
using the purchase method of accounting. The fair value of the consideration
issued to the Non-TSAT Parties was allocated to the assets and liabilities
acquired based upon the estimated fair values of such assets and liabilities.
TSAT was identified as the acquirer for accounting purposes and the
predecessor for financial reporting purposes due to the fact that TSAT owned
the largest interest in the Company immediately following consummation of the
Restructuring.
On a pro forma basis, the Company's revenue, net loss and loss per common
share for the three months ended March 31, 1998 would have been $372,563,000,
$154,206,000 and $.77 assuming the Restructuring had been consummated on
January 1, 1998. Such unaudited pro forma financial information is based upon
historical results of operations adjusted for acquisition costs and, in the
opinion of management, is not necessarily indicative of the results had the
Restructuring been consummated on January 1, 1998.
Interim Financial Statements
The accompanying interim consolidated financial statements of the Company
are unaudited. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) have been made which are necessary to present
fairly the financial position of the Company as of March 31, 1999 and the
results of its operations for the periods ended March 31, 1999 and 1998. The
results of operations for any interim period are not necessarily indicative of
the results for the entire year. These financial statements should be read in
conjunction with the financial statements and related notes thereto included in
the Company's December 31, 1998 Annual Report on Form 10-K.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-57
<PAGE>
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications
Certain amounts have been reclassified for comparability with the 1999
presentation.
(4) Comprehensive Loss
The Company's total comprehensive loss for all periods presented herein did
not differ from those amounts reported as net loss in the consolidated
statements of operations.
(5) Loss Per Common Share
The loss per common share for the three months ended March 31, 1999 and 1998
is based on the weighted average number of shares outstanding during the period
(200,942,000 and 67,633,000 for the three months ended March 31, 1999 and 1998,
respectively).
(6) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $41,514,000 and $13,844,000 during the three
months ended March 31, 1999 and 1998, respectively. Cash paid for income taxes
was not material during such periods.
(7) Debt
The components of debt are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
amounts in thousands
<S> <C> <C>
Bank Credit Facility.................................... $ 535,200 513,200
Bridge Loan Agreement (a)............................... 350,000 350,000
Partnership Credit Facility............................. 575,000 575,000
Senior Subordinated Notes............................... 200,000 200,000
Senior Subordinated Discount Notes...................... 195,366 189,722
Other................................................... 5,151 5,273
---------- ---------
$1,860,717 1,833,195
========== =========
</TABLE>
- --------
(a) On the Restructuring Closing Date, the Company entered into a senior
subordinated credit agreement (the "Bridge Loan Agreement") with certain
financial institutions (the "Lenders") with respect to a $350 million
unsecured senior subordinated interim loan. The Bridge Loan Agreement
provided for commitments of $350 million. The commitments were fully funded
to the Company on the Restructuring Closing Date.
The obligations under the Bridge Loan Agreement were due in full one year
from the Restructuring Closing Date. However, the Company had the option to
convert any outstanding principal amount of the Bridge Loan on such date
(the "Conversion Date") into a term loan maturing on April 1, 2008. The
Company gave notice of such conversion on March 29, 1999, in accordance
with the terms of the Bridge Loan Agreement. However, the Bridge Loan was
repaid and all commitments were terminated on the Hughes Closing Date.
F-58
<PAGE>
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, on the Conversion Date, the Company became obligated to enter
into a stock warrant agreement with the Lenders providing for the issuance
of warrants to purchase common stock of the Company equal to 2% of the
Company's outstanding common stock on the Conversion Date. The warrants are
to be exercisable over a ten-year period at a nominal exercise price.
The fair value of the Company's debt is estimated based upon the quoted
market prices for the same or similar issuances or on the current rates offered
to the Company for debt of the same remaining maturities. With the exception of
the Notes, which had an aggregate fair value of $253,250,000 at March 31, 1999,
Phoenixstar believes that the fair value and the carrying value of its debt
were approximately equal at March 31, 1999.
(8) Transactions With Related Parties
The Company is a party to a satellite transponder service agreement, as
amended (the "GE-2 Agreement") with an affiliate of GE Americom for satellite
service on GE-2. Charges to the Company for the use of GE-2 and other services
provided by GE Americom aggregated $21,585,000 for the three months ended
March 31, 1999 and are included in operating expenses in the accompanying
consolidated statements of operations.
TCI and the Non-TSAT Parties, other than GE Americom, have arranged for
letters of credit (the "GE-2 Letters of Credit") to support the Company's
obligations under the GE-2 Agreement. Pursuant to the Restructuring Agreement,
the Company reimburses TCI and the Non-TSAT Parties for fees related to the
Partnership Letters of Credit and the GE-2 Letters of Credit. Such
reimbursements aggregated $2,265,000 during the three months ended March 31,
1999 and are included in interest expense in the accompanying consolidated
statement of operations.
Since April 1, 1998, a subsidiary of TCI has provided satellite uplink
services to the Company. Charges for such services aggregated $3,550,000 for
the three months ended March 31, 1999 and are included in operating expenses in
the accompanying consolidated statements of operations.
TCI also provided the Company with customer support services from TCI's
Boise, Idaho call center. Amounts charged by TCI to the Company for such
services aggregated $9,614,000 and $5,026,000 during the three months ended
March 31, 1999 and 1998, respectively and are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
Certain key employees of the Company hold stock options in tandem with stock
appreciation rights with respect to certain common stock of TCI. Estimates of
the compensation related to the options and/or stock appreciation rights
granted to employees of the Company have been recorded in the accompanying
consolidated financial statements, but are subject to future adjustment based
upon the market value of the underlying common stock of TCI and, ultimately, on
the final determination of market value when the rights are exercised.
Compensation expense recognized by the Company related to such options
aggregated $271,000 and $3,814,000 during the three months ended March 31, 1999
and 1998, respectively.
Prior to the Restructuring, the Partnership provided programming services to
TSAT and other authorized distributors in exchange for a fee based upon the
number of subscribers receiving programming services. In addition, the
Partnership arranged for satellite capacity and uplink services, and provided
national marketing and administrative support services in exchange for a
separate authorization fee.
F-59
<PAGE>
PHOENIXSTAR, INC. AND SUBSIDIARIES
(formerly PRIMESTAR, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Commitments and Contingencies
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible the Company may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In the
opinion of management, it is expected that amounts, if any, which may be
required to satisfy such contingencies will not be material in relation to the
accompanying consolidated financial statements.
F-60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
PRIMESTAR, Inc.:
We have audited the accompanying consolidated balance sheets of PRIMESTAR,
Inc. and subsidiaries (as defined in note 1) as of December 31, 1998 and 1997
and the related consolidated statements of operations, equity (deficit), and
cash flows for each of the years in the three-year period ended December 31,
1998. In connection with our audit of the consolidated financial statements, we
have also audited the financial statement schedule included herein. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PRIMESTAR,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the information set
forth therein.
KPMG LLP
Denver, Colorado
April 15, 1999
F-61
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
amounts in thousands
<S> <C> <C>
Assets
Cash and cash equivalents................................ $ -- 6,084
Trade accounts receivable................................ 117,655 40,386
Other receivables........................................ 29,387 --
---------- ---------
147,042 40,386
Less allowance for doubtful accounts..................... 7,442 5,307
---------- ---------
139,600 35,079
---------- ---------
Prepaid expenses......................................... 3,967 1,262
Investment in PRIMESTAR Partners L.P. (the "Partnership")
(note 3)................................................ -- 11,093
Property and equipment, at cost:
Satellites............................................. -- 463,133
Satellite reception equipment.......................... 1,198,376 674,387
Subscriber installation costs.......................... 270,384 227,131
Support equipment...................................... 93,698 34,389
---------- ---------
1,562,458 1,399,040
Less accumulated depreciation........................ 413,868 277,103
---------- ---------
1,148,590 1,121,937
---------- ---------
Intangible assets, net of accumulated amortization (note
6)...................................................... 786,373 --
Deferred financing costs and other assets, net of
accumulated amortization................................ 33,557 29,401
---------- ---------
$2,112,087 1,204,856
========== =========
</TABLE>
(continued)
F-62
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- ---------
amounts in thousands
<S> <C> <C>
Liabilities and Stockholders' Equity (Deficit):
Accounts payable..................................... $ 195,873 $ 50,755
Accrued charges from related parties (note 12)....... 14,792 62,816
Accrued commissions.................................. 16,296 10,435
Accrued interest payable............................. 16,142 8,658
Other accrued expenses............................... 104,463 17,712
Deferred revenue..................................... 100,948 29,675
Due to the Partnership (note 13)..................... -- 463,133
Debt (note 8)........................................ 1,833,195 418,729
Deferred income taxes (note 11)...................... 75,057 --
Other liabilities.................................... 40,095 6,674
----------- ---------
Total liabilities.................................. 2,396,861 1,068,587
=========== =========
Stockholders' Equity (Deficit) (note 9):
PRIMESTAR, Inc. ("PRIMESTAR") preferred stock, $.01
par value; authorized 350,000,000 shares; none
issued.............................................. -- --
PRIMESTAR Class A common stock, $.01 par value;
authorized 850,000,000 shares; issued 179,143,934 in
1998................................................ 1,791 --
PRIMESTAR Class B common stock, $.01 par value;
authorized 50,000,000 shares; issued 8,465,324 in
1998................................................ 85 --
PRIMESTAR Class C common stock, $.01 par value;
authorized 30,000,000 shares; issued 13,332,365 in
1998................................................ 133 --
PRIMESTAR Class D common stock, $.01 par value;
authorized 150,000,000 shares; none issued.......... -- --
TCI Satellite Entertainment, Inc. ("TSAT") preferred
stock, $.01 par value; authorized 5,000,000 shares;
none issued......................................... -- --
TSAT Series A common stock; $1 par value; authorized
185,000,000 shares; issued 58,239,136 shares in
1997................................................ -- 58,239
TSAT Series B common stock, $1 par value; authorized
10,000,000 shares; issued 8,465,324 shares in 1997.. -- 8,465
Additional paid-in capital........................... 1,511,041 523,685
Accumulated deficit.................................. (1,797,824) (454,120)
----------- ---------
Total stockholders' equity (deficit)............... (284,774) 136,269
----------- ---------
Commitments and contingencies (note 13)................ $ 2,112,087 1,204,856
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-63
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
amounts in thousands,
except per share amounts
<S> <C> <C> <C>
Revenue:
Programming and equipment rental......... $ 1,227,270 $ 512,894 $ 351,548
Installation............................. 62,396 49,096 65,913
----------- --------- ---------
1,289,666 561,990 417,461
----------- --------- ---------
Operating costs and expenses:
Charges from the Partnership (note 12)... 82,235 259,600 188,724
Operating (note 12)...................... 565,510 23,992 28,546
Selling, general and administrative (note
12)..................................... 438,795 198,263 193,566
Transition (note 12)..................... 20,855 -- --
Restructuring charges (note 10).......... 26,025 -- --
Impairment of long-lived assets (note
2)...................................... 950,289 -- --
Stock compensation....................... 414 8,092 (446)
Depreciation (note 5).................... 445,911 243,642 191,355
Amortization............................. 97,176 -- --
----------- --------- ---------
2,627,210 733,589 601,745
----------- --------- ---------
Operating loss......................... (1,337,544) (171,599) (184,284)
----------- --------- ---------
Other income (expense):
Interest expense......................... (145,939) (47,992) (2,023)
Share of losses of the Partnership....... (5,822) (20,473) (3,275)
Other, net............................... (1,927) 1,723 3,641
----------- --------- ---------
(153,688) (66,742) (1,657)
----------- --------- ---------
Loss before income taxes............... (1,491,232) (238,341) (185,941)
Income tax benefit (note 11)............... 147,528 -- 45,937
----------- --------- ---------
Net loss................................. $(1,343,704) (238,341) (140,004)
=========== ========= =========
Basic and diluted loss per common share
(note 6).................................. $ (8.02) $ (3.58) $ (2.11)
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-64
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
PRIMESTAR TSAT Due to TCI
Common Stock Common Stock Additional Communications, Total
----------------------- ------------------ paid-in Accumulated Inc. stockholders'
Class A Class B Class C Series A Series B capital deficit ("TCIC") equity (deficit)
------- ------- ------- -------- -------- ---------- ----------- --------------- ----------------
amounts in thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................. $ -- -- -- -- -- -- (75,775) 559,359 483,584
Net loss............. -- -- -- -- -- -- (140,004) -- (140,004)
TCIC intercompany
allocations......... -- -- -- -- -- -- -- 21,009 21,009
Net cash transfers
from TCIC........... -- -- -- -- -- -- -- 228,622 228,622
Recognition of
deferred tax assets
upon transfer of
PRIMESTAR Partners
investment in
connection with
Distribution (note
4).................. -- -- -- -- -- -- -- 29,142 29,142
Adjustment to reflect
consummation of
Distribution (note
4).................. -- -- -- 57,941 8,467 521,724 -- (838,132) (250,000)
Issuance of TSAT
Series A Common
Stock upon
conversion of notes
of Tele-
Communications,
Inc................. -- -- -- 5 -- -- -- -- 5
------ --- --- ------- ------ --------- ---------- -------- ----------
Balance at December
31, 1996............. -- -- -- 57,946 8,467 521,724 (215,779) -- 372,358
Net loss............. -- -- -- -- -- -- (238,341) -- (238,341)
Recognition of stock
compensation related
to stock options and
restricted stock
awards.............. -- -- -- -- -- 1,781 -- -- 1,781
Issuance of TSAT
Series A Common
Stock related to
restricted stock
awards.............. -- -- -- 33 -- 180 -- -- 213
Issuance of TSAT
Series A Common
Stock upon
conversion of
convertible
securities of Tele-
Communications,
Inc................. -- -- -- 258 -- -- -- -- 258
Conversion of TSAT
Series B to TSAT
Series A............ -- -- -- 2 (2) -- -- -- --
------ --- --- ------- ------ --------- ---------- -------- ----------
Balance at December
31, 1997............. -- -- -- 58,239 8,465 523,685 (454,120) -- 136,269
Net loss............. -- -- -- -- -- -- (1,343,704) -- (1,343,704)
Recognition of stock
compensation related
to stock options and
restricted stock
awards.............. -- -- -- -- -- 2,596 -- -- 2,596
Issuance of TSAT
Series A Common
Stock related to
restricted stock
awards.............. -- -- -- 50 -- (50) -- -- --
Issuance of TSAT
Series A Common
Stock upon
conversion of
convertible
securities of Tele-
Communications,
Inc................. -- -- -- 989 -- -- -- -- 989
Issuance of PRIMESTAR
common stock in
Restructuring (note
3).................. 1,791 85 133 (59,278) (8,465) 984,962 -- -- 919,228
Reimbursement of TSAT
expenses (note 12)... -- -- -- -- -- (152) -- -- (152)
------ --- --- ------- ------ --------- ---------- -------- ----------
Balance at December
31, 1998............. $1,791 85 133 -- -- 1,511,041 (1,797,824) -- (284,774)
====== === === ======= ====== ========= ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-65
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------- --------
amounts in thousands
(see note 7)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(1,343,704) (238,341) (140,004)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................ 543,087 243,642 191,355
Share of losses of the Partnership........... 5,822 20,473 3,275
Accretion of debt discount................... 20,941 16,719 --
Restructuring charges........................ 26,025 -- --
Payments related to restructuring charges.... (6,388) -- --
Impairment of long-lived assets.............. 950,289 -- --
Stock compensation........................... 414 8,092 (446)
Payments related to stock appreciation
rights...................................... (2,479) -- --
Deferred income tax expense (benefit)........ (147,528) -- 24,708
Other non-cash charges (credits)............. 3,940 6,919 (311)
Changes in operating assets and liabilities,
net of the effect of the Restructuring:
Change in receivables...................... (79,838) (15,014) 4,364
Change in prepaids......................... 3,417 (335) (841)
Change in accruals, payables and other
liabilities............................... 132,375 42,056 24,096
Change in deferred revenue................. 30,802 7,426 9,005
----------- -------- --------
Net cash provided by operating
activities.............................. 137,175 91,637 115,201
----------- -------- --------
Cash flows from investing activities:
Cash paid in Restructuring................... (54,894) -- --
Capital expended for property and
equipment................................... (563,334) (227,327) (326,621)
Capital expended for construction of
satellites.................................. -- (5,448) (74,785)
Additional investments in, and related
advances to, the Partnership................ (75) (7,073) (17,552)
Repayments of advances to the Partnership.... -- 7,815 --
Other investing activities................... (6,365) (1,581) (5,458)
----------- -------- --------
Net cash used in investing activities...... (624,668) (233,614) (424,416)
----------- -------- --------
Cash flows from financing activities:
Borrowings of debt........................... 959,761 498,061 259,000
Repayments of debt........................... (469,858) (344,699) (263,000)
Payment of deferred financing costs.......... (9,483) (17,780) (7,000)
Proceeds from issuance of common stock....... 989 471 --
Increase in due to the Partnership........... -- 5,448 74,785
Increase in due to TCIC...................... -- -- 250,189
----------- -------- --------
Net cash provided by financing
activities.............................. 481,409 141,501 313,974
----------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................. (6,084) (476) 4,759
Cash and cash equivalents:
Beginning of year............................ 6,084 6,560 1,801
----------- -------- --------
End of year.................................. $ -- 6,084 6,560
=========== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-66
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1)Organization and Basis of Presentation
The accompanying consolidated financial statements of PRIMESTAR, Inc.
("PRIMESTAR" or the "Company") include the historical financial information of
(i) certain satellite television assets (collectively, "TCI SATCO") of TCIC, a
subsidiary of Tele-Communications, Inc. ("TCI") for periods prior to the
December 4, 1996 consummation of the distribution transaction described in note
4, (ii) TSAT and its consolidated subsidiaries for the period from December 5,
1996 through March 31, 1998 and (iii) PRIMESTAR and its consolidated
subsidiaries for the period subsequent to March 31, 1998. PRIMESTAR was
incorporated on August 27, 1997, and subsequently, ten shares of the Company's
common stock were issued to TSAT for a capital contribution of $10. All
significant inter-entity and intercompany transactions have been eliminated.
The Company owns and operates the PRIMESTAR(R) direct to home satellite
service throughout the continental U.S. The PRIMESTAR(R) service is transmitted
via a satellite ("GE-2") owned and operated by GE American Communications ("GE
Americom") at the 85(degrees) West Longitude ("W.L.") orbital position.
(2)The Hughes Transactions
On January 22, 1999, PRIMESTAR announced that it had reached an agreement
with Hughes Electronics Corporation ("Hughes"), a subsidiary of General Motors
Corporation, to sell its medium-power direct broadcast satellite ("DBS")
business and assets to Hughes for $1.1 billion in cash and 4.871 million shares
of General Motors Class H common stock ("GMH Stock") valued at approximately
$225 million, based on the closing price of GMH Stock on the date of the
purchase agreement (the "Hughes Medium Power Transaction"). The foregoing
purchase price is subject to adjustments for working capital at the date of
closing. The Company is responsible for the payment of certain obligations not
assumed by Hughes, satisfaction of its funded indebtedness and the payment of
costs, currently estimated to range from $270 million to $340 million,
associated with the termination of certain vendor and service contracts and
lease agreements related to the Company's medium power business and proposed
high power business strategy. The consummation of the Hughes Medium Power
Transaction is subject to various consents from PRIMESTAR's lenders;
restructuring of certain of the Company's indebtedness, as described below; and
other customary conditions.
On February 1, 1999 and in connection with the Hughes Medium Power
Transaction, the Company commenced tender offers (the "Tender Offers") to
purchase 100% of the outstanding principal amount of the Company's 10 7/8%
Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes") at a price
of $670 per $1,000 principal amount and 100% of the outstanding principal
amount of the Company's 12 1/4% Senior Subordinated Discount Notes due 2007
(the "Senior Subordinated Discount Notes", and together with the Senior
Subordinated Notes, the "Notes") at a price of 67% of the accreted value of the
Senior Subordinated Discount Notes as of February 15, 1999.
In addition, PRIMESTAR made a separate offer to lenders under the Company's
Senior Subordinated Credit Agreement, dated as of April 1, 1998 (the "Interim
Loan Agreement"), to purchase 100% of the outstanding principal amount due
thereunder at a price of $670 per $1,000 principal amount (the "Offer to
Purchase"). Each of the Tender Offers and the Offer to Purchase was subject to
a minimum tender condition of 90% of the outstanding principal amount of such
issue. In conjunction with the Tender Offers, PRIMESTAR solicited consents to
certain proposed amendments to the indentures governing the Notes and the
Interim Loan that would eliminate substantially all of the restrictive
covenants thereunder and would amend certain other provisions. Consummation of
both the Tender Offers and the Offer to Purchase was conditioned upon the
closing of the Hughes Medium Power Transaction and other conditions.
F-67
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Following several extensions, the Tender Offer and the Offer to Purchase
expired on March 25, 1999. The minimum tender conditions were not satisfied
under the Tender Offer and Offer to Purchase, and no securities or loans were
purchased thereunder.
Since the announcement of the Hughes Medium Power Agreement and of the
proposed restructuring of the Company's senior subordinated indebtedness
relating thereto (the "Proposed Debt Restructuring"), the Company has been
engaged in negotiations with the representatives of an informal committee (the
"Bondholders' Committee") of holders of Notes and with representatives of an
informal committee (the "Bridge Lenders' Committee" and, together with the
Bondholders' Committee, the "Committees") of holders of loans under the Interim
Loan Agreement, with respect to the possible terms and conditions of the
Proposed Debt Restructuring. In that connection, the Company has entered into
confidentiality agreements with certain representatives of the Committees and
has agreed to pay certain expenses of the Committees, including certain fees
and expenses of their legal counsel and financial advisor. Based on the
progress of such negotiations to date, the Company believes that the Proposed
Debt Restructuring will be consummated on terms satisfactory to the Company and
such Committees, by means of privately negotiated transactions. However, the
Company has not entered into any agreements to date with respect to the terms
and conditions of any such restructuring, and there can be no assurance that
the Proposed Debt Restructuring will be consummated. In the event the Company
is unable to negotiate certain minimum tender conditions in connection with the
Proposed Debt Restructuring, the Company does not intend to consummate the
Hughes Medium Power Transaction.
In connection with their approval of the Hughes Medium Power Transaction,
the stockholders of PRIMESTAR also approved the payment to TSAT of
consideration (the "PRIMESTAR Payment") in the amount of $65 million, payable
in shares of GMH Stock, valued at $46.1875 (the closing price of such stock on
the date of the purchase agreements with Hughes), subject to the terms and
conditions set forth in an agreement dated as of January 22, 1999 (the
"PRIMESTAR Payment Agreement"). In consideration of the PRIMESTAR Payment, TSAT
agreed to approve the Hughes Medium Power Transaction and Hughes High Power
Transaction as a stockholder of PRIMESTAR, to modify certain agreements to
facilitate the Hughes High Power Transaction, and to issue the Company a share
appreciation right with respect to the shares of GMH Stock received as the
PRIMESTAR Payment, granting the Company the right to any appreciation in such
GMH Stock over the one year period following the date of issuance, over an
agreed strike price of $47.00. Pursuant to the PRIMESTAR Payment Agreement,
TSAT has also agreed to forego any liquidating distribution or other payment
that may be made in respect of the outstanding shares of PRIMESTAR upon any
dissolution and winding-up of PRIMESTAR, or otherwise in respect of PRIMESTAR's
existing equity Such payment is conditioned upon the closing of the Hughes
Medium Power Transaction.
In connection with the Hughes Medium Power Transaction, the Company
concluded that it would be unable to recover the carrying value of its assets
over their expected remaining useful life. Accordingly, the Company has
recorded an impairment loss of $950,289,000 (the "Impairment Loss"), which
represents the difference between the carrying value of the Company's assets
and their estimated fair value. Such fair value was based upon the estimated
consideration to be received by the Company in the Hughes Medium Power
Transaction.
F-68
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reduction in carrying amount of assets included in the Impairment Loss
is as follows (amounts in thousands):
<TABLE>
<S> <C>
Property and equipment:
Satellite reception equipment.................................... $103,898
Subscriber installation costs.................................... 223,541
Intangible assets:
Excess purchase price over acquired net assets................... 401,475
Tradename........................................................ 221,375
--------
$950,289
========
</TABLE>
In a separate transaction, the Company announced that TSAT and the Company
had reached an agreement with Hughes to sell (i) TSAT's authorizations granted
by the Federal Communications Commission (the "FCC") and other assets and
liabilities relating to a proposed DBS system being constructed by Tempo
Satellite, Inc. ("Tempo"), a subsidiary of TSAT, at 119(degrees) W.L.
(collectively, the "Tempo DBS Assets") and (ii) PRIMESTAR's rights relating to
the Tempo DBS Assets (see note 13) to Hughes, for aggregate consideration
valued at $500 million (the "Hughes High Power Transaction"). Pursuant to the
agreement, Hughes would assume $465 million of TSAT's liability to the
Partnership, pay TSAT $2.5 million in cash and pay PRIMESTAR and the
Partnership $32.5 million in cash. In addition, the Partnership has agreed to
forgive amounts due from TSAT in excess of the $465 million to be assumed by
Hughes ($4,498,000 at December 31, 1998). To facilitate such transaction, the
Partnership would terminate and relinquish the Tempo Capacity Option, as
defined in note 13.
Due to the fact that regulatory approval is required to transfer certain of
the Tempo DBS Assets to Hughes, the Hughes High Power Transaction will be
completed in two steps. Effective March 10, 1999, the first closing of the
Hughes High Power Transaction (the "First Closing") was consummated whereby
Hughes acquired one of Tempo's high power satellites ("Tempo DBS-2") and
PRIMESTAR's option to acquire Tempo DBS-2 (the "Tempo DBS-2 Option") for
aggregate consideration of $150 million. Such consideration was comprised of
the following: (i) $9,750,000 paid to PRIMESTAR and the Partnerships for the
Tempo DBS-2 Option and the termination of the Partnership's rights under the
Tempo Capacity Option, (ii) $750,000 paid to TSAT to exercise the Tempo DBS-2
Option and (iii) the assumption by Hughes of $139,500,000 due to the
Partnership from TSAT in exchange for Tempo DBS-2. Simultaneously with the
First Closing, Hughes repaid the liability to the Partnership that Hughes
assumed.
With regard to the sale of the remaining assets contemplated by the Hughes
High Power Agreement (the "Second Closing"), Tempo has been notified that its
in-orbit satellite ("Tempo DBS-1") experienced power reductions which occurred
on March 29, 1999 and April 2, 1999. Although the Company does not believe the
extent of such power reductions is significant, a definitive assessment of the
impact on Tempo DBS-1 is not yet complete. Notwithstanding the foregoing, the
Second Closing, which is subject to the receipt of appropriate regulatory
approvals and other customary closing conditions, is expected to be consummated
in the second quarter of 1999. In the event the Second Closing is not
consummated and the Hughes High Power Agreement is abandoned, there can be no
assurance that the Company will be able to recover the carrying amount of its
satellite rights.
In addition, consummation of the Hughes Medium Power Transaction is not
dependent on completion of the Hughes High Power Transaction, and completion of
the Hughes High Power Transaction is not dependent on consummation of the
Hughes Medium Power Transaction.
F-69
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has a history of operating losses and reported an accumulated
deficit at December 31 1998. In connection with the Hughes Medium Power
Transaction, affiliates of the stockholders of the Company, other than TSAT,
and an affiliate of TCI have committed to make funds available to the Company,
either in the form of capital contributions or loans, up to an aggregate of
$1,013 million. Management of the Company believes, but cannot assure, that
when such funds are combined with the proceeds from the Hughes Medium Power and
High Power Transactions and the Company's existing sources of liquidity, that
the Company will be able to meet its obligations as they become due and
payable.
In the event the Hughes Medium Power Transaction is not consummated and is
abandoned, the Company currently intends to continue operating its medium power
business. Under such scenario, the Company anticipates that it would curtail
marketing and sales activities, reduce the number of new installations and
otherwise reduce expenditures to the extent possible. The Company believes, but
cannot assure, that in such event, the Company's cash flow from continuing
operations, commitments from the Company's stockholders to make certain funds
available to the Company and proceeds from the Hughes High Power Transaction
would provide the necessary funds for the Company to meet its obligations as
they become due and payable through December 31, 1999. In the event the Company
is unable to meet its obligations as they become due and payable, the Company
may be required to restructure or refinance certain of its liabilities. There
can be no assurance that such restructuring or refinancing, if necessary, would
be accomplished on terms acceptable to the Company.
(3)The Restructuring and the TSAT Merger
The Restructuring
Effective April 1, 1998 (the "Closing Date") and pursuant to (i) a Merger
and Contribution Agreement dated as of February 6, 1998 (the "Restructuring
Agreement"), among the Company, TSAT, Time Warner Entertainment Company, L.P.
("TWE"), Advance/Newhouse Partnership ("Newhouse"), Comcast Corporation
("Comcast"), Cox Communications, Inc. ("Cox"), MediaOne of Delaware, Inc.
("MediaOne"), and GE Americom, and (ii) an Asset Transfer Agreement dated as of
February 6, 1998 (the "TSAT Asset Transfer Agreement"), between the Company and
TSAT, a business combination (the "Restructuring") was consummated. In
connection with the Restructuring, TSAT contributed and transferred to the
Company (the "TSAT Asset Transfer") all of TSAT's assets and liabilities except
(i) the capital stock of Tempo, (ii) the consideration received by TSAT in the
Restructuring and (iii) the rights and obligations of TSAT under agreements
with the Company and others. In addition, (i) the business of the Partnership,
(ii) the business of distributing the PRIMESTAR(R) programming service
("PRIMESTAR(R)"), including certain related assets and liabilities of each of
TWE, Newhouse, Comcast, Cox and affiliates of MediaOne, and (iii) the interest
in the Partnership of each of TWE, Newhouse, Comcast, Cox, affiliates of
MediaOne and GE Americom (collectively, the "Non-TSAT Parties") were
consolidated into the Company.
In connection with the Restructuring, each of TSAT, Comcast, Cox, MediaOne,
Newhouse, TWE and GE Americom received from the Company (i) cash or an
assumption of indebtedness, (ii) shares of Class A Common Stock, $.01 par value
per share, of the Company, ("Class A Common Stock"), (iii) in the case of TSAT
only, shares of Class B Common Stock, $.01 par value per share, of the Company
("Class B Common Stock"), and (iv) except in the case of TSAT and GE Americom,
shares of Class C Common Stock, $.01 par value per share, of the Company
("Class C Common Stock"), in each case in an amount determined pursuant to the
Restructuring Agreement. The total consideration paid by PRIMESTAR to the Non-
TSAT Parties (including assumed liabilities) aggregated approximately $2.2
billion comprising $1.3 billion of cash and assumed liabilities and $900
million of common stock.
F-70
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1998, the approximate ownership of PRIMESTAR's common
stock was as follows:
<TABLE>
<CAPTION>
Ownership
Name of Beneficial Owner Percentage
------------------------ ----------
<S> <C>
TSAT........................................................... 37.23%
TWE and Newhouse (collectively)................................ 30.02%
Comcast........................................................ 9.50%
MediaOne....................................................... 9.69%
Cox............................................................ 9.43%
GE Americom.................................................... 4.13%
</TABLE>
The TSAT Asset Transfer has been recorded at TSAT's historical cost, and
the remaining elements of the Restructuring, as set forth above, have been
accounted for using the purchase method of accounting. The fair value of the
consideration issued to the Non-TSAT Parties has been allocated to the assets
and liabilities acquired based upon the estimated fair values of such assets
and liabilities.
TSAT has been identified as the acquirer for accounting purposes and the
predecessor for financial reporting purposes due to the fact that TSAT owns
the largest interest in the Company immediately following consummation of the
Restructuring.
The following pro forma operating results for the Company assume the
Restructuring had been consummated on January 1, 1997. Such unaudited pro
forma financial information is based upon historical results of operations
adjusted for acquisition costs and, in the opinion of management, is not
necessarily indicative of the results had the Restructuring been consummated
on January 1, 1997.
<TABLE>
<CAPTION>
Year ended December
31,
----------------------
1998 1997
----------- ---------
<S> <C> <C>
Revenue.............................................. $ 1,493,729 1,272,274
Net loss............................................. $(1,434,214) (509,620)
Loss per common share................................ $ (7.14) (2.54)
</TABLE>
The TSAT Merger
Effective February 6, 1998, PRIMESTAR and TSAT entered into an Agreement
and Plan of Merger (the "TSAT Merger Agreement"), providing for the merger of
TSAT with and into PRIMESTAR, with PRIMESTAR as the surviving corporation (the
"TSAT Merger"). In connection with the First Closing, the Company and TSAT
terminated the TSAT Merger Agreement.
(4)Distribution Transaction
On December 4, 1996 (the "Distribution Date"), TCI distributed (the
"Distribution") all the capital stock of the Company to the holders of Tele-
Communications, Inc. Series A TCI Group Common Stock (the "Series A TCI Group
Stock") and Tele-Communications, Inc. Series B TCI Group Common Stock (the
"Series B TCI Group Stock" and, together with the Series A TCI Group Stock,
the "TCI Group Stock"). Holders of TCI Group Stock received one share of TSAT
Series A Common Stock for each ten shares of Series A TCI Group Stock owned
and one share of TSAT Series B Common Stock for each ten shares of Series B
TCI Group Stock owned.
In connection with the Distribution, the Company and TCI entered into
various agreements, including the "Reorganization Agreement" (see below), the
"Fulfillment Agreement" and the "Transition Services Agreement" (see note 12),
and an amendment to TCI's existing "Tax Sharing Agreement" (see note 11).
F-71
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pursuant to the Reorganization Agreement, on the Distribution Date, the
Company issued to TCIC a promissory note (the "Company Note"), in the principal
amount of $250,000,000, representing a portion of the Company's intercompany
balance owed to TCIC on such date. The remainder of the Company's intercompany
balance owed to TCIC on the Distribution Date (other than certain advances made
to the Company by TCIC in 1996 to fund certain construction and related costs
associated with the Tempo Satellites, as described in note 13) was assumed by
TCI in the form of a capital contribution to the Company. On December 31, 1996,
the Company entered into a bank credit agreement (the "Bank Credit Facility")
and used a portion of the borrowing availability thereunder to repay in full
all principal and interest due to TCIC pursuant to the Company Note.
(5)Changes in Accounting
During the fourth quarter of 1996, the Company changed its depreciation
policy for subscriber installation costs. Such change was adopted effective
October 1, 1996 and was treated as a change in accounting policy that was
inseparable from a change in estimate. Accordingly, the cumulative effect of
such change for periods prior to October 1, 1996, together with the fourth
quarter 1996 effect of such change, was included in the Company's depreciation
expense for the fourth quarter of 1996. Consequently, this change in policy
resulted in increases to the Company's depreciation expense, net loss and net
loss per share for the year ended December 31, 1996 of $55,304,000 ($8,754,000
of which relates to periods prior to January 1, 1996), $41,478,000 ($6,566,000
of which relates to periods prior to January 1, 1996) and $.62 ($.10 of which
relates to periods prior to January 1, 1996), respectively.
The Company also revised the estimated useful life of certain satellite
reception equipment on a prospective basis as of October 1, 1996. Such change
in estimate resulted in increases to the Company's depreciation expense, net
loss and net loss per share for the year ended December 31, 1996 of $7,796,000,
$5,847,000 and $.09, respectively.
(6)Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of acquisition to be cash equivalents.
Investment in PRIMESTAR Partners L.P.
Prior to the Restructuring, the Company used the equity method to account
for its investment in the Partnership. Under this method, the investment,
originally recorded at cost, was adjusted to recognize the Company's share of
the net earnings or losses of the Partnership as they occurred, rather than as
dividends or other distributions were received, limited to the extent of the
Company's investment in, and advances and commitments to, the Partnership. The
Company's share of net earnings or losses of the Partnership included the
amortization of the difference between the Company's investment and its share
of the net assets of the Partnership. As part of the Restructuring, the
Partnership became a wholly-owned subsidiary of the Company.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed on a
straight-line basis using estimated useful lives of 4 to 6 years (4 to 8 years
through September 30, 1996) for satellite reception equipment and 3 to 10 years
for support equipment. Subscriber installation costs are depreciated over the
estimated average life of
F-72
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a subscriber (4 years). Any subscriber installation costs that have not been
fully depreciated at the time service to a subscriber is terminated are charged
to depreciation expense during the period in which such termination occurs.
Repairs and maintenance are charged to operations, and betterments and
additions are capitalized. At the time of ordinary retirements of satellite
reception equipment, sales or other dispositions of property, the original cost
and cost of removal of such property are charged to accumulated depreciation,
and salvage, if any, is credited thereto.
The Company periodically reviews the carrying amount of its long-lived
assets to determine whether current events or circumstances warrant adjustments
to such carrying amounts. The Company considers historical and expected future
net operating losses to be its primary indicators of potential impairment.
Assets are grouped and evaluated for impairment at the lowest level for which
there are identifiable cash flows that are largely independent of the cash
flows of other groups of assets ("Assets"). The Company deems Assets to be
impaired if the Company is unable to recover the carrying value of its Assets
over their expected remaining useful life through a forecast of undiscounted
future operating cash flows directly related to the Assets. If Assets are
deemed to be impaired, the loss is measured as the amount by which the carrying
amount of the Assets exceeds their fair values. PRIMESTAR generally measures
fair value by considering sales prices for similar assets or by discounting
estimated future cash flows. Considerable management judgment is necessary to
estimate discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates.
Intangible Assets
Intangible assets at December 31, 1998 are comprised of the following
(amounts in thousands):
<TABLE>
<S> <C>
Customer relationships........................................... $390,000
Satellite rights................................................. 469,498
859,498
Accumulated amortization......................................... (73,125)
--------
$786,373
========
</TABLE>
Customer relationships are amortized using the straight-line method over
their estimated useful life of 4 years. Satellite rights represent PRIMESTAR's
right to use Tempo's two high power communications satellites (the "Tempo
Satellites") as described in note 13. The Company is not amortizing such rights
as the Company has not launched a high power service utilizing the Tempo
Satellites.
In connection with the Restructuring, the Company recorded tradenames of
$230,000,000 and excess cost over acquired net assets of $416,901,000. Such
intangible assets were amortized using the straight-line method over 20 years.
As of December 31, 1998, such intangible assets were written down to their
estimated fair value of zero. Such writedown has been included in the
Impairment Loss described in note 2.
Deferred Financing Costs
Deferred financing costs are amortized over the term of the related loan
facility.
Revenue Recognition
Programming and equipment rental revenue is recognized in the period that
services are delivered. Installation revenue is recognized in the period the
installation services are provided to the extent of direct
F-73
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
selling costs. To date, direct selling costs have exceeded installation
revenue. Payments received from customers at the time of installation to reduce
future monthly rental fees are deferred and recognized as revenue over the
average life of a customer.
Programming Carriage Fees
Payments received from programmers at the time of launch for which future
carriage by the Company is required are deferred and recognized as a reduction
of programming expense over the term of the programming contract.
Advertising Costs
Advertising costs are generally expensed as incurred. Amounts expensed for
advertising aggregated $51,859,000, $23,062,000 and $25,622,000 during 1998,
1997 and 1996, respectively.
Marketing and Direct Selling Costs
Marketing and direct selling costs are expensed as incurred. The excess cost
of customer premises equipment over proceeds received upon sale of such
equipment is recognized at the time of sale and is included in selling expense.
Residual Sales Commissions
Residual sales commissions, which become payable upon the collection of
programming revenue from certain subscribers, are expensed during the period in
which such commissions become payable.
Stock Based Compensation
The Company accounts for stock-based employee compensation using the
intrinsic value method pursuant to Accounting Principles Board Opinion No. 25.
Income Taxes
The Company accounts for its income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Loss Per Common Share
The loss per common share for the years ended December 31, 1998 and 1997 is
based on 167,615,000 and 66,658,000 weighted average shares outstanding
respectively. TSAT issued 66,408,000 shares of TSAT common stock pursuant to
the Distribution. The loss per share amounts set forth in the accompanying
consolidated statements of operations assume that the shares issued pursuant to
the Distribution were issued and outstanding since January 1, 1996.
Accordingly, the calculation of the loss per share assumes weighted average
shares outstanding of 66,408,000 for the year ended December 31, 1996. Excluded
from the computation of diluted EPS for the years ended December 31, 1998, 1997
and 1996 are options to acquire
F-74
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5,395,000, 7,894,000 and 591,000 weighted average shares of common stock,
respectively, because inclusion of such options would be anti-dilutive.
Comprehensive Income (Loss)
The Company's total comprehensive loss for all periods presented herein did
not differ from those amounts reported as net loss.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(7)Supplemental Disclosures to Statements of Cash Flows
Cash paid for interest was $116,193,000, $20,224,000 and $1,946,000 during
the years ended December 31, 1998, 1997 and 1996, respectively. Cash paid for
income taxes was not material during the years ended December 31, 1998, 1997,
and 1996.
Significant non-cash investing and financing activities for the year ended
December 31, 1998 are reflected in the following table (amounts in thousands):
<TABLE>
<S> <C>
Cash paid in Restructuring:
Property and equipment acquired................................... $ 716,821
Intangible assets................................................. 1,500,034
Current liabilities assumed, net of current assets................ (116,849)
Debt assumed...................................................... (903,299)
Deferred tax liability............................................ (222,585)
Common stock issued............................................... (919,228)
----------
$ 54,894
==========
</TABLE>
Transactions effected through the intercompany account with TCIC for periods
prior to the Distribution have been considered to be constructive cash receipts
and payments for purposes of the accompanying statements of cash flows.
The non-cash effects of the Distribution are set forth in the accompanying
statements of equity.
Accounts payable includes accrued capital expenditures of $26,593,000,
$35,645,000 and $7,713,000 at December 31, 1998, 1997 and 1996, respectively,
which have been excluded from the accompanying statements of cash flows.
F-75
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8)Debt
The components of debt are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
----------- ----------
amounts in thousands
<S> <C> <C>
Bank Credit Facility(a).................................... $ 513,200 48,000
Interim Loan Agreement(b).................................. 350,000 --
Partnership Credit Facility(c)............................. 575,000 --
Senior Subordinated Notes(d)............................... 200,000 200,000
Senior Subordinated Discount Notes(d)...................... 189,722 168,781
Other...................................................... 5,273 1,948
----------- --------
$ 1,833,195 418,729
=========== ========
</TABLE>
- --------
(a) In connection with the Restructuring, the Company amended and restated the
Bank Credit Facility. As amended, the Bank Credit Facility provides for
maximum commitments of up to $700 million, comprising $550 million of
revolving loan commitments and $150 million of term commitments, subject to
the Company's compliance with operating and financial covenants and other
customary conditions. In addition to the outstanding borrowings at December
31, 1998, $30 million of availability under the Bank Credit Facility had
been utilized to obtain two outstanding letters of credit. Commencing March
31, 2001, the revolving loan commitments will be reduced quarterly, and
outstanding borrowings under the term loan commitments will be payable in
quarterly installments, in each case in accordance with a schedule, until
final maturity at June 30, 2005.
Borrowings under the Bank Credit Facility bear interest at variable rates
(6.7% at December 31, 1998). In addition, the Company must pay a commitment
fee equal to 0.375% on the average daily unused portion of the available
commitments, payable quarterly in arrears and at maturity. Such commitment
fees were not significant during any of the years presented.
Borrowings under the Bank Credit Facility are guaranteed by all restricted
subsidiaries of the Company (defined under the Bank Credit Facility to mean
each of the Company's domestic subsidiaries of which the Company owns
directly or indirectly at least 80% of the outstanding capital stock), and
secured by collateral assignments or other security interests. The Bank
Credit Facility contains covenants regarding debt service coverage and
leverage, as well as negative covenants restricting, among other things
indebtedness, liens and other encumbrances, mergers or consolidation
transactions, transactions with affiliates, investments, capital
expenditures, and payment of dividends and other distributions.
At April 1, 1999, the Company was not in compliance with one of the
covenants in the Bank Credit Facility regarding the provision of audited
financial statements to the lenders under the Bank Credit Facility (the
"Banks") within 90 days of the Company's fiscal year-end. The Company will
remedy such event of noncompliance in accordance with the terms of the Bank
Credit Facility by providing its audited financial statements to the Banks
prior to April 30, 1999.
(b) On the Closing Date, the Company entered into the Interim Loan Agreement
with certain financial institutions (the "Lenders") with respect to a $350
million unsecured senior subordinated interim loan (the "Interim Loan").
The Interim Loan Agreement provided for commitments of $350 million. The
commitments were fully funded to the Company on the Closing Date.
The obligations under the Interim Loan Agreement were due in full one year
from the Closing Date. However, the Company had the option to convert any
outstanding principal amount of the Interim Loan on
F-76
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
such date (the "Conversion Date") into a term loan maturing on April 1,
2008. The Company gave notice of such conversion on March 29, 1999, in
accordance with the terms of the Interim Loan Agreement.
In addition, on the Conversion Date, the Company became obligated to
enter into a stock warrant agreement with the Lenders providing for the
issuance of warrants to purchase common stock of the Company equal to 2% of
the Company's outstanding common stock on the Conversion Date. The warrants
are to be exercisable over a ten-year period at a nominal exercise price.
The outstanding principal under the Interim Loan Agreement bears
interest at a rate per annum equal to the greater of 10% or, at the
election of the Lenders, (i) a rate per annum that is equal to the
corporate base rate, as provided for in the Interim Loan Agreement, (ii)
the Federal Funds effective rate, plus 0.50%, or (iii) the London interbank
offered rate ("LIBOR") for such period, plus in each case the Applicable
Spread (as defined in the Interim Loan Agreement). The interest rate on the
Interim Loan in effect at December 31, 1998 was 11.5% which included the
Applicable Spread of 650 basis points. The Applicable Spread increases
monthly thereafter, with a final increase to 750 basis points from and
after April 1, 1999.
At any time after the Conversion Date, the applicable spread is to be
850 basis points. In addition, at the request of any Lender, the interest
rate on all or any portion of the term loan owing to such Lender will be
converted to a fixed rate equal to the rate in effect as of the date such
Lender gave notice to the Company.
Interest was payable monthly in arrears on the last day of each month
until the Conversion Date. Thereafter, interest is payable quarterly in
arrears, except for any term loan converted to a fixed rate loan, in which
event interest is payable on March 31 and September 30 of each year. If
interest payable by the Company exceeds 15%, the Company may elect to pay
all or a portion of the interest in excess of 15% by issuance of notes in
an aggregate principal amount equal to such excess amount.
Prior to the Conversion Date, the Company could prepay the Interim Loan
without penalty. After the Conversion Date, certain limited prepayments are
permitted until April 1, 2001 out of the proceeds of certain equity
offerings. Otherwise, prepayment is not permitted until on or after April
1, 2003. Prepayment penalties apply to any prepayment prior to April 1,
2006, which penalties are calculated with reference to the interest rate in
effect at the time of prepayment. The Interim Loan Agreement provides for
mandatory prepayments of the Interim Loan upon the occurrence of certain
asset sales, capital contributions, securities issuances and a change of
control (as defined in the Interim Loan Agreement) of the Company.
(c) The Partnership Credit Facility, as amended, allows for borrowings up to
$585 million, and borrowings thereunder are collateralized by letters of
credit (the "Partnership Letters of Credit"), which were arranged for by
affiliates of the partners of the Partnership (the "Partners") (or, in the
case of TSAT, affiliates of TCI) other than GE Americom. In connection with
the Restructuring, the Partnership became an indirect, wholly-owned
subsidiary of the Company. In addition, the Partners and TCI agreed to
maintain their respective Partnership Letters of Credit through June 1999,
and the Company entered into Reimbursement Agreements with respect to such
letters of credit, whereby the Company agreed to indemnify the parties
arranging for such letters of credit from and against all obligations
thereunder and/or other existing documentation relating thereto, including
all existing and future payment obligations. The obligations of the Company
under such Reimbursement Agreements are subordinated in right of payment, in
the manner set forth in the Reimbursement Agreement, to all indebtedness of
the Company under the Bank Credit Facility, the Interim Loan Agreement and
the Notes.
F-77
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Borrowings under the Partnership Credit Facility bear interest at
variable rates (5.6% at December 31, 1998). In addition, the Company must
pay quarterly, in arrears, a commitment fee of 3/16% per annum on the daily
unused portion of the facility. Such commitment fees were not significant
during the year ended December 31, 1998.
The maturity date of the Partnership Credit Facility is June 30, 1999.
(d) On February 20, 1997, the Company issued the Senior Subordinated Notes
having an aggregate principal amount of $200,000,000 and the Senior
Subordinated Discount Notes having an aggregate principal amount at maturity
of $275,000,000.
Cash interest on the Senior Subordinated Notes is payable semi-annually
in arrears on February 15 and August 15. Cash interest will not accrue or
be payable on the Senior Subordinated Discount Notes prior to February 15,
2002. Thereafter cash interest will accrue at a rate of 12 1/4% per annum
and will be payable semi-annually in arrears on February 15 and August 15,
commencing August 15, 2002, provided however, that at any time prior to
February 15, 2002, the Company may make a Cash Interest Election (as
defined) on any interest payment date to commence the accrual of cash
interest from and after the Cash Election Date (as defined). The Notes will
be redeemable at the option of the Company, in whole or in part, at any
time after February 15, 2002 at specified redemption prices. In addition,
prior to February 15, 2000, the Company may use the net cash proceeds from
certain specified equity transactions to redeem up to 35% of the Notes at
specified redemption prices.
The fair value of the Company's debt is estimated based upon the quoted
market prices for the same or similar issuances or on the current rates offered
to the Company for debt of the same remaining maturities. With the exception of
the Notes, which had an aggregate fair value of $158,090,000 at December 31,
1998, PRIMESTAR believes that the fair value and the carrying value of its debt
were approximately equal at December 31, 1998.
As of December 31, 1998, annual maturities of the Company's debt for each of
the next five years were as follows (amounts in thousands):
<TABLE>
<S> <C>
1999............................ $575,921
2000............................ 1,013
2001............................ 15,342
2002............................ 30,368
2003............................ 153,596
</TABLE>
(9) Stockholders' Equity
PRIMESTAR Preferred Stock
The Restated Certificate of Incorporation of the Company authorizes the
PRIMESTAR Board of Directors (the "Board") to provide for the issuance of all
or any shares of preferred stock of the Company in one or more series and to
fix for each series the number of shares constituting such series and such
voting powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof as shall be stated and
expressed in the resolution or resolutions adopted by the Board providing for
the issuance of such series. As of December 31, 1998, no series of preferred
stock have been designated.
F-78
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PRIMESTAR Common Stock
Holders of Class A Common Stock are entitled to one vote for each share of
such stock held, holders of Class B Common Stock are entitled to ten votes for
each share of such stock held and holders of Class C Common Stock are entitled
to ten votes for each share of such stock held. Holders of Class D Common Stock
are not entitled to any voting rights with respect to such shares, except as
may be required by law.
Each share of Class B Common Stock is convertible, at the option of the
holder, into one share of Class A Common Stock. Each share of Class C Common
Stock is convertible, at the option of the holder, into one share of Class B
Common Stock, and will be mandatorily and automatically so converted upon the
tenth anniversary of the Closing Date.
TSAT Preferred Stock
Prior to the Restructuring, TSAT was authorized to issue 5,000,000 shares of
Preferred Stock.
TSAT Common Stock
Prior to the Restructuring, the TSAT Series A Common Stock had one vote per
share and the TSAT Series B Common Stock had ten votes per share. Each share of
TSAT Series B Common Stock was convertible, at the option of the holder, into
one share of TSAT Series A Common Stock.
Employee Retirement Plan
Prior to the Restructuring, TSAT maintained an employee stock purchase plan
(the "TSAT Plan") pursuant to which employees could contribute up to 10% of
their compensation. TSAT, by annual resolution of the TSAT Board of Directors
(the "TSAT Board"), could elect to contribute up to 100% of the amount
contributed by employees. In connection with the Restructuring and effective
June 30, 1998, the TSAT Plan was merged with and into the Partnership's amended
and restated retirement plan, which has been renamed the PRIMESTAR, Inc. 401(k)
Savings Plan.
Stock Options
In June 1996, the Board of Directors of TCI (the "TCI Board") authorized TCI
to permit certain of its executive officers to acquire equity interests in
certain of TCI's subsidiaries. In connection therewith, the TCI Board approved
the acquisition by each of two executive officers of TCI who were not employees
of TSAT (the "TCI Officers"), of 1.0% of the net equity of TSAT. The TCI Board
also approved the acquisition by the chief executive officer and a director of
TSAT (the "TSAT Officer"), of 1.0% of the net equity of TSAT and the
acquisition by an executive officer of certain TCI subsidiaries who is also a
director, but not an employee, of TSAT (the "TCI Subsidiary Officer"), of 0.5%
of the net equity of TSAT. The TCI Board determined to structure such
transactions as grants by TSAT to such persons of options to purchase shares of
TSAT Series A Common Stock representing 1.0% (in the case of each of the TCI
Officers and the TSAT Officer) and 0.5% (in the case of the TCI Subsidiary
Officer) of the shares of TSAT Series A Common Stock and TSAT Series B Common
Stock issued and outstanding on the Distribution Date, determined immediately
after giving effect to the Distribution, but before giving effect to any
exercise of such options (the "Distribution Date Options").
Pursuant to the Reorganization Agreement, and (in the case of the TCI
Officers and the TCI Subsidiary Officer) in partial consideration for the
capital contribution made by TCI to TSAT in connection with the Distribution,
TSAT agreed, effective as of the Distribution Date, to bear all obligations
under such options and to enter into stock option agreements with respect to
such options with each of the TCI Officers, the TSAT Officer and the TCI
Subsidiary Officer.
F-79
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Distribution Date Options to purchase 2,324,266 shares of TSAT Series A
Common Stock at a per share price of $8.86 were granted on the Distribution
Date. The market price of the TSAT Series A Common Stock on such date was
$12.63. As originally granted, the Distribution Date Options vest in 20%
cumulative increments on each of the first five anniversaries of February 1,
1996, and will be exercisable for up to ten years following February 1, 1996.
Compensation expense with respect to the Distribution Date Options held by the
TSAT Officer aggregated $1,026,000, $1,101,000 and $95,000 during the years
ended December 31, 1998, 1997 and 1996, respectively.
On the Distribution Date, the TSAT Board adopted, and TCI as the sole
stockholder of TSAT prior to the Distribution, approved, the TCI Satellite
Entertainment, Inc. 1996 Stock Incentive Plan (the "TSAT 1996 Plan"). The TSAT
1996 Plan provides for awards to be made in respect of a maximum of 3,200,000
shares of TSAT Series A Common Stock (subject to certain anti-dilution
adjustments). Awards may be made as grants of stock options, stock appreciation
rights ("SARs"), restricted shares, stock units, performance awards or any
combination thereof. As originally granted, options granted pursuant to the
TSAT 1996 Plan vest evenly over five years from the date of grant and expire 10
years from the date of grant.
In March 1998, stockholders of TSAT approved the TCI Satellite
Entertainment, Inc. 1997 Nonemployee Director Stock Option Plan (the "TSAT
DSOP") including the grant, effective as of February 3, 1997, to each person
that as of that date was a member of the TSAT Board and was not an employee of
TSAT or any of its subsidiaries, of options to purchase 50,000 shares of TSAT
Series A Common Stock. Pursuant to the TSAT DSOP, options to purchase 200,000
shares of TSAT Series A Common Stock were granted at an exercise price of $8.00
per share. As originally granted, options issued pursuant to the TSAT DSOP vest
and become exercisable over a five-year period from the date of grant and
expire 10 years from the date of grant. In November 1997, the TSAT Board voted
to increase the number of directors by one, and the director named to fill such
newly created directorship received options to purchase 50,000 shares of TSAT
Series A Common Stock at an exercise price of $6.50.
In February 1997, certain key employees of TSAT were granted, pursuant to
the TSAT 1996 Plan, an aggregate of 325,000 restricted shares of TSAT Series A
Common Stock. Such restricted shares had a grant-date fair value of $8.00. As
originally granted, such restricted shares vest as to 50% on January 1, 2001
and as to the remaining 50% on January 1, 2002. Compensation expense with
respect to the restricted shares aggregated $1,570,000 and $585,000 during the
years ended December 31, 1998 and 1997, respectively.
In November 1997, the TSAT Board and the compensation committee of the TSAT
Board approved modifications to the vesting provisions of all options and
restricted stock awards issued pursuant to the TSAT 1996 Plan, (i) accelerating
the vesting schedules under such options, to provide for vesting in three equal
annual installments, commencing February 1998, and (ii) accelerating the
vesting schedules under such restricted stock awards to provide for vesting of
50% on each of the second and third anniversaries of the date of granting.
Options granted prior to the Distribution, which were 40% vested in February
1998, will become two-thirds vested in February 1999 and fully vested in
February 2000.
On April 2, 1998, the PRIMESTAR Board of Directors approved the PRIMESTAR,
Inc. 1998 Incentive Plan (the "1998 PRIMESTAR Plan"). The 1998 PRIMESTAR Plan
provides for awards to be made in respect of a maximum of 7,000,000 shares of
Class A Common Stock. Awards may be made as grants of stock options, SARs,
restricted shares, stock units, performance awards or any combination thereof.
Options granted pursuant to the 1998 PRIMESTAR Plan vest evenly over three
years from the date of grant and expire 10 years from the date of grant.
The Company applies Accounting Principles Board Opinion No. 25 in accounting
for its stock options, and accordingly, compensation expense has been
recognized for its stock options in the accompanying financial
F-80
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
statements using the intrinsic value method. Had the Company determined
compensation expense based on the grant-date fair value method pursuant to
Statement of Financial Accounting Standards No. 123, the Company's net loss and
loss per share would have been $240,384,000 and $3.61 for 1997 and would not
have been significantly different than the amounts reported for 1998 or 1996.
The following table presents the number, weighted-average exercise price and
weighted-average grant-date fair value of options to buy TSAT Series A Common
Stock and Class A Common Stock.
<TABLE>
<CAPTION>
Number of options
Weighted- Weighted-
average average
TSAT PRIMESTAR exercise grant-date
Series A Class A price fair value
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Granted in connection with
Distribution..................... 2,324,266 $8.86 $8.74
----------
Outstanding at December 31, 1996.. 2,324,266 8.86
Granted......................... 1,070,000 7.93 4.77
----------
Outstanding at December 31, 1997.. 3,394,266 8.57
Options not assumed by PRIMESTAR
(1)............................ (3,394,266)
Granted......................... -- 4,934,993 7.69 5.95
Canceled........................ -- (242,285) 7.69
---------- ---------
Outstanding at December 31, 1998.. -- 4,692,708 7.69
========== =========
Exercisable at December 31, 1996.. --
========== =========
Exercisable at December 31, 1997.. 464,853 8.86
==========
Exercisable at December 31, 1998.. --
=========
</TABLE>
- --------
(1) At the time of the Restructuring, none of the outstanding options to
acquire TSAT common stock were converted into options to acquire PRIMESTAR
common stock. However, PRIMESTAR assumed TSAT's liability with respect to
any future cash payment to be made upon exercise by any PRIMESTAR employee
of an option or SAR issued by TSAT prior to the Restructuring.
Options outstanding at December 31, 1998 have an exercise price of $7.69 and
a weighted-average remaining contractual life of approximately nine years.
The respective estimated grant-date fair values of the options noted above
are based on the Black-Scholes model and are stated in current annualized
dollars on a present value basis. The key assumptions used in the model for
purposes of these calculations include the following: (a) a discount rate equal
to the 10-year Treasury rate on the date of grant; (b) a 65% volatility rate;
(c) the 10-year option term; (d) the closing price of the TSAT Series A Common
Stock on the date of grant; and (e) an expected dividend rate of zero.
Pursuant to the Reorganization Agreement, TSAT granted to TCI an option to
purchase up to 4,765,000 shares of TSAT Series A Common Stock, at an exercise
price of $1.00 per share, as required by TCI from time to time to meet its
obligations under the conversion features of certain convertible securities of
TCI as such conversion features were adjusted as a result of the Distribution.
During 1998, 1997 and 1996, TCI purchased 989,000 shares, 258,000 shares and
5,000 shares, respectively, of TSAT Series A Common Stock pursuant to such
option.
In connection with the Distribution, TCI and the Company also entered into a
"Share Purchase Agreement" to sell to each other from time to time, at the then
current market price, shares of Series A TCI
F-81
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Group Stock and TSAT Series A Common Stock, respectively, as necessary to
satisfy their respective obligations after the Distribution Date under certain
stock options and SARs held by their respective employees and non-employee
directors.
Other
At December 31, 1998, a total of 4,692,708 shares of Class A Common Stock
were reserved for issuance pursuant to the 1998 PRIMESTAR Plan. In addition,
one share of Class A Common Stock is reserved for each outstanding share of
Class B Common Stock and Class C Common Stock.
(10)Restructuring Charges
During 1998, the Company reorganized its operations. In connection
therewith, the Company closed certain of its local offices and reduced its
corporate work force. As a result, the Company terminated approximately 700
employees. In connection with such reorganization, the Company recognized
restructuring charges of $26,025,000. Such restructuring charges related to (i)
severance costs for terminated employees ($18,828,000), (ii) lease cancellation
fees and other office shutdown costs ($3,617,000) and (iii) the net book value
of abandoned equipment ($3,580,000). As of December 31, 1998, the Company had
paid approximately $6,388,000 of the restructuring charges and has a remaining
accrual of $16,057,000.
(11)Income Taxes
Through the Distribution Date, TSAT's results of operations were included in
TCI's consolidated U.S. Federal income tax returns, in accordance with the
existing tax sharing arrangements among TCI and its consolidated subsidiaries.
Effective July 1, 1995, TCI, TCIC and certain other subsidiaries of TCI entered
into a tax sharing agreement (the "Tax Sharing Agreement"), which formalized
such pre-existing tax sharing arrangements and implemented additional
provisions regarding the allocation of certain consolidated income tax
attributes and the settlement procedures with respect to the intercompany
allocation of current tax attributes. In connection with the Distribution, the
Tax Sharing Agreement was amended to provide that TSAT be treated as if it had
been a party to the Tax Sharing Agreement, effective July 1, 1995. TSAT's
intercompany income tax allocation through the Distribution Date has been
calculated in accordance with the Tax Sharing Agreement. Subsequent to the
Distribution Date, the Company files separate U.S. Federal and state income tax
returns.
Income tax benefit (expense) for the years ended December 31, 1998, 1997 and
1996 consists of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
amounts in thousands
<S> <C> <C> <C>
Year ended December 31, 1998:
Federal............................................ $ -- 128,243 128,243
State and local.................................... -- 19,285 19,285
------- ------- -------
$ -- 147,528 147,528
======= ======= =======
Year ended December 31, 1997:
Federal............................................ $ -- -- --
State and local.................................... -- -- --
------- ------- -------
$ -- -- --
======= ======= =======
Year ended December 31, 1996:
Intercompany allocation............................ $70,645 -- 70,645
Federal............................................ -- (17,699) (17,699)
State and local.................................... -- (7,009) (7,009)
------- ------- -------
$70,645 (24,708) 45,937
======= ======= =======
</TABLE>
F-82
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income tax benefit (expense) differs from the amounts computed by applying
the Federal income tax rate of 35% as a result of the following:
<TABLE>
<CAPTION>
Years ended December 31
--------------------------
1998 1997 1996
-------- ------- -------
amounts in thousands
<S> <C> <C> <C>
Computed "expected" tax benefit................... $521,931 83,419 65,079
State and local income taxes, net of Federal
income tax benefit............................... 12,535 13,009 (2,672)
Change in valuation allowance..................... (238,739) (98,521) (16,371)
Amortization of goodwill.......................... (145,915) -- --
Other............................................. (2,284) 2,093 (99)
-------- ------- -------
$147,528 -- 45,937
======== ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
amounts in
thousands
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards........................ $226,823 133,024
Investment in the Partnership:
Due to an increase in tax basis upon transfer from TCIC
to the Company......................................... 29,305 29,305
Due principally to losses recognized for financial
statement purposes in excess of losses recognized for
tax purposes........................................... 57 2,671
Property and equipment principally due to impairment
write-offs for financial statement purposes............. 11,801 --
Future deductible amounts principally due to accruals
deductible in later periods............................. 12,310 5,028
-------- --------
Total deferred tax assets................................ 280,296 170,028
Less-valuation allowance................................ (238,739) (114,892)
-------- --------
Net deferred tax assets.................................. 41,557 55,136
Deferred tax liabilities:
Intangible assets recorded in purchase accounting for
financial statement purposes............................ 116,614 --
Property and equipment, principally due to differences in
depreciation............................................ -- 55,136
-------- --------
Net deferred tax liability................................. $ 75,057 --
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998 was
$238,739,000. Such balance increased $123,847,000 from December 31, 1997. The
valuation allowance at December 31, 1997 related to TSAT's net operating loss
carryforwards which were not contributed to PRIMESTAR in the Restructuring.
The Company has analyzed the sources and expected reversal periods of its
deferred tax assets. The Company believes that the tax benefits attributable to
deductible temporary differences will be realized to the extent of future
reversals of existing taxable temporary differences.
At December 31, 1998, the Company had net operating loss carry forwards for
income tax purposes aggregating approximately $593,001,000 of which, if not
utilized to reduce taxable income in future periods,
F-83
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$900,000 expire in 2005, $1,200,000 expire in 2006, $2,170,000 expire in 2008,
$2,003,000 expire in 2011, $6,200,000 expire in 2012 and $580,528,000 expire in
2018.
(12)Transactions with Related Parties
Pursuant to the terms of the TSAT Merger Agreement, PRIMESTAR reimbursed
TSAT for all reasonable costs and expenses incurred by TSAT (i) to comply with
its tax and financial reporting obligations, (ii) to maintain certain insurance
coverage and (iii) to maintain its status as a publicly traded company. During
the year ended December 31, 1998, such reimbursements aggregated $152,000, and
have been reflected as a reduction of PRIMESTAR's equity.
In addition, PRIMESTAR makes advances to TSAT for the payment of certain
costs related to the Tempo Satellites and the proposed high power strategy.
Such advances aggregated $6,365,000 during 1998 and have been included in
intangible assets in the accompanying consolidated balance sheet. PRIMESTAR
anticipates that it will recover the advances upon the sale of the Tempo
Satellites to Hughes.
The Company is a party to a satellite transponder service agreement, as
amended (the "GE-2 Agreement") with an affiliate of GE Americom for satellite
service on GE-2. As originally executed, the GE-2 Agreement had an initial term
extending through February 2003 at an annual rate of $86,340,000, with an
option to extend the term through the end-of-life of GE-2. The option to extend
has expired without exercise. However, the Company remains in discussions with
GE Americom regarding other alternatives for extension of the GE-2 Agreement,
and the Company will continue to assess other alternatives if the Hughes Medium
Power Transaction is not consummated. No assurance can be given that the
parties will agree to any such extension, if necessary, or that any other
alternatives will be confirmed. Charges to the Company for the use of GE-2 and
other services provided by GE Americom aggregated $64,755,000 for the period
from April 1, 1998 through December 31, 1998, and are included in operating
expenses in the accompanying consolidated statement of operations.
Pursuant to the GE-2 Agreement, GE Americom provides the Company with
service on 24 transponders on GE-2. The Company is currently entitled to non-
preemptible service on 18 of the transponders on GE-2 and preemptible service
on six transponders. Preemptible transponders are transponders that may be
reassigned to restore service to protected customers if such protected
customers experience transponder or satellite failure. The Company does not
believe that, during the early stages of GE-2's operational life, the use of
preemptible transponders is likely to interfere in any material respect with
the operation of the PRIMESTAR(R) service. The Company currently receives
"orbital location protected service" on all 24 of its transponders, meaning
that if there is a failure of GE-2, the Company will be entitled to restore the
lost service on another GE Americom medium power satellite, GE-3, which was
successfully launched on September 4, 1997, into the same 85(degrees) W.L.
orbital position used by GE-2. Even in those circumstances, the six preemptible
transponders, although protected, would remain preemptible. Upon the successful
launch of another GE Americom medium power satellite, GE-4, the Company's six
preemptible transponders will become non-preemptible.
TCI and the Non-TSAT Parties, other than GE Americom, have arranged for
letters of credit (the "GE-2 Letters of Credit") to support the Company's
obligations under the GE-2 Agreement. Pursuant to the Restructuring Agreement,
the Company reimburses TCI and the Non-TSAT Parties for fees related to the
Partnership Letters of Credit and the GE-2 Letters of Credit. Such
reimbursements aggregated $10,004,000 during the year ended December 31, 1998
and are included in interest expense in the accompanying consolidated
statements of operations.
F-84
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Since April 1, 1998, a subsidiary of TCI has provided satellite uplink
services to the Company. Charges for such services aggregated $10,659,000
during 1998 and are included in operating expenses in the accompanying
consolidated statement of operations.
Since March 1997, TCI has provided the Company with customer support
services from TCI's Boise, Idaho call center. Amounts charged by TCI to the
Company for such services aggregated $24,938,000 and $12,173,000 during the
years ended December 31, 1998 and 1997, respectively, and are included in
selling, general and administrative expenses in the accompanying consolidated
statements of operations.
Subsequent to the Restructuring, the Non-TSAT Parties continued to operate
certain non-strategic local offices (the "Transition Offices") for
approximately three months (the "Transition Period") while the responsibilities
of such offices were transferred to other PRIMESTAR offices. By the end of the
Transition Period, all of the Transition Offices had been closed. Transition
expenses include costs incurred through December 31, 1998 and charged to the
Company by the Non-TSAT Parties to operate the Transition Offices during the
Transition Period.
Certain key employees of the Company hold stock options in tandem with stock
appreciation rights with respect to certain common stock of TCI. Estimates of
the compensation related to the options and/or stock appreciation rights
granted to employees of the Company have been recorded in the accompanying
consolidated financial statements, but are subject to future adjustment based
upon the market value of the underlying common stock of TCI and, ultimately, on
the final determination of market value when the rights are exercised. Stock
compensation recognized by the Company related to such options aggregated
($2,182,000), $6,134,000 and $(541,000) during the years ended December 31,
1998, 1997 and 1996, respectively.
Prior to the Restructuring, the Partnership provided programming services to
TSAT and other authorized distributors in exchange for a fee based upon the
number of subscribers receiving programming services. In addition, the
Partnership arranged for satellite capacity and uplink services, and provided
national marketing and administrative support services in exchange for a
separate authorization fee.
TCI also provided corporate administrative services to the Company pursuant
to a transition services agreement (the "Transition Services Agreement").
Pursuant to the Transition Services Agreement, the Company was required to pay
TCI a monthly fee of $1.50 per qualified subscriber up to a maximum of
$3,000,000 per month, and to reimburse TCI quarterly for direct, out-of-pocket
expenses incurred by TCI to third parties in providing the services. Charges
under the Transition Services Agreement aggregated $3,174,000 and $11,579,000
during the years ended December 31, 1998 and 1997, respectively, and are
included in selling, general and administrative expenses in the accompanying
consolidated statements of operations. The Transition Services Agreement was
terminated in connection with the consummation of the Restructuring.
Through the Distribution Date, the effects of all transactions between the
Company and TCI were reflected as adjustments to a non-interest bearing
intercompany account. As described in note 4, all but $250,000,000 of this
intercompany account was forgiven in connection with the Distribution.
Subsequent to the Distribution Date, the effects of all transactions (other
than those related to the TCIC Credit Facility) have been reflected in a non-
interest bearing account between the Company and TCIC and are settled
periodically in cash.
Through December 31, 1996, TCI provided certain installation, maintenance,
retrieval and other customer fulfillment services to the Company. The costs
associated with such services were allocated to the Company based upon a
standard charge for each of the various customer fulfillment activities
performed by TCI. During the year ended December 31, 1996, the Company's
capitalized installation costs included amounts allocated from TCI of
$53,169,000. Maintenance, retrieval and other operating expenses allocated from
TCI to the Company aggregated $20,365,000 during the year ended December 31,
1996.
F-85
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Effective January 1, 1997, charges for customer fulfillment services
provided by TCI were made pursuant to the Fulfillment Agreement entered into by
the Company and TCI in connection with the Distribution. Pursuant to the
Fulfillment Agreement, TCI continued to provide fulfillment services on an
exclusive basis to the Company following the Distribution with respect to
customers of the PRIMESTAR(R) medium power service. Such services were
performed in accordance with specified performance standards. Charges to TSAT
pursuant to the Fulfillment Agreement aggregated $54,823,000 during 1997, of
which $46,498,000 were capitalized installation costs. The Fulfillment
Agreement terminated on December 31, 1997.
(13)Commitments and Contingencies
At December 31, 1998, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $44 million The Company
currently purchases all of its integrated receiver/decoders ("IRDs") from one
supplier and all of its home satellite dishes ("HSDs") from a different
supplier. Each supplier has certain disaster recovery plans. However, a break
in production of either IRDs or HSDs could result in a slow down in the
addition of new customers and a corresponding reduction in the Company's
revenue.
As part of the compensation paid to the Company's various sales agents, the
Company has agreed to pay certain residual sales commissions during specified
periods following the initiation of service (generally five years). Residual
payments to sales agents aggregated $25,639,000, $15,364,000, and $11,848,000
during 1998, 1997 and 1996, respectively and were charged to expense in the
accompanying consolidated statements of operations.
In addition to leasing transponder capacity on GE-2, the Company leases
business offices and uses certain equipment under lease arrangements. Rental
expense under such arrangements amounted to $9,847,000, $2,237,000, and
$2,095,000 in 1998, 1997 and 1996, respectively. Included in the 1998 amount is
$2,013,000 related to lease cancellation fees. It is expected that, in the
normal course of business, expiring leases will be renewed or replaced by
leases on other properties; thus, it is anticipated that future minimum lease
commitments will not be less than the rental expense incurred during 1998,
exclusive of the amounts for lease cancellations.
In February 1990, Tempo entered into an option agreement with the
Partnership granting the Partnership the right and option (the "Tempo Capacity
Option"), upon exercise, to purchase or lease 100% of the capacity of the DBS
system to be built, launched and operated by Tempo with the purchase price (or
aggregate lease payments) being sufficient to cover the costs of constructing,
launching and operating such DBS system. In connection with the Tempo Capacity
Option and certain related matters, Tempo and the Partnership subsequently
entered into two letter agreements (the "Tempo Letter Agreements") which
provided for, among other things, the funding by the Partnership of milestone
and other payments due under a satellite construction agreement, and certain
related costs, through advances by the Partnership to Tempo. The Tempo Letter
Agreements permit the Partnership to apply its advances to Tempo against any
payments due under the Tempo Capacity Option with respect to its purchase or
lease of satellite capacity. The aggregate funding provided to Tempo by the
Partnership ($469,498,000 at December 31, 1998) is reflected as satellite
rights in the accompanying consolidated balance sheet. On February 7, 1997, the
Partnership exercised the Tempo Capacity Option, but no capacity lease or
purchase agreement has been entered into in connection therewith. In connection
with the Hughes High Power Transaction, Hughes has agreed to assume, and to
satisfy and discharge, $465 million of Tempo's obligation to the Partnership
for such advances, and the Partnership has agreed to forgive the remaining
balance. In addition, the Partnership has agreed to terminate and relinquish
its rights under the Tempo Capacity Option.
F-86
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pursuant to the Restructuring Agreement, the Company has indemnified each of
the Non-TSAT Parties against (i) any and all losses and liabilities, suffered
or incurred by any such indemnified party resulting from any liabilities of
such party assumed by the Company in the Restructuring, (ii) any and all losses
and liabilities resulting from the operation by the Company of the digital
satellite business, whether before, on or after the Closing Date and (iii) any
and all losses and liabilities resulting from the business, affairs, assets or
liabilities of the Company whether arising before, on or after the Closing
Date.
In addition, the Company is required to indemnify each of the Non-TSAT
Parties against (i) all liability for taxes, other than transfer taxes,
incurred as a result of the Restructuring ("Covered Taxes") of PRIMESTAR for
the taxable period that begins after the Closing Date or the portion that
begins after the Closing Date of any taxable period that begins before and ends
after the Closing Date, (ii) all liability for Covered Taxes failing to qualify
under Section 368(a) of the Code if such failure is attributable to any action
taken after the Closing by the Company (other than any such action expressly
required or contemplated by the Restructuring Agreement) and (iii) all
liability for any reasonable legal, accounting, appraisal, consulting or
similar fees and expenses relating to the foregoing.
The International Bureau of the FCC has granted a subsidiary of EchoStar
Communications Corporation ("EchoStar") a conditional authorization to
construct, launch and operate a Ku-band domestic fixed satellite into the
orbital position at 83(degrees) W.L., immediately adjacent to that occupied by
GE-2, the medium power satellite now used to provide the PRIMESTAR(R) service.
Contrary to previous FCC policy, which would have permitted operation of a
satellite at the 83(degrees) W.L. orbital position at a power level of only 60
to 90 watts (subject to coordination requirements), EchoStar has been
authorized to operate at a power level of 130 watts. If EchoStar were to launch
its high power satellite authorized to 83(degrees) W.L. and commence operations
at that location at a power level of 130 watts, it would likely cause harmful
interference to the reception of the PRIMESTAR(R) signal from GE-2 by
subscribers to the PRIMESTAR(R) medium power service.
GE Americom and PRIMESTAR have each requested reconsideration of the
International Bureau's authorization for EchoStar to operate at 83(degrees)
W.L. These requests, which were opposed by EchoStar and others, currently are
pending at the International Bureau. There can be no assurance that the
International Bureau will change slot assignments, or power levels, in a
fashion that eliminates the potential for harmful interference. Accordingly,
the ultimate outcome of this matter cannot presently be predicted.
GE Americom and PRIMESTAR have attempted to resolve potential coordination
problems directly with EchoStar, and EchoStar has advanced a proposition to
resolve this matter. PRIMESTAR is currently evaluating such proposition. It is
uncertain whether any agreement in respect of such coordination between the
Partnership and EchoStar will be reached, or that if such agreement is reached
that coordination will resolve such interference.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible the Company may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In the
opinion of management, it is expected that amounts, if any, which may be
required to satisfy such contingencies will not be material in relation to the
accompanying financial statements.
F-87
<PAGE>
Schedule II
PRIMESTAR, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additions Deductions
---------- ----------
Balance at Charged to Write-offs Balance
beginning profit net of at end
Description of year and loss recoveries of year
- ----------- ---------- ---------- ---------- -------
amounts in thousands
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful receivables--
trade.............................. $5,307 43,460 (41,325) 7,442
====== ====== ======= =====
Year ended December 31, 1997:
Allowance for doubtful receivables--
trade.............................. $4,666 18,339 (17,698) 5,307
====== ====== ======= =====
Year ended December 31, 1996:
Allowance for doubtful receivables--
trade.............................. $4,819 19,235 (19,388) 4,666
====== ====== ======= =====
</TABLE>
F-88
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
amounts in thousands
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................. $ 752 --
Investment in Phoenixstar, Inc. (formerly PRIMESTAR,
Inc.) ("Phoenixstar") (notes 3 and 7)................. -- --
Satellites, at cost (note 8)........................... 239,118 463,133
--------- --------
$ 239,870 463,133
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Due to Phoenixstar (note 8)............................ $ 332,818 469,498
--------- --------
Stockholders' Deficit:
Preferred stock, $.01 par value; authorized 5,000,000
shares; none issued................................. -- --
Series A common stock, $1 par value; authorized
85,000,000 shares; issued 59,354,966 in 1999 and
59,280,466 in 1998.................................. 59,355 59,280
Series B common stock, $1 par value; authorized
10,000,000 shares; issued 8,465,324 in 1999 and
1998................................................ 8,465 8,465
Additional paid-in capital........................... 825,382 825,276
Accumulated deficit.................................. (986,150) (899,386)
--------- --------
Total stockholders' deficit........................ (92,948) (6,365)
--------- --------
$ 239,870 463,133
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-89
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1999 1998
------------ ------------
amounts in thousands,
except per share amounts
<S> <C> <C>
Revenue............................................. $ -- 168,500
Operating cost and expenses:
Charges from PRIMESTAR Partners L.P. (note 9)..... -- 82,235
Operating......................................... 2,777 9,847
Selling, general and administrative............... 43 55,341
Stock compensation (note 9)....................... 181 4,869
Depreciation...................................... -- 65,105
------------ -----------
3,001 217,397
------------ -----------
Operating loss.................................. (3,001) (48,897)
Other income (expense):
Loss on sale of satellite (note 2)................ (83,765) --
Interest expense.................................. -- (14,177)
Share of losses of PRIMESTAR Partners L.P......... -- (5,822)
Other, net........................................ 2 (621)
------------ -----------
(86,763) (20,620)
------------ -----------
Loss before income taxes........................ (86,764) (69,517)
Income tax benefit (note 10)........................ -- --
------------ -----------
Net loss........................................ $ (86,764) (69,517)
============ ===========
Basic and diluted loss per common share (note 5).... $ (1.28) (1.07)
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-90
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Three months ended March 31, 1999
(unaudited)
<TABLE>
<CAPTION>
Common stock Additional Total
----------------- paid-in Accumulated stockholders'
Series A Series B capital deficit deficit
-------- -------- ---------- ----------- -------------
amounts in thousands
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1999................... $59,280 8,465 825,276 (899,386) (6,365)
Net loss................ -- -- -- (86,764) (86,764)
Recognition of stock
compensation related to
stock options and
restricted stock awards
(note 9)............... -- -- 181 --
Issuance of Series A
Common Stock related to
restricted stock
awards................. 75 -- (75) -- --
------- ----- ------- -------- -------
Balance at March 31,
1999................... $59,355 8,465 825,382 (986,150) (92,948)
======= ===== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-91
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months
ended March 31,
-----------------
1999 1998
-------- -------
amounts in
thousands
(see note 6)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(86,764) (69,517)
Adjustments to reconcile net loss to net cash provided
(used)
by operating activities:
Loss on sale of satellite............................... 83,765 --
Depreciation............................................ -- 65,105
Share of losses of PRIMESTAR Partners L.P. ............. -- 5,822
Accretion of debt discount.............................. -- 4,682
Stock compensation...................................... 181 4,869
Other non-cash charges.................................. -- 7,956
Changes in operating assets and liabilities:
Change in receivables................................. -- 10,845
Change in other assets................................ -- (736)
Change in accruals and payables....................... -- (10,209)
Change in subscriber advance payments................. -- (3,114)
-------- -------
Net cash provided (used) by operating activities.... (2,818) 15,703
-------- -------
Cash flows from investing activities:
Proceeds from sale of satellite........................... 750 --
Capital expended for property and equipment............... -- (73,966)
Additional investments in and advances to PRIMESTAR
Partners L.P. ........................................... -- (75)
-------- -------
Net cash provided (used) by investing activities.... 750 (74,041)
-------- -------
Cash flows from financing activities:
Borrowings of debt........................................ -- 113,000
Repayments of debt........................................ -- (61,735)
Increase in due to Phoenixstar............................ 2,820 --
Proceeds from issuance of common stock.................... -- 989
-------- -------
Net cash provided by financing activities........... 2,820 52,254
-------- -------
Net increase (decrease) in cash and cash
equivalents........................................ 752 (6,084)
Cash and cash equivalents:
Beginning of period....................................... -- 6,084
-------- -------
End of period............................................. $ 752 --
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-92
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
TCI Satellite Entertainment, Inc. and those of all majority-owned subsidiaries
("TSAT" or the "Company"). All significant inter-company transactions have been
eliminated.
As a result of the TSAT Asset Transfer described in note 3, TSAT is
currently a holding company, with no substantial assets or liabilities other
than (i) 100% of the outstanding capital stock of Tempo Satellite, Inc.
("Tempo"), (ii) its ownership interest in Phoenixstar, and (iii) its rights and
obligations under certain agreements with Phoenixstar and others.
In addition, the Company has no operations subsequent to the TSAT Asset
Transfer other than (i) expenses associated with the operation and maintenance
of the Tempo Satellites, as defined below and (ii) general and administrative
expenses incurred to maintain the Company's status as a publicly traded
company.
Tempo holds a permit (the "FCC Permit") issued by the Federal Communications
Commission ("FCC") authorizing the construction of a direct broadcast satellite
("DBS") system in the 119 degrees West Longitude ("W.L.") orbital position.
Tempo is also a party to a construction agreement (the "Satellite Construction
Agreement") with Space Systems/Loral, Inc. ("Loral"), pursuant to which Tempo
arranged for the construction of two high power communications satellites (the
"Tempo Satellites"), one of which is currently in orbit at 119 degrees W.L.
("Tempo DBS-1") and one of which was sold on March 10, 1999 ("Tempo DBS-2").
The accompanying interim consolidated financial statements of TSAT are
unaudited. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) have been made which are necessary to present fairly
the financial position of TSAT as of March 31, 1999 and the results of its
operations for the periods ended March 31, 1999 and 1998. The results of
operations for any interim period are not necessarily indicative of the results
for the entire year. These financial statements should be read in conjunction
with the financial statements and related notes thereto included in TSAT's
December 31, 1998 Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Certain amounts have been reclassified for comparability with the 1999
presentation.
(2) Hughes Transactions
On January 22, 1999, the Company announced that the Company and Phoenixstar
had reached an agreement with Hughes Electronics Corporation ("Hughes"), a
subsidiary of General Motors Corporation, to sell (i) the Tempo Satellites,
(ii) the FCC Permit and (iii) Phoenixstar's rights relating to Tempo's DBS
system to Hughes, for aggregate consideration valued at $500 million (the
"Hughes High Power Transaction"). Pursuant to the agreement, Hughes has agreed
to assume $465 million of TSAT's liability to PRIMESTAR Partners, pay TSAT $2.5
million in cash and pay Phoenixstar and PRIMESTAR Partners $32.5 million in
cash. In addition, Phoenixstar and PRIMESTAR Partners have agreed to forgive
certain amounts due from TSAT in
F-93
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
excess of the $465 million to be assumed by Hughes. Due to the fact that
regulatory approval is required to transfer Tempo DBS-1 and the FCC Permit to
Hughes, the Hughes High Power Transaction will be completed in two steps.
Effective March 10, 1999, the first closing of the Hughes High Power
Transaction (the "First Closing") was consummated whereby Hughes acquired Tempo
DBS-2 and Phoenixstar's option to acquire Tempo DBS-2 (the "Tempo DBS-2
Option") for aggregate consideration of $150 million. Such consideration was
comprised of the following: (i) $9,750,000 paid to Phoenixstar and PRIMESTAR
Partners for the Tempo DBS-2 Option and the termination of PRIMESTAR Partners'
rights with respect to the capacity of Tempo's high power DBS assets, (ii)
$750,000 paid to TSAT to exercise the Tempo DBS-2 Option and (iii) the
assumption by Hughes of $139,500,000 due to PRIMESTAR Partners from TSAT in
exchange for Tempo DBS-2, which had a carrying value of $224 million at the
time of closing.
The sale of the remaining assets contemplated by the Hughes High Power
Agreement (the "Second Closing") is subject to the receipt of appropriate
regulatory approvals and other customary closing conditions and is expected to
be consummated in mid-1999. Tempo has been notified that Tempo DBS-1
experienced power reductions which occurred on March 29, 1999 and April 2,
1999. Although the Company does not believe the extent of such power reductions
is significant, a definitive assessment of the impact on Tempo DBS-1 is not yet
complete. Upon completion of the sale of the Company's high power assets, which
had a carrying value of $239 million at March 31, 1999, the Company will
receive additional consideration of $327 million in the form of cash and debt
assumption.
In a separate transaction completed on April 28, 1999 (the"Hughes Medium
Power Transaction"), Phoenixstar sold to Hughes Phoenixstar's medium-power DBS
business and assets for $1.1 billion in cash and 4.871 million shares of
General Motors Class H common stock ("GMH Stock") valued at approximately
$258 million on the date of closing. Phoenixstar is responsible for the payment
of certain obligations not assumed by Hughes, satisfaction of its funded
indebtedness and the payment of costs, currently estimated to range from $270
million to $340 million, associated with the termination of certain vendor and
service contracts and lease agreements not assumed by Hughes. Affiliates of
stockholders of Phoenixstar, other than the Company, and an affiliate of Tele-
Communications, Inc. ("TCI") have committed to make funds available to
Phoenixstar, up to an aggregate of $1,013 million to fund such payments.
In connection with their approval of the Hughes Medium Power Transaction,
the stockholders of Phoenixstar approved the payment to TSAT of consideration
in the form of 1.407 million shares of GMH Stock (the "Phoenixstar Payment"),
subject to the terms and considerations set forth in an agreement (the
"Phoenixstar Payment Agreement") dated as of January 22, 1999. In consideration
of the Phoenixstar Payment, the Company agreed to approve the Hughes Medium
Power Transaction and Hughes High Power Transaction as a stockholder of
Phoenixstar, to modify certain agreements to facilitate the Hughes High Power
Transaction, and to issue Phoenixstar a share appreciation right (the "TSAT GMH
SAR") with respect to the shares of GMH Stock received as the Phoenixstar
Payment, granting Phoenixstar the right to any market price appreciation in
such GMH Stock during the one-year period following the date of issuance, over
an agreed strike price of $47.00. On the Hughes Closing Date, the Company
received 1.407 million shares of GMH Stock from Phoenixstar in satisfaction of
the Phoenixstar Payment.
The TSAT GMH SAR is secured by a first priority pledge and security interest
in the underlying shares of GMH Stock, and both the TSAT GMH SAR and such
pledge and security interest have been pledged by Phoenixstar for the benefit
of certain holders of share appreciation rights issued by Phoenixstar with
respect to shares of GMH Stock (the "Phoenixstar GMH SARs"). The shares of GMH
Stock issued to TSAT pursuant to the Phoenixstar Payment Agreement are subject
to certain restrictions on transfer during the first year after the closing of
the Hughes Medium Power Transaction, and TSAT will be entitled (together with
Phoenixstar) to
F-94
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
certain registration rights with respect to such shares following the
expiration of such one-year period. Pursuant to the Phoenixstar Payment
Agreement, TSAT has also agreed to forego any liquidating distribution or other
payment that may be made in respect of the outstanding shares of Phoenixstar
upon any dissolution and winding-up of Phoenixstar, or otherwise in respect of
Phoenixstar's existing equity.
(3) The Restructuring
Effective April 1, 1998 (the "Closing Date") and pursuant to (i) a Merger
and Contribution Agreement dated as of February 6, 1998, (the "Restructuring
Agreement"), among TSAT, Phoenixstar, prior to the Restructuring a wholly-owned
subsidiary of TSAT, Time Warner Entertainment Company, L.P. ("TWE"),
Advance/Newhouse Partnership ("Newhouse"), Comcast Corporation ("Comcast"), Cox
Communications, Inc. ("Cox"), MediaOne of Delaware, Inc. ("MediaOne"), and GE
American Communications, Inc., and (ii) an Asset Transfer Agreement dated as of
February 6, 1998, (the "TSAT Asset Transfer Agreement") between TSAT and
Phoenixstar, a business combination (the "Restructuring") was consummated. In
connection with the Restructuring, TSAT contributed and transferred to
Phoenixstar (the "TSAT Asset Transfer") all of TSAT's assets and liabilities
except (i) the capital stock of Tempo, (ii) the consideration to be received by
TSAT in the Restructuring and (iii) the rights and obligations of TSAT under
certain agreements with Phoenixstar and others. In addition, the business of
PRIMESTAR Partners L.P. ("PRIMESTAR Partners") and the business of distributing
the PRIMESTAR(R) programming service ("PRIMESTAR(R)") of each of TWE, Newhouse,
Comcast, Cox and affiliates of MediaOne were consolidated into Phoenixstar.
In connection with the TSAT Asset Transfer, Phoenixstar assumed all of
TSAT's indebtedness on such date, and TSAT received from Phoenixstar 66.3
million shares of Class A Common Stock of Phoenixstar ("Phoenixstar Class A
Common Stock") and 8.5 million shares of Class B Common Stock of Phoenixstar
("Phoenixstar Class B Common Stock" and together with the Phoenixstar Class A
Common Stock, "Phoenixstar Common Stock"), in accordance with the Restructuring
Agreement and the TSAT Asset Transfer Agreement. As a result, TSAT owns
approximately 37% of the outstanding shares of common equity of Phoenixstar,
representing approximately 38% of the combined voting power of such common
equity. As a result of the dilution of TSAT's investment in Phoenixstar from
100% to approximately 37%, TSAT recognized an increase in its investment in
Phoenixstar and an increase in additional paid-in capital of $299,046,000, net
of income taxes. Such increase represents the difference between TSAT's
historical investment basis in Phoenixstar and TSAT's proportionate share of
Phoenixstar's equity subsequent to the Restructuring.
(4) Comprehensive Loss
The Company's total comprehensive loss for all periods presented herein did
not differ from those amounts reported as net loss in the consolidated
statements of operations.
(5) Loss Per Common Share
The basic and diluted loss per common share is based on the weighted average
number of shares outstanding during the period (67,783,000 and 67,633,000
shares for the three months ended March 31, 1999 and 1998, respectively).
Excluded from the computation of diluted loss per common share for the three
months ended March 31, 1999 and 1998 are options and convertible securities to
acquire 8,515,000 and 8,855,000 shares of Series A Common Stock, respectively,
because inclusion of such options would be anti-dilutive.
(6) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $0 and $13,844,000 during the three months ended
March 31, 1999 and 1998, respectively. Cash paid for income taxes was not
significant during either of such periods.
F-95
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant non-cash investing and financing activities for the three months
ended March 31, 1999 are as follows (amounts in thousands):
<TABLE>
<S> <C>
Assumption of amounts due to
Phoenixstar
in exchange for Tempo DBS-2........ $139,500
</TABLE>
(7) Investment in Phoenixstar
Prior to the Hughes Medium Power Transaction, Phoenixstar owned and operated
the PRIMESTAR(R) direct to home satellite service throughout the continental
United States. TSAT's basis in Phoenixstar had been reduced to zero as of
December 31, 1998.
(8) Satellites
Tempo DBS System
TSAT, through Tempo, holds the FCC Permit issued by the FCC authorizing
construction for a high-power DBS system consisting of up to two satellites
delivering DBS service in 11 frequencies at the 119 degrees W.L. orbital
position.
Tempo is also a party to the Satellite Construction Agreement with Loral,
pursuant to which Tempo has arranged for the construction of the Tempo
Satellites at a fixed contract price of $487,159,500, and has an option to
purchase up to three additional satellites.
Tempo DBS-1 was launched into geosynchronous orbit on March 8, 1997. During
1997, Loral notified TSAT of nine separate occurrences of power reductions on
Tempo DBS-1. In addition, Loral notified TSAT of two additional power
reductions that occurred on March 29, 1999 and April 2, 1999. TSAT does not
currently know the extent of such power reductions, and cannot confirm the
precise causes thereof; however, such reductions could eventually affect the
proposed operation of Tempo DBS-1, either alone or together with other events
that may arise during the expected life of the satellite. As a result of such
power reductions, in-orbit testing has been extended and Tempo DBS-1 has not
yet been accepted. Pursuant to the Satellite Construction Agreement, Loral
bears the risk of loss of Tempo DBS-1 until Tempo accepts delivery of Tempo
DBS-1. TSAT currently believes that Tempo DBS-1 may not fully comply with
specifications, but has not yet determined the extent of any such non-
compliance. Tempo and Loral are currently engaged in negotiations regarding
this matter, including the timing, extent and methodology of any further tests
to be conducted and the terms of any monetary settlement with respect to the
satellite to which Tempo may be entitled under the Satellite Construction
Agreement. Certain launch defects or damages affecting Tempo DBS-1 could cause
a substantial monetary loss to TSAT.
Under the FCC Permit, the time by which the Tempo Satellites must be
operational was due to expire in May 1998. On April 3, 1998, Tempo filed a
request with the FCC for an extension of that deadline pending FCC review of
TSAT's request for consent to the transfer of control of Tempo to Phoenixstar
(the "Transfer Application") should the FCC determine that an extension is
necessary for Tempo to maintain its FCC authorizations at 119 degrees W.L. and
166 degrees W.L.
On April 30, 1998, the FCC determined that Tempo's satellite at 119 W.L. was
not operational. It did find, however, that an extension of time was warranted
for that orbital location and granted an extension to Tempo for 119 W.L. Such
extension was granted until six months after the FCC determination on the
Transfer Application, with the condition that Tempo not enter into a lease
agreement with Phoenixstar or any similar lease arrangement prior to the FCC's
decision on the Transfer Application. In addition, Tempo voluntarily
surrendered its permit for 166 W.L.
F-96
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On November 25, 1998, Tempo and Phoenixstar requested expedited action by
the FCC on the Transfer Application. Several parties filed responses to that
request, objecting to the proposed transfer. Phoenixstar and Tempo filed a
joint reply to those objections. On January 27, 1999, Tempo filed a joint
application with DIRECTV Enterprises, Inc. seeking FCC approval to assign
Tempo's DBS authorization to DIRECTV ("DIRECTV Application"). In addition,
Tempo and Phoenixstar jointly filed a letter seeking to maintain the status quo
with respect to the Transfer Application until the FCC decides the DIRECTV
Application. Therefore, Tempo and Phoenixstar requested that the Transfer
Application be held in abeyance and, subject to and contemporaneously with
approval of the DIRECTV Application, that the FCC dismiss the Transfer
Application.
Upon delivery of Tempo DBS-1, Phoenixstar, on behalf of Tempo, is obligated
to make a $10 million incentive payment to Loral. Phoenixstar is eligible to
receive a pro rata warranty payback of each such incentive payment to the
extent that transponder failures occur during the twelve-year period following
delivery. Satellite incentive payments and any related warranty paybacks are
treated as adjustments of the cost of the applicable Tempo Satellite.
Tempo Option
In February 1997, PRIMESTAR Partners exercised its option (the "Tempo
Capacity Option"), to purchase or lease 100% of the capacity of the DBS system
to be built, launched and operated by Tempo pursuant to the FCC Permit. The
purchase price (or aggregate lease payments) are to be sufficient to cover the
costs of constructing, launching and operating such DBS system. In connection
with the Tempo Capacity Option and certain related matters, Tempo and PRIMESTAR
Partners entered into two letter agreements (the "Tempo Letter Agreements"),
which provided for, among other things, the funding by PRIMESTAR Partners of
milestone and other payments due under the Satellite Construction Agreement,
and certain related costs, through advances by PRIMESTAR Partners to Tempo. The
aggregate funding provided to Tempo by PRIMESTAR Partners is reflected in due
to Phoenixstar, Inc. in the accompanying consolidated balance sheets.
In connection with the Hughes High Power Transaction, Hughes has agreed to
assume, and to satisfy and discharge $465 million of Tempo's obligation to
PRIMESTAR Partners, and PRIMESTAR Partners has agreed to forgive the remaining
balance. In addition, PRIMESTAR Partners has agreed to terminate its rights
under the Tempo Capacity Option.
(9) Transactions with Related Parties
Prior to the Restructuring, PRIMESTAR Partners provided programming services
to the Company and other authorized distributors in exchange for a fee based
upon the number of subscribers receiving programming services. In addition,
PRIMESTAR Partners arranged for satellite capacity and uplink services, and
provided national marketing and administrative support services in exchange for
a separate authorization fee.
Prior to the Restructuring, certain key employees of TSAT held stock options
in tandem with stock appreciation rights with respect to certain common stock
of TCI. Estimates of the compensation related to the options and/or stock
appreciation rights granted to employees of TSAT have been recorded in the
accompanying consolidated financial statements. Compensation expense recognized
by TSAT related to such options aggregated $3,814,000 during the three months
ended March 31, 1998.
F-97
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Income Taxes
TSAT recognized no income tax benefit during either of the three month
periods ended March 31, 1999 and 1998. TSAT is only able to realize income tax
benefits for financial reporting purposes to the extent that such benefits
offset TSAT's income tax liabilities or TSAT generates taxable income. For
financial reporting purposes, all of TSAT's income tax liabilities had been
fully offset by income tax benefits at March 31, 1999 and December 31, 1998.
Additionally, during the foreseeable future, TSAT believes that it will incur
net losses for income tax purposes, and accordingly, will not be in a position
to realize income tax benefits on a current basis.
F-98
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
TCI Satellite Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of TCI
Satellite Entertainment, Inc. and subsidiaries (as defined in note 1) as of
December 31, 1998 and 1997 and the related consolidated statements of
operations, equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1998. In connection with our audit of the
consolidated financial statements, we have also audited the financial statement
schedule included herein. These consolidated financial statements and the
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TCI
Satellite Entertainment, Inc. and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Denver, Colorado
April 15, 1999
F-99
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
amounts in thousands
<S> <C> <C>
Assets
Cash and cash equivalents.............................. $ -- 6,084
Accounts receivable, net of allowance for doubtful ac-
counts................................................ -- 35,079
Investment in PRIMESTAR, Inc. ("PRIMESTAR") (note 8)... -- --
Investment in, and related advances to, PRIMESTAR
Partners L.P. ("PRIMESTAR Partners").................. -- 11,093
Property and equipment, at cost:
Satellites (note 9).................................. 463,133 463,133
Satellite reception equipment........................ -- 674,387
Subscriber installation costs........................ -- 227,131
Support equipment.................................... -- 34,389
---------- ----------
463,133 1,399,040
Less accumulated depreciation........................ -- 277,103
---------- ----------
463,133 1,121,937
---------- ----------
Deferred financing costs and other assets, net of accu-
mulated amortization.................................. -- 30,663
---------- ----------
$ 463,133 1,204,856
========== ==========
Liabilities and Stockholders' Equity (Deficit)
Accounts payable....................................... $ -- 50,755
Accrued charges from PRIMESTAR Partners................ -- 48,591
Accrued charges from TCI Communications, Inc.
("TCIC").............................................. -- 14,225
Accrued commissions.................................... -- 10,435
Accrued interest payable............................... -- 8,658
Other accrued expenses................................. -- 24,386
Subscriber advance payments............................ -- 29,675
Due to PRIMESTAR (note 9).............................. 469,498 463,133
Debt................................................... -- 418,729
---------- ----------
Total liabilities.................................. 469,498 1,068,587
---------- ----------
Stockholders' Equity (Deficit) (note 10):
Preferred stock, $.01 par value; authorized 5,000,000
shares; none issued................................. -- --
Series A common stock, $1 par value; authorized
185,000,000 shares; issued 59,280,466 in 1998 and
58,239,136 in 1997.................................. 59,280 58,239
Series B common stock, $1 par value; authorized
10,000,000 shares; issued 8,465,324 in 1998 and
1997................................................ 8,465 8,465
Additional paid-in capital............................. 825,276 523,685
Accumulated deficit.................................... (899,386) (454,120)
---------- ----------
Total stockholders' equity (deficit)............... (6,365) 136,269
---------- ----------
Commitments (note 9)
$ 463,133 1,204,856
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-100
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
amounts in thousands,
except per share amounts
<S> <C> <C> <C>
Revenue:
Programming and equipment rental............. $ 154,257 512,894 351,548
Installation................................. 14,243 49,096 65,913
--------- -------- --------
168,500 561,990 417,461
--------- -------- --------
Operating costs and expenses:
Charges from PRIMESTAR Partners (note 12).... 82,235 259,600 188,724
Operating (note 12).......................... 16,211 23,992 28,546
Selling, general and administrative (note
12)......................................... 55,495 198,263 193,566
Stock compensation........................... 4,869 8,092 (446)
Depreciation (note 5)........................ 65,105 243,642 191,355
--------- -------- --------
223,915 733,589 601,745
--------- -------- --------
Operating loss............................. (55,415) (171,599) (184,284)
--------- -------- --------
Other income (expense):
Interest expense............................. (14,177) (47,992) (2,023)
Share of losses of PRIMESTAR (note 8)........ (369,231) -- --
Share of losses of PRIMESTAR Partners........ (5,822) (20,473) (3,275)
Other, net................................... (621) 1,723 3,641
--------- -------- --------
(389,851) (66,742) (1,657)
--------- -------- --------
Loss before income taxes................... (445,266) (238,341) (185,941)
Income tax benefit (note 11)................... -- -- 45,937
--------- -------- --------
Net loss................................... $(445,266) (238,341) (140,004)
========= ======== ========
Basic and diluted loss per common share (note
6)............................................ $ (6.58) $ (3.58) (2.11)
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-101
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock
-----------------
Additional Total
paid-in Accumulated Due to stockholders'
Series A Series B capital deficit TCIC equity (deficit)
-------- -------- ---------- ----------- -------- ----------------
amounts in thousands
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... $ -- -- -- (75,775) 559,359 483,584
Net loss.............. -- -- -- (140,004) -- (140,004)
TCIC intercompany
allocations.......... -- -- -- -- 21,009 21,009
Net cash transfers
from TCIC............ -- -- -- -- 228,622 228,622
Recognition of
deferred tax assets
upon transfer of
PRIMESTAR Partners
investment in
connection with Spin-
off.................. -- -- -- -- 29,142 29,142
Adjustment to reflect
consummation of Spin-
off (note 4)......... 57,941 8,467 521,724 -- (838,132) (250,000)
Issuance of Series A
Common Stock upon
conversion of notes
of Tele-
Communications,
Inc.................. 5 -- -- -- -- 5
------- ----- ------- -------- -------- --------
Balance at December 31,
1996................... 57,946 8,467 521,724 (215,779) -- 372,358
Net loss.............. -- -- -- (238,341) -- (238,341)
Recognition of stock
compensation related
to stock options and
restricted stock
awards............... -- -- 1,781 -- -- 1,781
Issuance of Series A
Common Stock related
to restricted stock
awards............... 33 -- 180 -- -- 213
Issuance of Series A
Common Stock upon
conversion of
convertible
securities of Tele-
Communications,
Inc.................. 258 -- -- -- -- 258
Conversion of Series B
to Series A.......... 2 (2) -- -- -- --
------- ----- ------- -------- -------- --------
Balance at December 31,
1997................... 58,239 8,465 523,685 (454,120) 136,269
Net loss.............. -- -- -- (445,266) -- (445,266)
Recognition of stock
compensation related
to stock options and
restricted stock
awards............... -- -- 2,595 -- -- 2,595
Issuance of Series A
Common Stock related
to restricted stock
awards............... 50 -- (50) -- -- --
Issuance of Series A
Common Stock upon
conversion of
convertible
securities of Tele-
Communications,
Inc.................. 991 -- -- -- -- 991
Issuance of common
stock by subsidiary
(note 3)............. -- -- 299,046 -- -- 299,046
------- ----- ------- -------- -------- --------
Balance at December 31,
1998................... $59,280 8,465 825,276 (899,386) -- (6,365)
======= ===== ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-102
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
amounts in thousands
(see note 7)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(445,266) (238,341) (140,004)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation.................................. 65,105 243,642 191,355
Share of losses of PRIMESTAR.................. 369,231 -- --
Share of losses of PRIMESTAR Partners......... 5,822 20,473 3,275
Accretion of debt discount.................... 4,682 16,719 --
Stock compensation............................ 4,869 8,092 (446)
Deferred income tax expense................... -- -- 24,708
Other non-cash charges (credits).............. 8,108 6,919 (311)
Changes in operating assets and liabilities,
net of the effect of the Restructuring:
Change in receivables........................ 10,845 (15,014) 4,364
Change in other assets....................... (736) (335) (841)
Change in accruals and payables.............. (10,210) 42,056 24,096
Change in subscriber advance payments........ (3,114) 7,426 9,005
--------- -------- --------
Net cash provided by operating activities... 9,336 91,637 115,201
--------- -------- --------
Cash flows from investing activities:
Capital expended for property and equipment.... (73,966) (227,327) (326,621)
Capital expended for construction of satel-
lites......................................... -- (5,448) (74,785)
Additional investments in, and related advances
to, PRIMESTAR Partners........................ (75) (7,073) (17,552)
Repayments of advances to PRIMESTAR Partners... -- 7,815 --
Other investing activities..................... -- (1,581) (5,458)
--------- -------- --------
Net cash used in investing activities....... (74,041) (233,614) (424,416)
--------- -------- --------
Cash flows from financing activities:
Borrowings of debt............................. 113,000 498,061 259,000
Repayments of debt............................. (61,735) (344,699) (263,000)
Payment of deferred financing costs............ -- (17,780) (7,000)
Increase in due to PRIMESTAR................... 6,365 5,448 74,785
Proceeds from issuance of common stock......... 991 471 --
Increase in due to TCIC........................ -- -- 250,189
--------- -------- --------
Net cash provided by financing activities... 58,621 141,501 313,974
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................ (6,084) (476) 4,759
Cash and cash equivalents:
Beginning of year.......................... 6,084 6,560 1,801
--------- -------- --------
End of year................................ $ -- 6,084 6,560
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-103
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1)Basis of Presentation
The accompanying financial statements of TCI Satellite Entertainment, Inc.
("TSAT" or the "Company") include the historical financial information of (i)
certain satellite television assets (collectively, "TCI SATCO") of TCIC, a
subsidiary of Tele-Communications, Inc. ("TCI") for periods prior to the
December 4, 1996 consummation of the distribution transaction (the "Spin-off")
described in note 4, and (ii) TSAT and its consolidated subsidiaries for the
period following such date. Upon consummation of the Spin-off, TSAT became the
owner of the assets that comprise TCI SATCO, which assets included (i) a 100%
ownership interest in the TCIC business that distributed the PRIMESTAR(R)
programming service to subscribers within specified areas of the continental
United States, (ii) a 100% ownership interest in Tempo Satellite, Inc.
("Tempo"), and (iii) a 20.86% aggregate ownership interest in PRIMESTAR
Partners, which owned and operated the PRIMESTAR(R) service.
As a result of the TSAT Asset Transfer described in note 3, TSAT is
currently a holding company, with no substantial assets or liabilities other
than (i) 100% of the outstanding capital stock of Tempo, (ii) its ownership
interest in PRIMESTAR, and (iii) its rights and obligations under certain
agreements with PRIMESTAR and others.
In addition, the Company has no operations subsequent to the TSAT Asset
Transfer other than (i) expenses associated with the operation and maintenance
of the Tempo Satellites, as defined below and (ii) general and administrative
expenses incurred to maintain the Company's status as a publicly traded
company.
Tempo holds a permit (the "FCC Permit") issued by the Federal Communications
Commission ("FCC") authorizing the construction of a direct broadcast satellite
("DBS") system in the 119(degrees) West Longitude ("W.L.") orbital position.
Tempo is also a party to a construction agreement (the "Satellite Construction
Agreement") with Space Systems/Loral, Inc. ("Loral"), pursuant to which Tempo
arranged for the construction of two high power communications satellites (the
"Tempo Satellites"), one of which is currently in orbit at 119(degrees) W.L.
("Tempo DBS--1") and one of which is currently used as a ground spare ("Tempo
DBS-2").
All significant inter-entity and intercompany transactions have been
eliminated.
(2)Proposed Hughes Transactions
On January 22, 1999, the Company announced that the Company and PRIMESTAR
had reached an agreement with Hughes to sell (i) the Tempo Satellites, (ii)
Tempo's 119(degrees) W.L. orbital location license and (iii) PRIMESTAR's rights
relating to Tempo's DBS system to Hughes, for aggregate consideration of $500
million. Pursuant to the agreement, Hughes has agreed to assume $465 million of
TSAT's liability to PRIMESTAR Partners, pay TSAT $2.5 million in cash and pay
PRIMESTAR and PRIMESTAR Partners $32.5 million in cash. In addition, PRIMESTAR
Partners has agreed to forgive amounts due from TSAT in excess of the $465
million to be assumed by Hughes ($4,498,000 at December 31, 1998). Due to the
fact that regulatory approval is required to transfer Tempo DBS-1 and Tempo's
FCC authorization for 119(degrees) W.L. to Hughes, the Hughes High Power
Transaction will be completed in two steps.
Effective March 10, 1999, the first closing of the Hughes High Power
Transaction (the "First Closing") was consummated whereby Hughes acquired Tempo
DBS-2 and PRIMESTAR's option to acquire Tempo DBS-2 (the "Tempo DBS-2 Option")
for aggregate consideration of $150 million. Such consideration was comprised
of the following: (i) $9,750,000 paid to PRIMESTAR and PRIMESTAR Partners for
the Tempo
F-104
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DBS-2 Option and the termination of PRIMESTAR Partners rights with respect to
the capacity of Tempo's high power DBS assets, (ii) $750,000 paid to TSAT to
exercise the Tempo DBS-2 Option and (iii) the assumption by Hughes of
$139,500,000 due to PRIMESTAR Partners from TSAT in exchange for Tempo DBS-2,
which had a carrying value of $224 million at December 31, 1998.
With regard to the sale of the remaining assets contemplated by the Hughes
High Power Agreement (the "Second Closing"), Tempo has been notified that Tempo
DBS-1 experienced power reductions which occurred on March 29, 1999 and April
2, 1999. Although the Company does not believe the extent of such power
reductions is significant, a definitive assessment of the impact on Tempo DBS-1
is not yet complete. Notwithstanding the foregoing, the Second Closing, which
is subject to the receipt of appropriate regulatory approvals and other
customary closing conditions, is expected to be consummated in the second
quarter of 1999. Upon completion of the sale of the Company's high power
assets, which had a carrying value of $239 million at December 31, 1998, the
Company will receive additional consideration of $327 million in the form of
cash and debt assumption. In the event the Second Closing is not consummated
and the Hughes High Power Agreement is abandoned, there can be no assurance
that the Company will be able to recover the carrying amount of its satellites.
In a separate transaction (the "Hughes Medium Power Transaction"), PRIMESTAR
also announced that it had reached an agreement with Hughes to sell PRIMESTAR's
medium-power DBS business and assets for $1.1 billion in cash and 4.871 million
shares of General Motors Class H common stock ("GMH Stock") valued at
approximately $225 million, based on the closing price of GMH Stock on the date
of the purchase agreements. The foregoing purchase price is subject to
adjustments for working capital at the date of closing. PRIMESTAR is
responsible for the payment of certain obligations not assumed by Hughes,
satisfaction of its funded indebtedness and the payment of costs, currently
estimated to range from $270 million to $340 million, associated with the
termination of PRIMESTAR's high power business strategy and sale of its medium
power assets. The consummation of the Hughes Medium Power Transaction is
subject to various consents from PRIMESTAR's lenders, restructuring of certain
of PRIMESTAR's indebtedness, and other customary conditions.
In addition, completion of the Hughes High Power Transaction is not
dependent on consummation of the Hughes Medium Power Transaction, and
consummation of the Hughes Medium Power Transaction is not dependent on
completion of the Hughes High Power Transaction.
In connection with their approval of the Hughes Medium Power Transaction,
the stockholders of PRIMESTAR approved the payment to TSAT of consideration
(the "PRIMESTAR Payment") in the amount of $65 million, payable in shares of
GMH Stock, valued at $46.1875 (the closing price of such stock on the date of
the purchase agreements with Hughes), subject to the terms and considerations
set forth in an agreement (the "PRIMESTAR Payment Agreement") dated as of
January 22, 1999. In consideration of the PRIMESTAR Payment, the Company agreed
to approve the Hughes Medium Power Transaction and Hughes High Power
Transaction as a stockholder of PRIMESTAR, to modify certain agreements to
facilitate the Hughes High Power Transaction, and to issue PRIMESTAR a share
appreciation right (the "TSAT GMH SAR") with respect to the shares of GMH Stock
received as the PRIMESTAR Payment, granting PRIMESTAR the right to any
appreciation in such GMH Stock over the one year period following the date of
issuance, over an agreed strike price of $47.00.
The TSAT GMH SAR will be secured by a first priority pledge and security
interest in the underlying shares of GMH Stock, and both the TSAT GMH SAR and
such pledge and security interest will be pledged by PRIMESTAR for the benefit
of certain holders of share appreciation rights issued by PRIMESTAR with
respect to shares of GMH Stock (the "PRIMESTAR GMH SARs"). The shares of GMH
Stock issued to
F-105
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
TSAT pursuant to the PRIMESTAR Payment Agreement will be subject to certain
restrictions on transfer during the first year after the closing of the Hughes
Medium Power Transaction, and TSAT will be entitled (together with PRIMESTAR)
to certain registration rights with respect to such shares following the
expiration of such one-year period. Pursuant to the PRIMESTAR Payment
Agreement, TSAT has also agreed to forego any liquidating distribution or other
payment that may be made in respect of the outstanding shares of PRIMESTAR upon
any dissolution and winding-up of PRIMESTAR, or otherwise in respect of
PRIMESTAR's existing equity. The PRIMESTAR Payment is conditioned upon the
closing of the Hughes Medium Power Transaction.
If the Hughes Medium Power Transaction is not consummated for any reason,
PRIMESTAR currently intends to continue operating its medium power business,
which may require the restructuring or refinancing of certain of its
liabilities. There can be no assurance that such restructuring or refinancing,
if necessary, could be accomplished on terms acceptable to PRIMESTAR.
(3)The Roll-up Plan
On March 6, 1998, the TSAT stockholders voted to approve a proposal to adopt
the provisions of certain agreements and the transactions contemplated thereby,
collectively, referred to herein as the "Roll-up Plan". The Roll-up Plan is a
two-step transaction comprising the Restructuring and the proposed TSAT Merger,
as described below.
Restructuring
Effective April 1, 1998 (the "Closing Date") and pursuant to (i) a Merger
and Contribution Agreement dated as of February 6, 1998, (the "Restructuring
Agreement"), among TSAT, PRIMESTAR, Time Warner Entertainment Company, L.P.
("TWE"), Advance/Newhouse Partnership ("Newhouse"), Comcast Corporation
("Comcast"), Cox Communications, Inc. ("Cox"), MediaOne of Delaware, Inc.,
("MediaOne"), US WEST Media Group, Inc. and GE American Communications, Inc.,
and (ii) an Asset Transfer Agreement dated as of February 6, 1998, (the "TSAT
Asset Transfer Agreement") between TSAT and PRIMESTAR, a business combination
(the "Restructuring") was consummated. In connection with the Restructuring,
TSAT contributed and transferred to PRIMESTAR (the "TSAT Asset Transfer") all
of TSAT's assets and liabilities except (i) the capital stock of Tempo, (ii)
the consideration received by TSAT in the Restructuring and (iii) the rights
and obligations of TSAT under certain agreements with PRIMESTAR and others. In
addition, the business of PRIMESTAR Partners and the business of distributing
the PRIMESTAR(R) programming service ("PRIMESTAR(R)") of each of TWE, Newhouse,
Comcast, Cox and affiliates of MediaOne were consolidated into PRIMESTAR.
In connection with the TSAT Asset Transfer, PRIMESTAR assumed all of TSAT's
indebtedness on such date, and TSAT received from PRIMESTAR such number of
shares of Class A Common Stock of PRIMESTAR ("PRIMESTAR Class A Common Stock")
and Class B Common Stock of PRIMESTAR ("PRIMESTAR Class B Common Stock" and
together with the PRIMESTAR Class A Common Stock, "PRIMESTAR Common Stock"),
respectively, as equals the number of shares of Series A Common Stock of TSAT
("Series A Common Stock") and Series B Common Stock of TSAT ("Series B Common
Stock"), respectively, issued and outstanding on the Closing Date, in
accordance with the Restructuring Agreement and the TSAT Asset Transfer
Agreement. In addition, TSAT received one share of PRIMESTAR Class A Common
Stock for each share of Series A Common Stock issuable at the Closing Date
("Issuable TSAT Shares") pursuant to certain TSAT stock options, restricted
stock awards and other arrangements. TSAT received 66.3 million shares of
PRIMESTAR Class A Common Stock and 8.5 million shares of PRIMESTAR Class B
Common Stock, and as a result, owns approximately 37% of the outstanding shares
of common equity of PRIMESTAR at the closing of the Restructuring, representing
approximately 38% of the combined voting
F-106
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
power of such common equity. As a result of the dilution of TSAT's investment
in PRIMESTAR from 100% to approximately 37%, TSAT recognized an increase in its
investment in PRIMESTAR and an increase in additional paid-in capital of
$299,046,000, net of income taxes. Such increase represents the difference
between TSAT's historical investment basis in PRIMESTAR and TSAT's
proportionate share of PRIMESTAR's equity subsequent to the Restructuring.
TSAT Merger
Effective February 6, 1998, TSAT and PRIMESTAR entered into an Agreement and
Plan of Merger (the "TSAT Merger Agreement"), providing for the merger of TSAT
with and into PRIMESTAR, with PRIMESTAR as the surviving corporation (the "TSAT
Merger"). In connection with the First Closing, the Company and PRIMESTAR
terminated the TSAT Merger Agreement.
(4)TSAT Spin-off Transaction
General
On December 4, 1996 (the "Spin-off Date"), TCI distributed (the "Spin-off")
all the capital stock of the Company to the holders of Tele-Communications,
Inc. Series A TCI Group Common Stock (the "Series A TCI Group Stock") and Tele-
Communications, Inc. Series B TCI Group Common Stock (the "Series B TCI Group
Stock" and, together with the Series A TCI Group Stock, the "TCI Group Stock").
The Spin-off did not involve the payment of any consideration by the holders of
TCI Group Stock (such holders, the "TCI Group Stockholders"), and was intended
to qualify as a tax-free spinoff. TCI Group Stockholders received one share of
Series A Common Stock for each ten shares of Series A TCI Group Stock owned and
one share of Series B Common Stock for each ten shares of Series B TCI Group
Stock owned.
Since the Spin-off, the Company and TCI have operated independently. For the
purposes of governing certain of the ongoing relationships between the Company
and TCI after the Spin-off, and to provide mechanisms for an orderly
transition, the Company and TCI entered into various agreements, including the
"Reorganization Agreement" (see 10), the "Fulfillment Agreement" and the
"Transition Services Agreement" (see note 12), and an amendment to TCI's
existing "Tax Sharing Agreement" (see note 11).
(5)Changes in Accounting
During the fourth quarter of 1996, the Company changed its depreciation
policy for subscriber installation costs. Such change was adopted effective
October 1, 1996 and was treated as a change in accounting policy that was
inseparable from a change in estimate. Accordingly, the cumulative effect of
such change for periods prior to October 1, 1996, together with the fourth
quarter 1996 effect of such change, was included in the Company's depreciation
expense for the fourth quarter of 1996. Consequently, this change in policy
resulted in increases to the Company's depreciation expense, net loss and net
loss per share for the year ended December 31, 1996 of $55,304,000 ($8,754,000
of which relates to periods prior to January 1, 1996), $41,478,000 ($6,566,000
of which relates to periods prior to January 1, 1996) and $.62 ($.10 of which
relates to periods prior to January 1, 1996), respectively.
The Company also revised the estimated useful life of certain satellite
reception equipment on a prospective basis as of October 1, 1996. Such change
in estimate resulted in increases to the Company's depreciation expense, net
loss and net loss per share for the year ended December 31, 1996 of $7,796,000,
$5,847,000 and $.09, respectively.
F-107
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6)Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of acquisition to be cash equivalents.
Equity Method Investments
The Company uses the equity method to account for its investment in
PRIMESTAR Partners and PRIMESTAR. Under this method, the investment, originally
recorded at cost, is adjusted to recognize the Company's share of the net
earnings or losses as they occur, rather than as dividends or other
distributions are received, limited to the extent of the Company's investment
in, and advances and commitments to, the investee.
Changes in the Company's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
additional securities by such subsidiary or equity investee, are recognized as
increases to or reductions of additional paid-in capital in the consolidated
statements of stockholders' equity.
Property and Equipment
Property and equipment is stated at cost. Upon acceptance by the Company of
delivery of a satellite, the satellite is depreciated using the straight-line
method over the estimated useful life of such satellite.
The Company periodically reviews the carrying amount of its long-lived
assets to determine whether current events or circumstances warrant adjustments
to such carrying amounts. The Company considers historical and expected future
net operating losses to be its primary indicators of potential impairment.
Assets are grouped and evaluated for impairment at the lowest level for which
there are identifiable cash flows that are largely independent of the cash
flows of other groups of assets ("Assets"). The Company deems Assets to be
impaired if the Company is unable to recover the carrying value of its Assets
over their expected remaining useful life through a forecast of undiscounted
future operating cash flows directly related to the Assets. If Assets are
deemed to be impaired, the loss is measured as the amount by which the carrying
amount of the Assets exceeds their fair values. TSAT generally measures fair
value by considering sales prices for similar assets or by discounting
estimated future cash flows. Considerable management judgment is necessary to
estimate discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates.
Deferred Financing Costs
Deferred financing costs are amortized over the term of the related loan
facility.
Revenue Recognition
Programming and equipment rental revenue is recognized in the period that
services are delivered. Installation revenue is recognized in the period the
installation services are provided to the extent of direct selling costs. To
date, direct selling costs have exceeded installation revenue.
Advertising Costs
Advertising costs generally are expensed as incurred. Amounts expensed for
advertising aggregated $5,066,000, $23,062,000 and $25,622,000 during 1998,
1997 and 1996, respectively.
F-108
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Marketing and Direct Selling Costs
Marketing and direct selling costs are expensed as incurred. The excess cost
of customer premises equipment over proceeds received upon sale of such
equipment is recognized at the time of sale and is included in selling expense.
Residual Sales Commissions
Residual sales commissions, which become payable upon the collection of
programming revenue from certain subscribers, are expensed during the period in
which such commissions become payable.
Stock Based Compensation
The Company accounts for stock-based employee compensation using the
intrinsic value method pursuant to Accounting Principles Board Opinion No. 25.
Income Taxes
TSAT accounts for its income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Loss Per Common Share
The loss per common share for the years ended December 31, 1998 and 1997 is
based on 67,718,000 and 66,658,000 weighted average shares outstanding during
the respective period. TSAT issued 66,408,000 shares of Company Common Stock
pursuant to the Spin-off. The loss per share amounts set forth in the
accompanying statements of operations assume that the shares issued pursuant to
the Spin-off were issued and outstanding since January 1, 1996. Accordingly,
the calculation of the loss per share assumes weighted average shares
outstanding of 66,408,000 for the year ended December 31, 1996. Excluded from
the computation of diluted EPS for the years ended December 31, 1998, 1997 and
1996 are options to acquire 6,929,000, 7,894,000 and 591,000 weighted average
shares of Series A Common Stock, respectively, because inclusion of such
options would be anti-dilutive.
Comprehensive Income (Loss)
The Company's total comprehensive loss for all periods presented herein did
not differ from those amounts reported as net loss in the consolidated
statements of operations.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
F-109
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7)Supplemental Disclosures to Statements of Cash Flows
Cash paid for interest was $13,844,000, $20,224,000 and $1,946,000 during
the years ended December 31, 1998, 1997 and 1996. Cash paid for income taxes
was not material during the years ended December 31, 1998, 1997 and 1996.
Significant non-cash investing and financing activities for the year
ended December 31 1998 are as follows (amounts in thousands):
<TABLE>
<S> <C>
Contribution of operating assets and liabilities to subsidiary
in Restructuring.............................................. $ 68,796
========
Increase in equity due to issuance of stock by subsidiary in
Restructuring................................................. $299,046
========
</TABLE>
Transactions effected through the intercompany account with TCIC for periods
prior to the Spin-off have been considered to be constructive cash receipts and
payments for purposes of the accompanying statements of cash flows.
The non-cash effects of the Spin-off are set forth in the accompanying
statements of equity.
Accounts payable include accrued capital expenditures of $35,645,000 and
$7,713,000 at December 31, 1997 and 1996, respectively, which have been
excluded from the accompanying statements of cash flows.
(8)Investment in PRIMESTAR, Inc.
As a result of the Restructuring, PRIMESTAR owns and operates the
PRIMESTAR(R) direct to home satellite service throughout the continental U.S.
Summarized unaudited financial information for PRIMESTAR is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ---------
amounts in thousands
<S> <C> <C>
Financial Position
Current assets....................................... $ 143,567 42,425
Property and equipment, net.......................... 1,148,590 1,121,937
Intangible assets, net............................... 786,373 --
Other assets, net.................................... 33,557 40,494
---------- ---------
Total assets....................................... $2,112,087 1,204,856
========== =========
Current liabilities.................................. $ 448,514 180,051
Debt................................................. 1,833,195 418,729
Deferred income taxes................................ 75,057 --
Other liabilities.................................... 40,095 469,807
Stockholders' equity (deficit)....................... (284,774) 136,269
---------- ---------
Total liabilities and stockholders' equity
(deficit)......................................... $2,112,087 1,204,856
========== =========
</TABLE>
F-110
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1998 1997 1996
----------- -------- --------
amounts in thousands
<S> <C> <C> <C>
Results of Operations
Revenue................................... $ 1,289,666 561,990 417,461
Operating, selling, general and
administrative expenses.................. (1,133,834) (489,947) (410,390)
Impairment of long-lived assets........... (950,289) -- --
Depreciation and amortization............. (543,087) (243,642) (191,355)
----------- -------- --------
Operating loss.......................... (1,337,544) (171,599) (184,284)
Interest expense.......................... (145,939) (47,992) (2,023)
Other, net................................ (7,749) (18,750) 366
Income tax benefit........................ 147,528 -- 45,937
----------- -------- --------
Net loss................................ $(1,343,704) (238,341) (140,004)
=========== ======== ========
</TABLE>
(9)Satellites
Tempo DBS System
The Company, through Tempo, holds the FCC Permit authorizing construction of
a high power DBS system consisting of two or more satellites delivering DBS
service in 11 frequencies at the 119(degrees) W.L. orbital position.
Tempo is also a party to the Satellite Construction Agreement with Loral,
pursuant to which Tempo has arranged for the construction of the Tempo
Satellites at a fixed contract price of $487,159,500, and has an option to
purchase up to three additional satellites.
Tempo DBS-1 was launched into geosynchronous orbit on March 8, 1997. During
1997, Loral notified TSAT of nine separate occurrences of power reductions on
Tempo DBS-1. In addition, Loral notified Tempo of two additional power
reductions that occurred on March 29, 1999 and April 2, 1999. TSAT does not
currently know the extent of such power reductions, and cannot confirm the
precise causes thereof; however, such reductions could eventually affect the
proposed operation of Tempo DBS-1, either alone or together with other events
that may arise during the expected life of the satellite. As a result of such
power reductions, in-orbit testing has been extended and Tempo DBS-1 has not
yet been accepted. Pursuant to the Satellite Construction Agreement, Loral
bears the risk of loss of the Tempo Satellites until Tempo accepts delivery of
the Tempo Satellites. TSAT currently believes that Tempo DBS-1 may not fully
comply with specifications, but has not yet determined the extent of any such
non-compliance. Tempo and Loral are currently engaged in negotiations regarding
this matter, including the timing, extent and methodology of any further tests
to be conducted and the terms of any monetary settlement with respect to the
satellite to which Tempo may be entitled under the Satellite Construction
Agreement. Certain launch defects or damages affecting Tempo DBS-1 could cause
a substantial monetary loss to TSAT.
Under the FCC Permit, the time by which the Tempo Satellites must be
operational was due to expire in May 1998. On April 3, 1998, Tempo filed a
request with the FCC for an extension of that deadline pending FCC review of
TSAT's request for consent to the transfer of control of Tempo to PRIMESTAR
(the "Transfer Application") should the FCC determine that an extension is
necessary for Tempo to maintain its FCC authorizations at 119(degrees) W.L. and
166(degrees) W.L.
On April 30, 1998, the FCC determined that Tempo's satellite at 119(degrees)
W.L. was not operational. It did find, however, that an extension of time was
warranted for that orbital location and granted an extension to
F-111
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tempo for 119(degrees) W.L. Such extension was granted until six months after
the FCC determination on the Transfer Application, with the condition that
Tempo not enter into a lease agreement with PRIMESTAR or any similar lease
arrangement prior to the FCC's decision on the Transfer Application. In
addition, Tempo voluntarily surrendered its permit for 166(degrees) W.L.
On November 25, 1998, Tempo and PRIMESTAR requested expedited action by the
FCC on the Transfer Application. Several parties filed responses to that
request, objecting to the proposed transfer. PRIMESTAR and Tempo filed a joint
reply to those objections. On January 27, 1999, Tempo filed a joint application
with DIRECTV Enterprises, Inc. seeking FCC approval to assign Tempo's DBS
authorization to DIRECTV ("DIRECTV Application"). In addition, Tempo and
PRIMESTAR jointly filed a letter seeking to maintain the status quo with
respect to the Transfer Application until the FCC decides the DIRECTV
Application. Therefore, Tempo and PRIMESTAR requested that the Transfer
Application be held in abeyance and, subject to and contemporaneously with
approval of the DIRECTV Application, that the FCC dismiss the Transfer
Application.
Upon delivery of each of the Tempo Satellites, Tempo is obligated to make a
$10 million incentive payment to Loral. Tempo is eligible to receive a pro rata
warranty payback of each such incentive payment to the extent that transponder
failures occur during the twelve-year period following delivery. Satellite
incentive payments and any related warranty paybacks are treated as adjustments
of the cost of the applicable Tempo Satellite.
Tempo Option
In February 1990, Tempo entered into an option agreement (the "Tempo Option
Agreement") with PRIMESTAR Partners granting PRIMESTAR Partners the right and
option (the "Tempo Capacity Option"), upon exercise, to purchase or lease 100%
of the capacity of the DBS system to be built, launched and operated by Tempo
pursuant to the FCC Permit. Under the Tempo Option Agreement, upon the exercise
of the Tempo Capacity Option, PRIMESTAR Partners was obligated to pay Tempo
$1,000,000 (the "Exercise Fee") and to lease or purchase the entire capacity of
the DBS system with the purchase price (or aggregate lease payments) being
sufficient to cover the costs of constructing, launching and operating such DBS
system. In connection with the Tempo Capacity Option and certain related
matters, Tempo and PRIMESTAR Partners subsequently entered into two letter
agreements (the "Tempo Letter Agreements"), which provided for, among other
things, the funding by PRIMESTAR Partners of milestone and other payments due
under the Satellite Construction Agreement, and certain related costs, through
advances by PRIMESTAR Partners to Tempo (the "PRIMESTAR Advances"). The
PRIMESTAR Advances aggregated $469,498,000 at December 31, 1998 and are
reflected in due to PRIMESTAR, Inc. in the accompanying consolidated balance
sheets.
On February 7, 1997, the Partners Committee of PRIMESTAR Partners adopted a
resolution (i) affirming that PRIMESTAR Partners had unconditionally exercised
the Tempo Capacity Option, (ii) approving the proposed launch of Tempo DBS-1
into the 119(degrees) W.L. orbital position and the use of Tempo DBS-2 as a
spare or back-up for Tempo DBS-1, pending other deployment or disposition as
determined by PRIMESTAR Partners, and (iii) authorizing the payment by
PRIMESTAR Partners to Tempo of the Exercise Fee and other amounts in connection
with the Tempo Capacity Option and the Tempo Letter Agreements, including
funding of substantially all construction and related costs relating to the
Tempo Satellites not previously funded by PRIMESTAR Partners.
The Tempo Letter Agreements permit PRIMESTAR Partners to apply its advances
to Tempo against any payments (other than the Exercise Fee) due under the Tempo
Capacity Option with respect to its purchase or lease of satellite capacity.
Although TSAT and PRIMESTAR Partners have not entered into an agreement with
respect to the purchase or lease of 100% of the capacity of the proposed Tempo
DBS system pursuant to the
F-112
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tempo Capacity Option, TSAT believes that its obligations to PRIMESTAR Partners
with respect to such advances will be satisfied in connection with the
completion of such purchase or lease, including the Hughes High Power
Transaction. However, if notwithstanding the exercise of the Tempo Capacity
Option such purchase or lease of satellite capacity is not completed, TSAT
believes that alternative courses of action are available that would allow TSAT
to recover its costs of constructing the Tempo Satellites.
In connection with the Hughes High Power Transaction, Hughes has agreed to
assume, and to satisfy and discharge $465 million of Tempo's obligation to
PRIMESTAR Partners for the PRIMESTAR Advances, and PRIMESTAR Partners has
agreed to forgive the remaining balance. In addition, PRIMESTAR Partners has
agreed to terminate its rights under the Tempo Capacity Option.
(10)Stockholders' Equity
Common Stock
The Series A Common Stock has one vote per share and the Series B Common
Stock has ten votes per share. Each share of Series B Common Stock is
convertible, at the option of the holder, into one share of Series A Common
Stock.
Preferred Stock
TSAT is authorized to issue 5,000,000 shares of Preferred Stock. The
Preferred Stock may be issued from time to time as determined by the Board of
Directors, without stockholder approval. Such Preferred Stock may be issued in
such series and with such designations, preferences, conversion or other
rights, voting powers, qualifications, limitations, or restrictions as shall be
stated or expressed in a resolution or resolutions providing for the issue of
such series adopted by the Company's Board of Directors (the "TSAT Board"). The
TSAT Board has not authorized the issuance of any shares of Preferred Stock and
has no current plans for the issuance of any shares of Preferred Stock.
Employee Retirement Plan
TSAT's Employee Stock Purchase Plan (the "TSAT ESPP") became effective on
January 1, 1997 and was merged into PRIMESTAR Partners' retirement plan in
connection with the Restructuring. The TSAT Plan provided eligible employees
with an opportunity to invest in TSAT and to create a retirement fund. Terms of
the TSAT ESPP provided for eligible employees to contribute up to 10% of their
compensation to a trust for investment in TSAT common stock. TSAT, by annual
resolution of the TSAT Board, could elect to contribute up to 100% of the
amount contributed by employees. TSAT contributions to the TSAT ESPP aggregated
$317,000 and $1,200,000 for 1998 and 1997.
Stock Options
On the Spin-off Date, the TSAT Board adopted, and TCI as the sole
stockholder of the Company prior to the Spin-off, approved, the TCI Satellite
Entertainment, Inc. 1996 Stock Incentive Plan (the "TSAT 1996 Plan"). The TSAT
1996 Plan provides for awards to be made in respect of a maximum of 3,200,000
shares of Series A Common Stock (subject to certain anti-dilution adjustments).
Awards may be made as grants of stock options, stock appreciation rights
("SARs"), restricted shares, stock units, performance awards or any combination
thereof (collectively, "Awards"). Awards may be made to employees and to
consultants and advisors to the Company who are not employees. Shares of Series
A Common Stock that are subject to Awards that expire, terminate or are
annulled for any reason without having been exercised (or deemed exercised, by
virtue of the exercise of a related SAR), or are forfeited prior to becoming
vested, will return to the pool of
F-113
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
such shares available for grant under the TSAT 1996 Plan. Options granted
pursuant to the TSAT 1996 Plan vest evenly over five years from the date of
grant and expire 10 years from the date of grant.
In June 1996, the Board of Directors of TCI (the "TCI Board") authorized TCI
to permit certain of its executive officers to acquire equity interests in
certain of TCI's subsidiaries. In connection therewith, the TCI Board approved
the acquisition by each of two executive officers of TCI who are not employees
of the Company (the "TCI Officers"), of 1.0% of the net equity of the Company.
The TCI Board also approved the acquisition by the chief executive officer and
a director of the Company (the "Company Officer"), of 1.0% of the net equity of
the Company and the acquisition by an executive officer of certain TCI
subsidiaries who is also a director, but not an employee, of the Company (the
"TCI Subsidiary Officer"), of 0.5% of the net equity of the Company. The TCI
Board determined to structure such transactions as grants by the Company to
such persons of options to purchase shares of Series A Common Stock
representing 1.0% (in the case of each of the TCI Officers and the Company
Officer) and 0.5% (in the case of the TCI Subsidiary Officer) of the shares of
Series A Common Stock and Series B Common Stock issued and outstanding on the
Spin-off Date, determined immediately after giving effect to the Spin-off, but
before giving effect to any exercise of such options (the "Spin-off Date
Options").
Spin-off Date Options to purchase 2,324,266 shares of Series A Common Stock
at a per share price of $8.86 were granted on the Spin-off Date. As originally
granted, the Spin-off Date options were to vest in 20% cumulative increments on
each of the first five anniversaries of February 1, 1996, and were to be
exercisable for up to ten years following February 1, 1996. In November 1997,
the TSAT Board approved modifications to the vesting provisions of the Spin-off
Date Options accelerating the vesting schedule such that the Spin-off Date
Options will be two-thirds vested in February 1999 and fully vested in February
2000. Compensation expense with respect to the Spin-off Date Options held by
the Company Officer aggregated $621,000, $1,101,000 and $95,000 during the
years ended December 31, 1998, 1997 and 1996, respectively.
Pursuant to the Reorganization Agreement, and (in the case of the TCI
Officers and the TCI Subsidiary Officer) in partial consideration for the
capital contribution made by TCI to the Company in connection with the Spin-
off, the Company agreed, effective as of the Spin-off Date, to bear all
obligations under such options and to enter into stock option agreements with
respect to such options with each of the TCI Officers, the Company Officer and
the TCI Subsidiary Officer
On March 6, 1998, stockholders of the Company approved the TCI Satellite
Entertainment, Inc. 1997 Nonemployee Director Stock Option Plan (the "TSAT
DSOP") including the grant, effective as of February 3, 1997, to each person
that as of that date was a member of the TSAT Board and was not an employee of
the Company or any of its subsidiaries, of options to purchase 50,000 shares of
Series A Common Stock. Pursuant to the TSAT DSOP, options to purchase 200,000
shares of Series A Common Stock were granted at an exercise price of $8.00 per
share. As originally granted, options issued pursuant to the TSAT DSOP vest and
become exercisable over a five-year period from the date of grant and expire 10
years from the date of grant. In November 1997, the TSAT Board approved
modifications to the vesting provisions to provide for vesting in three annual
installments, commencing February 1998. In November 1997, the TSAT Board also
voted to increase the number of directors by one, and the director named to
fill such newly created directorship received options to purchase 50,000 shares
of Series A Common Stock at an exercise price of $6.50.
The Company applies Accounting Principles Board Opinion No. 25 in accounting
for its stock options, and accordingly, compensation expense has been
recognized for its stock options in the accompanying financial statements using
the intrinsic value method. Had the Company determined compensation expense
based on the grant-date fair value method pursuant to Statement of Financial
Accounting Standards No. 123, the Company's
F-114
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
net loss and loss per share would have been $447,012,000 and $6.60 for 1998,
$240,384,000 and $3.61 for 1997 and would not have been significantly different
than the amounts reported for 1996.
The following table presents the number, weighted-average exercise price and
weighted-average grant-date fair value of options to buy Series A Common Stock.
<TABLE>
<CAPTION>
Weighted- Weighted-
average average
Number of exercise grant-date
options price fair value
--------- --------- ----------
<S> <C> <C> <C>
Granted in connection with Spin-off.......... 2,324,266 $8.86 $8.74
---------
Outstanding at December 31, 1996............. 2,324,266
Granted in 1997............................ 1,070,000 7.93 4.77
---------
Outstanding at December 31, 1997 and 1998.... 3,394,266 8.57
=========
Exercisable at December 31, 1996............. --
=========
Exercisable at December 31, 1997............. 464,853 8.86
=========
Exercisable at December 31, 1998............. 1,241,706 8.64
=========
</TABLE>
As originally granted, options granted to employees vest evenly over five
years with such vesting period beginning January 1, 1997, first become
exercisable on January 1, 1998 and expire on December 31, 2006. In November
1997, the TSAT Board approved modifications to the vesting provisions to
provide for vesting in three equal annual installments, commencing February
1998.
Options outstanding at December 31, 1998 have a range of exercise prices
from $6.50 to $8.86 and a weighted-average remaining contractual life of
approximately eight years.
The respective estimated grant-date fair values of the options noted above
are based on the Black-Scholes model and are stated in current annualized
dollars on a present value basis. The key assumptions used in the model for
purposes of these calculations include the following: (a) a discount rate equal
to the 10-year Treasure rate on the date of grant; (b) a 35% volatility rate;
(c) the 10-year option term; (d) the closing price of the Series A Common Stock
on the date of grant; and (e) an expected dividend rate of zero.
In February 1997, certain key employees of the Company were granted,
pursuant to the TSAT 1996 Plan, an aggregate of 325,000 restricted shares of
Series A Common Stock. As originally granted, such restricted shares vest as to
50% on January 1, 2001 and as to the remaining 50% on January 1, 2002. In
November 1997, the TSAT Board approved modifications to the vesting provisions
accelerating the vesting schedules under such restricted stock awards to
provide for vesting of 50% on each of the second and third anniversaries of the
date of granting. Compensation expense with respect to the restricted shares
aggregated $434,000 and $585,000 during the years ended December 31, 1998 and
1997, respectively.
Other
Pursuant to the Reorganization Agreement, the Company granted to TCI an
option to purchase up to 4,765,000 shares of Series A Common Stock, at an
exercise price of $1.00 per share, as required by TCI from time to time to meet
its obligations under the conversion features of certain convertible securities
of TCI as such conversion features were adjusted as a result of the Spin-off.
During 1998 and 1997, TCI purchased 991,000 shares and 258,000 shares,
respectively, of Series A Common Stock pursuant to such option.
F-115
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the Spin-off, TCI and the Company also entered into a
"Share Purchase Agreement" to sell to each other from time to time, at the then
current market price, shares of Series A TCI Group Stock and Series A Common
Stock, respectively, as necessary to satisfy their respective obligations after
the Spin-off Date under certain stock options and SARs held by their respective
employees and non-employee directors.
At December 31, 1998, a total of 8,790,209 shares of Series A Common Stock
were reserved for issuance pursuant to the Spin-off Date Options, the Share
Purchase Agreements, the Reorganization Agreement, the TSAT 1996 Plan and the
TSAT DSOP. In addition, one share of Series A Common Stock is reserved for each
outstanding share of Series B Common Stock.
(11) Income Taxes
Through the Spin-off Date, TSAT's results of operations were included in
TCI's consolidated U.S. Federal income tax returns, in accordance with the
existing tax sharing arrangements among TCI and its consolidated subsidiaries.
Effective July 1, 1995, TCI, TCIC and certain other subsidiaries of TCI entered
into a tax sharing agreement (the "Tax Sharing Agreement"), which formalized
such pre-existing tax sharing arrangements and implemented additional
provisions regarding the allocation of certain consolidated income tax
attributes and the settlement procedures with respect to the intercompany
allocation of current tax attributes. In connection with the Spin-off, the Tax
Sharing Agreement was amended to provide that TSAT be treated as if it had been
a party to the Tax Sharing Agreement, effective July 1, 1995. TSAT's
intercompany income tax allocation through the Spin-off Date has been
calculated in accordance with the Tax Sharing Agreement. Subsequent to the
Spin-off Date, TSAT files separate U.S. Federal and state income tax returns.
In connection with the Restructuring, TSAT and TCI entered into a tax
sharing agreement dated June 1997, to confirm that pursuant to the amended Tax
Sharing Agreement (i) neither TSAT nor any of its subsidiaries has any
obligation to indemnify TCI or the TCI shareholders for any tax resulting from
the Spin-off failing to qualify as a tax-free distribution pursuant to Section
355 of the Internal Revenue Code of 1986 (the "Code"); (ii) TCI is obligated to
indemnify TSAT and its subsidiaries for any taxes resulting from the Spin-off
failing to qualify as a tax-free distribution pursuant to Section 355 of the
Code; (iii) to the best knowledge of TCI, TSAT's total payment obligation under
the Tax Sharing Agreement could not reasonably be expected to exceed $5
million; and (iv) the sole agreement between TCI and TSAT or any of its
subsidiaries relating to taxes is the Tax Sharing Agreement.
TSAT recognized no income tax benefit during either of the years ended
December 31, 1998 and 1997. As a result of the Spin-off, TSAT is no longer a
part of the TCI consolidated tax group, and accordingly, is only able to
realize income tax benefits for financial reporting purposes to the extent that
such benefits offset TSAT's income tax liabilities or TSAT generates taxable
income. For financial reporting purposes, all of TSAT's income tax liabilities
had been fully offset by income tax benefits at December 31, 1998 and 1997.
Additionally, during the foreseeable future, TSAT believes that it will incur
net losses for income tax purposes, and accordingly, will not be in a position
to realize income tax benefits on a current basis.
Income tax benefit (expense) for the year ended December 31, 1996 consists
of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
amounts in thousands
<S> <C> <C> <C>
Year ended December 31, 1996:
Intercompany allocation......................... $70,645 -- 70,645
Federal......................................... -- (17,699) (17,699)
State and local................................. -- (7,009) (7,009)
------- ------- -------
$70,645 (24,708) 45,937
======= ======= =======
</TABLE>
F-116
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income tax benefit (expense) differs from the amounts computed by applying
the Federal income tax rate of 35% as a result of the following (amounts in
thousands):
<TABLE>
<CAPTION>
Years ended December 31
--------------------------
1998 1997 1996
-------- ------- -------
amounts in thousands
<S> <C> <C> <C>
Computed "expected" tax benefit................ $155,843 83,419 65,079
State and local income taxes, net of Federal
income tax benefit............................ -- 13,009 (2,672)
Issuance of common stock by subsidiary......... (104,666) -- --
Change in valuation allowance.................. (51,736) (98,521) (16,371)
Other.......................................... 559 2,093 (99)
-------- ------- -------
$ -- -- 45,937
======== ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
--------- --------
amounts in
thousands
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 152,468 133,024
Investment in PRIMESTAR, principally due to losses
recognized for financial statement purposes in
excess of losses recognized for tax purposes....... 15,827 --
Investment in PRIMESTAR Partners:
Due to an increase in tax basis upon transfer from
TCIC to the Company.............................. -- 29,305
Due principally to losses recognized for financial
statement purposes in excess of losses recognized
for tax purposes................................. -- 2,671
Future deductible amounts principally due to
accruals deductible in later periods............... -- 5,028
--------- --------
Total deferred tax assets........................... 168,295 170,028
Less-valuation allowance.......................... (166,628) (114,892)
--------- --------
Net deferred tax assets............................. 1,667 55,136
Deferred tax liability:
Property and equipment, principally due to
differences in depreciation net of increase in tax
basis resulting from intercompany transfer......... -- 55,136
Other............................................... 1,667 --
--------- --------
Net deferred tax liability............................ $ -- --
========= ========
</TABLE>
Immediately prior to the Spin-off, the investment in PRIMESTAR Partners was
transferred from TCIC to the Company. Such transfer, which resulted in an
increased tax basis for the investment in PRIMESTAR Partners, was recorded at
TCIC's carryover basis for financial reporting purposes. In connection with
such transfer, the Company recorded a $29,142,000 non-cash increase to the
intercompany account owed to TCIC and $29,142,000 non-cash decrease to the
Company's deferred tax liability.
The valuation allowance for deferred tax assets as of December 31, 1998 was
$166,628,000. Such balance increased $51,736,000 from December 31, 1997.
F-117
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has analyzed the sources and expected reversal periods of its
deferred tax assets. The Company believes that the tax benefits attributable to
deductible temporary differences will be realized to the extent of future
reversals of existing taxable temporary differences.
At December 31, 1998, the Company had net operating loss carry forwards for
income tax purposes aggregating approximately $398,609,000 of which, if not
utilized to reduce taxable income in future periods, $526,000 expire in 2006,
$13,967,000 expire in 2010, $55,145,000 expire in 2011, $258,347,000 expire in
2012 and $70,624,000 expire in 2018.
(12)Transactions with Related Parties
Pursuant to the terms of the TSAT Merger Agreement, PRIMESTAR reimbursed
TSAT for all reasonable costs and expenses incurred by TSAT (i) to comply with
its tax and financial reporting obligations, (ii) to maintain certain insurance
coverage and (iii) to maintain its status as a publicly traded company. During
the year ended December 31, 1998, such reimbursements aggregated $152,000. The
effects of such reimbursements have been reflected as a reduction of TSAT's
investment in PRIMESTAR.
In addition, PRIMESTAR makes advances to TSAT for the payment of certain
costs related to the Tempo Satellite and the proposed high power strategy. Such
advances aggregated $6,365,000 during 1998, and are included in due to
PRIMESTAR in the accompanying consolidated balance sheets.
Certain former employees of TSAT, who are now employees of PRIMESTAR, hold
stock options, stock options with tandem stock appreciation rights, and
restricted shares of TSAT (collectively, the "TSAT Options"). Subsequent to the
Restructuring, compensation expense related to the TSAT Options aggregated
$1,541,000 and has been reflected as an increase in TSAT's investment in
PRIMESTAR in the accompanying consolidated financial statements.
Prior to the Restructuring, PRIMESTAR Partners provided programming services
to the Company and other authorized distributors in exchange for a fee based
upon the number of subscribers receiving programming services. In addition,
PRIMESTAR Partners arranged for satellite capacity and uplink services, and
provided national marketing and administrative support services in exchange for
a separate authorization fee.
Through December 31, 1996, TCIC provided certain installation, maintenance,
retrieval and other customer fulfillment services to the Company. The costs
associated with such services were allocated to the Company based upon a
standard charge for each of the various customer fulfillment activities
performed by TCIC. During the year ended December 31, 1996, the Company's
capitalized installation costs included amounts allocated from TCIC of
$53,169,000. Maintenance, retrieval and other operating expenses allocated from
TCIC to the Company aggregated $20,365,000 during the year ended December 31,
1996.
Effective January 1, 1997, charges for customer fulfillment services
provided by TCI were made pursuant to the Fulfillment Agreement entered into by
the Company and TCIC in connection with the Spin-off. Pursuant to the
Fulfillment Agreement, TCIC continued to provide fulfillment services on an
exclusive basis to the Company following the Spin-off with respect to customers
of the PRIMESTAR(R) medium power service. Such services were performed in
accordance with specified performance standards. Charges to TSAT pursuant to
the Fulfillment Agreement aggregated $54,823,000 during 1997, of which
$46,498,000 were capitalized installation costs. The Fulfillment Agreement
terminated on December 31, 1997.
F-118
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
TCIC also provided corporate administrative services to the Company. Through
the Spin-off Date, such administrative expenses, which were allocated from TCIC
to the Company based primarily on the estimated cost of providing the service
aggregated $18,120,000 during the year ended December 31, 1996.
Effective on the Spin-off Date, charges for administrative services provided
by TCIC were made pursuant to the Transition Services Agreement. Pursuant to
the Transition Services Agreement, TCI was obligated to provide to the Company
certain services and other benefits. As compensation for the services rendered
and for the benefits made available to the Company pursuant to the Transition
Services Agreement, the Company was required to pay TCI a monthly fee of $1.50
per qualified subscribing household or other residential or commercial unit
(counted as one subscriber regardless of the number of satellite receivers), up
to a maximum of $3,000,000 per month, and to reimburse TCI quarterly for
direct, out-of-pocket expenses incurred by TCI to third parties in providing
the services. Amounts charged to TSAT pursuant to the Transition Services
Agreement aggregated $3,174,000 and $11,579,000 for the years ended December
31, 1998 and 1997, respectively, and are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations. Upon consummation of the Restructuring, TSAT and TCI agreed to
terminate the Transition Services Agreement.
Beginning in March 1997, and through the Closing Date, TCIC provided TSAT
with customer support services from TCIC's Boise, Idaho call center. Amounts
charged by TCIC to TSAT for such services aggregated $5,026,000 and $12,173,000
during the years ended December 31, 1998 and 1997, respectively, and are
included in selling, general and administrative expenses in the accompanying
consolidated statements of operations.
Certain key employees of the Company hold stock options in tandem with SARs
with respect to certain common stock of TCI. In connection with the Spin-off,
the Company assumed the stock compensation liability with respect to such TCI
options and SARs. Estimates of the compensation related to the options and/or
SARs granted to employees of the Company have been recorded in the accompanying
financial statements, but are subject to future adjustment based upon the
market value of the underlying TCI common stock and, ultimately, on the final
determination of market value when the rights are exercised. Non-cash increases
(decreases) to such estimated stock compensation liability, which are included
in the above-described TCIC administrative expense allocations, aggregated
$(541,000) during the year ended December 31, 1996. In 1998 and 1997, the
Company recognized $3,814,000 and $6,134,000, respectively, of stock
compensation expense related to the aforementioned options with tandem SARs.
F-119
<PAGE>
Schedule II
TCI SATELLITE ENTERTAINMENT, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additions Deductions
---------- ----------
Balance at Charged to Write-offs Balance
beginning profit net of at end
Description of year and loss recoveries Other(1) of year
- ----------- ---------- ---------- ---------- -------- -------
amounts in thousands
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1998:
Allowance for doubtful
receivables--trade..... $5,307 3,062 (4,003) (4,366) --
====== ====== ======= ====== =====
Year ended December 31,
1997:
Allowance for doubtful
receivables--trade..... $4,666 18,339 (17,698) -- 5,307
====== ====== ======= ====== =====
Year ended December 31,
1996:
Allowance for doubtful
receivables--trade..... $4,819 19,235 (19,388) -- 4,666
====== ====== ======= ====== =====
</TABLE>
- --------
(1) Contribution of accounts receivable and related allowance for doubtful
accounts in connection with TSAT Asset Transfer.
F-120
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
unaudited
<TABLE>
<CAPTION>
For
the Three Months
Ended March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues................................................... $164,161 $136,839
Cost of Sales.............................................. 96,696 84,656
-------- --------
Gross Margin............................................... 67,465 52,183
Operating Expenses:
Selling and marketing.................................... 33,559 27,230
Manufacturer Incentive................................... 11,115 11,310
General and administrative............................... 19,817 13,437
Commissions to retailers................................. 2,978 3,256
Engineering and operations............................... 4,784 3,311
Depreciation and amortization............................ 5,013 3,772
-------- --------
Net operating loss..................................... (9,801) (10,133)
Other Income:
Interest income.......................................... 740 996
Other.................................................... 1 8
-------- --------
Net loss............................................... $ (9,060) $ (9,129)
======== ========
Net loss per share--basic and diluted.................. $ (0.10) $ (0.10)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-121
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 67,884 $ 66,297
Trade accounts receivable, net...................... 57,828 47,843
Prepaid expenses and other.......................... 7,238 8,856
-------- --------
Total current assets.............................. 132,950 122,996
-------- --------
Property and equipment:
Land................................................ 351 351
Buildings and improvements.......................... 5,106 5,106
Equipment........................................... 151,092 150,249
-------- --------
156,549 155,706
Less--Accumulated depreciation...................... (101,561) (96,548)
-------- --------
Total property and equipment, net................. 54,988 59,158
-------- --------
Other assets:
Long-term investments, consisting of U.S. Treasury
securities......................................... -- 4,501
Other............................................... 3,244 3,456
-------- --------
Total other assets................................ 3,244 7,957
-------- --------
$191,182 $190,111
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-122
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET--(Continued)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses............... $ 74,900 $ 65,743
Deferred revenue.................................... 64,368 52,956
Manufacturer Incentive obligation................... 27,659 25,579
Contract cancellation payable....................... -- 13,200
--------- ---------
Total current liabilities......................... 166,927 157,478
--------- ---------
Long term liabilities:
Due to HBI.......................................... 10,000 10,000
Manufacturer Incentive obligation................... 77,653 77,103
--------- ---------
Total long term liabilities....................... 87,653 87,103
--------- ---------
Commitments and contingencies (Note 3)
Shareholders' equity (deficit)
Preferred Stock, $0.01 Par Value, 50 million shares
authorized; none issued or outstanding ............ -- --
Class A Common Stock--Participating, voting, $.0001
Par Value, 500 million shares authorized,
30,451,450 shares issued and outstanding at
March 31, 1999 and 29,390,450 at December 31,
1998............................................... 2 2
Common Stock--Participating, voting, $.0001 Par
Value, 100 million shares authorized, 59,382,825
shares issued and outstanding at March 31, 1999 and
60,422,825 at December 31, 1998.................... 7 7
Additional paid-in capital.......................... 375,032 374,896
Accumulated deficit................................. (438,439) (429,380)
Accumulated other comprehensive income.............. -- 5
--------- ---------
Total shareholders' equity (deficit).............. (63,398) (54,470)
--------- ---------
$ 191,182 $ 190,111
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-123
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
unaudited
<TABLE>
<CAPTION>
For The Three Months
Ended March 31
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating activities:
Net loss............................................. $ (9,060) $ (9,129)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities--
Depreciation and amortization...................... 5,013 3,772
Change in operating items:
Receivables and other current assets............. (8,367) 7,392
Accounts payable and accrued expenses............ (4,043) 1,302
Deferred revenue................................. 11,412 6,184
Manufacturer Incentive........................... 2,630 7,342
Other............................................ 206 (107)
---------- ----------
Net cash provided by (used in) operating
activities.................................... (2,209) 16,756
---------- ----------
Investing activities:
Purchase of and deposits on equipment................ (842) (1,665)
Proceeds from sale of long-term available-for-sale
investments ........................................ 4,501 --
---------- ----------
Net cash provided by (used in) investing
activities ................................... 3,659 (1,665)
---------- ----------
Financing activities:
Proceeds from stock issuance......................... 137 --
---------- ----------
Net cash provided by financing activities...... 137 --
---------- ----------
Increase in cash and cash equivalents.......... 1,587 15,091
---------- ----------
Cash and cash equivalents, beginning of period ........ 66,297 68,646
---------- ----------
Cash and cash equivalents, end of period .............. $ 67,884 $ 83,737
========== ==========
Supplementary cash flow information:
Cash paid during the period for--
Interest........................................... $ -- $ --
========== ==========
Income taxes....................................... $ -- $ --
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-124
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Note 1. Organization:
United States Satellite Broadcasting Company, Inc. and Subsidiaries ("USSB"
or the "Company") provide subscription television programming via a high-power
direct broadcast satellite ("DBS") to households throughout the continental
United States. The Company broadcasts a high quality digital television signal
using a digital satellite system ("DIRECTV/USSB System"). The Company's
programming is available to customers who have a DIRECTV/USSB System, which
consists of an 18-inch satellite dish, a receiver/decoder and a remote control.
All of the Company's gross revenues and identifiable assets relate to the
Company's activities in this industry.
Hubbard Broadcasting, Inc. ("HBI") beneficially owned 51.8% of the Company
as of March 31, 1999 and December 31, 1998, and had approximately 74.5% of the
total voting power at March 31, 1999.
The Company has entered into an Agreement and Plan of Merger dated as of
December 11, 1998 (the "Merger Agreement") with General Motors Corporation, a
Delaware Corporation ("GM"), and its subsidiary Hughes Electronics Corporation,
a Delaware corporation ("Hughes"), pursuant to which, if certain conditions are
satisfied, the Company will be merged with and into Hughes (the "Merger"). The
Merger, which is subject to shareholder approval and to the satisfaction of
other conditions contained in the Merger Agreement, is expected to take place
in May 1999. If the Merger is completed, each share of USSB stock will be
converted, subject to certain limitations, into either (i) a fraction of a
share of Class H Common Stock of GM equal to the exchange ratio provided in the
Merger Agreement or (ii) cash equal to that exchange ratio multiplied by the
20-day volume-weighted average price of the GM Class H Common Stock (the
"Merger Consideration"). The Merger Consideration is dependent upon the GM
Class H Common Stock price and will not exceed $18.00 per share.
Note 2. Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting Principles for
interim financial statements and, therefore, do not include all information and
disclosures required by Generally Accepted Accounting Principles for complete
financial statements. In the opinion of management, such statements reflect all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations, and cash
flows for the periods presented. The results of operations for interim periods
presented are not necessarily indicative of the results which may be expected
for the entire fiscal year. These statements should be read in conjunction with
the December 31, 1998 consolidated financial statements, the notes thereto, and
the Company's Report on Form 10-K.
Note 3. Commitments and Contingencies:
Regulatory Matters
USSB II, Inc. (a wholly owned subsidiary of the Company) holds a license
from the Federal Communications Commission (the "FCC") to broadcast from five
transponders at 101DEG. west longitude (the "License"). The Company must
continue to maintain the License to operate its business. The License expires
in June 2004 and is renewable at ten-year intervals. Although the Company
expects to obtain such renewals in the ordinary course, there can be no
assurance that such renewals will be granted.
The construction and launch of broadcasting satellites and the operation of
satellite broadcasting systems are subject to substantial regulation by the
FCC. Under the License, the Company is subject to FCC review primarily for the
following: (i) standards regarding individual satellites (e.g., meeting minimum
financial, legal
F-125
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS--(Continued)
and technical standards); (ii) avoiding interference with other satellites; and
(iii) complying with rules the FCC has established specifically for high-power
DBS satellite licenses. In addition, uplink facilities are separately licensed
by the FCC. The Company's National Broadcast Center and the Auxiliary Broadcast
Center have each received its FCC license. FCC rules are subject to change in
response to industry developments, new technology and political considerations.
The FCC granted the Company a Construction Permit and Launch Authority (the
"Permit"), held by USSB II, for satellites with three transponders at 110DEG.
west longitude and eight transponders at 148DEG. west longitude. On June 24,
1998, the Company voluntarily returned to the FCC its authorization for eight
transponders at 148DEG. west longitude. The return of the authorization at
148DEG. west longitude had no effect on the status of the Company's Permit for
the 110DEG. orbital location.
The Permit requires the Company to comply with specified construction and
launch schedules. The FCC has the authority to revoke the Permit for the
110DEG. orbital location if the Company fails to comply with the FCC schedule
for construction and launch. Under the Merger Agreement, the Company and Hughes
have agreed to cooperate and use their reasonable best efforts to maintain the
Permit at the 110DEG. orbital location. In connection therewith, the Company
and Hughes have jointly filed an application for modification of authorization
to move the DBS-1 satellite, which presently operates at the 101DEG. orbital
location, to the 110DEG. orbital location to satisfy the FCC's due diligence
requirements. On April 1, 1999, the FCC staff issued an order approving the
transfer of control of the FCC authorization for construction at the 110DEG.
orbital location to DIRECTV, conditioned upon DIRECTV initiating service on the
three transponders authorized at the 110DEG. orbital location by December 31,
1999.
Under the Merger Agreement, on December 17, 1998, Hughes, DIRECTV
Enterprises, Inc., a wholly-owned subsidiary of Hughes, and the Company also
filed applications with the FCC requesting consent to the transfer of control
of all of the FCC authorizations held by USSB II, Inc. to Hughes. The FCC
staff's April 1, 1999 order also approved the transfer of control of the FCC
license for five transponders at the 101DEG. orbital location and related earth
station licenses to DIRECTV.
The order of the FCC staff issued on April 1, 1999 became final on May 12,
1999.
While the Company has generally been successful to date with respect to
compliance with regulatory matters, there can be no assurance that the Company
will succeed in obtaining and maintaining all requisite regulatory approvals
for its operations.
Lockheed Martin Astro Space Agreement
The Company originally entered into contracts with Lockheed Martin for the
construction of direct broadcast satellites at the 110DEG. orbital location
(the "110DEG. Contract") and at the 148DEG. orbital location (the "148DEG.
Contract"). As required by the Merger Agreement, the Company has canceled the
110DEG. Contract and has allowed the 148DEG. Contract to expire in accordance
with its terms. Both actions were effective December 31, 1998.
Insurance
The Company maintains business interruption and in-orbit insurance coverages
at levels management considers necessary to address the normal risks of
operating via communications satellite, including damage, destruction or
failure of the satellite or its transponders. Additionally, the Company
maintains general liability and directors' and officers' insurance coverages.
F-126
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS--(Continued)
Satellite
All of the Company's programming is carried on a single satellite, DBS-1,
which the Company co-owns with DIRECTV, a subsidiary of Hughes Electronics
Corporation. As previously reported, a spacecraft control processor ("SCP")
aboard the DBS-1 satellite failed on July 4, 1998, and control of DBS-1 was
automatically switched to the spare SCP without interruption of service. In
connection with the execution of the Merger Agreement, DIRECTV and the Company
entered into a Channel Services Provision Agreement which provides that,
subject to the terms of that Agreement, DIRECTV will provide to USSB, on a full
time basis, channel capacity and related services on two other satellites owned
by Hughes at the 101DEG. orbital location sufficient to transmit and deliver a
limited number of premium movie services to USSB subscribers. At the same time,
the Company and Hughes also entered into a Replacement Payload Option Agreement
which clarifies USSB's right to transponder capacity on a replacement
satellite, in the event the Merger Agreement is terminated due to the failure
of the transponders on DBS-1. The Replacement Payload Option Agreement provides
that USSB may elect to purchase five transponders at a fixed price on DIRECTV
1-R, a satellite under construction by Hughes.
Litigation
In November 1996, Personalized Media Communications, L.L.C. ("PMC")
initiated legal proceedings against the Company and others before the United
States International Trade Commission ("ITC"), and in the United States
District Court for the Northern District of California. The Company does not
believe that PMC is entitled to damages or any remedies from the Company, and
management intends to vigorously defend both actions.
In June 1997, IPPV Enterprises, a Georgia partnership ("IPPV") initiated a
legal proceeding against the Company and others in the United States District
Court for the District of Delaware. The parties have agreed in principal to
settle this litigation and, pursuant to such agreement, the Company expects to
contribute an amount which it does not presently anticipate to be material to
the financial position of the Company.
In September 1998, WIC Premium Television, Ltd., an Edmonton, Alberta,
Canada corporation, ("WIC") initiated legal proceedings in both the Federal
Court of Canada Trial Division and the Alberta Courts against numerous
retailers, programming providers, and programming distributors, including the
Company. The Company is challenging the jurisdiction of both courts, and
management has not reached a judgement regarding whether WIC may be entitled to
damages or any remedies from the Company.
The Company is also exposed to other litigation encountered in the normal
course of business. In the opinion of management, the resolution of these other
litigation matters of which the Company is aware will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
Manufacturer Incentive Program
On August 26, 1996, the Company, together with DIRECTV, Inc., entered into
financial incentive arrangements with certain manufacturers of DIRECTV/USSB
System equipment to assist these manufacturers in lowering the price of
DIRECTV/USSB System. Such arrangements, which run for up to four years
depending on manufacturer, commit the Company to pay the manufacturers over a
five-year period from the date new DIRECTV/USSB System households are
authorized to receive programming. The expense and liability for such future
commitments are established and recorded upon activation of the related
DIRECTV/USSB System. In the quarter ended March 31, 1999, the Company charged
to expense $11.1 million, representing the full amount of those future
obligations for the Manufacturer Incentive program incurred during the quarter.
Cash paid in the quarter ended March 31, 1999 totaled $6.2 million, and future
payment obligations (all of which have been previously charged to expense)
totaled $105.3 million at March 31, 1999.
F-127
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS--(Continued)
While the amounts to be incurred in the future by the Company under these
arrangements cannot be precisely estimated, the Company expects that as the
level of retail DIRECTV/USSB System unit sales increase, the cash flow related
to these arrangements will increase accordingly.
Note 4. Recently Issued Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative financial instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet either as an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. The
Company will be required to adopt SFAS No. 133 no later than January 1, 2000.
The Company has not entered into any derivative financial instruments as of
March 31, 1999. As a result, adoption of SFAS No. 133 would currently have no
impact on the Company. In the future, if the Company were to enter into
derivative financial instruments which are covered by SFAS No. 133, volatility
in earnings and other comprehensive income could be increased.
F-128
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United States Satellite Broadcasting Company, Inc.
We have audited the consolidated balance sheets of United States Satellite
Broadcasting Company, Inc. (a Minnesota corporation) and Subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United States Satellite
Broadcasting Company, Inc. and Subsidiaries as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Minneapolis, Minnesota,
January 22, 1999
F-129
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
--------------------------
1998 1997
------------ ------------
(In thousands, except
share and per share data)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents......................... $ 66,297 $ 68,646
Trade accounts receivable, less allowance of
$5,986 and $6,074 at December 31, 1998 and 1997,
respectively..................................... 47,843 44,992
Prepaid expenses and other........................ 8,856 11,832
------------ ------------
Total current assets............................ 122,996 125,470
------------ ------------
Property and Equipment
Land.............................................. 351 351
Buildings and improvements........................ 5,106 5,075
Equipment......................................... 150,249 138,264
------------ ------------
155,706 143,690
------------ ------------
Less--Accumulated depreciation..................... (96,548) (79,235)
------------ ------------
Total property and equipment, net............... 59,158 64,455
------------ ------------
Other Assets
Satellite deposits................................ -- 8,380
Long-term investments............................. 4,501 3,970
Other............................................. 3,456 4,035
------------ ------------
Total other assets.............................. 7,957 16,385
------------ ------------
$ 190,111 $ 206,310
============ ============
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses............. $ 65,743 $ 60,599
Deferred revenue.................................. 52,956 56,156
Manufacturer Incentive obligation................. 25,579 17,023
Contract cancellation payable..................... 13,200 --
------------ ------------
Total current liabilities....................... 157,478 133,778
------------ ------------
Manufacturer Incentive Obligation.................. 77,103 60,433
Due to HBI......................................... 10,000 10,000
Commitments and Contingencies (Note 4)
Shareholders' Equity (Deficit)
Preferred Stock, $.01 par value, 50 million shares
authorized; none issued or outstanding............ -- --
Class A Common Stock--
Participating, voting, $.0001 par value, 500
million shares authorized, 29,390,450 and
16,172,601 shares issued and outstanding at
December 31, 1998 and 1997, respectively
respectively..................................... 2 2
Common Stock--
Participating, voting, $.0001 par value, 100
million shares authorized, 60,422,825 and
73,638,174 shares issued and outstanding at
December 31, 1998 and 1997, respectively
respectively..................................... 7 7
Additional paid-in capital......................... 374,896 374,877
Accumulated deficit................................ (429,380) (372,777)
Accumulated other comprehensive income (deficit)... 5 (10)
------------ ------------
Total shareholders' equity (deficit)............ (54,470) 2,099
------------ ------------
$ 190,111 $ 206,310
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-130
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -------------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues............................ $ 550,801 $ 456,619 $ 292,624
Cost of Sales....................... 327,676 292,917 193,356
------------ ------------ -------------
Gross Margin........................ 223,125 163,702 99,268
Operating Expenses
Selling and marketing............... 114,983 99,399 102,715
Manufacturer Incentive.............. 44,778 66,726 18,387
General and administrative.......... 57,571 46,935 31,992
Commissions to retailers............ 13,232 14,537 13,909
Engineering and operations.......... 13,834 9,801 11,644
Depreciation and amortization....... 17,316 18,426 19,687
Early cancellation of contracts due
to merger (Note 2)................. 22,130 -- --
------------ ------------ -------------
Net operating loss................ (60,719) (92,122) (99,066)
------------ ------------ -------------
Other (Income) Expense
Interest expense.................... -- -- 2,326
Interest (income)................... (4,067) (4,919) (6,244)
Cost to terminate Credit Agreement.. -- -- 9,504
Other............................... (49) 103 307
------------ ------------ -------------
Net loss.......................... $ (56,603) $ (87,306) $ (104,959)
------------ ------------ -------------
Net loss per share--basic and
diluted.......................... $ (0.63) $ (0.97) $ (1.17)
------------ ------------ -------------
Weighted average shares
outstanding--basic and diluted... 89,811 89,811 89,811
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-131
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Class A Accumulated
Common Stock Common Stock Additional Other Unused
--------------- --------------- Paid-In Accumulated Comprehensive Media
Shares Amount Shares Amount Warrants Capital Deficit Income (Deficit) Credits Total
------- ------ ------- ------ -------- ---------- ----------- ---------------- ------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholders'
Equity (Deficit)
at December 31,
1995............ 16,876 $ 2 72,935 $ 7 $7,350 $127,423 $(180,512) $ 154 $(3,396) $ (48,972)
Conversion of
shares pursuant
to
Recapitalization.. (16,876) (2) 16,876 2 -- -- -- -- -- --
Conversion of
notes and
cancellation of
warrants........ -- -- 7,412 1 (7,350) 44,491 -- -- -- 37,142
Conversion of
shares available
for
overallotment... 1,245 -- (1,245) -- -- -- -- -- -- --
Transfer of
common stock
from HBI........ -- -- (15,712) (2) -- -- -- -- -- (2)
Sale of Class A
common stock for
$27 per share,
net............. 8,300 1 -- -- -- 206,200 -- -- -- 206,201
Conversion of
shares pursuant
to certain
shareholder
rights.......... 5,570 1 (5,570) (1) -- -- -- -- -- --
Media credits
utilized........ -- -- -- -- -- -- -- -- 243 243
Unrealized loss
on investments.. -- -- -- -- -- -- -- (176) -- (176)
Net loss......... -- -- -- -- -- -- (104,959) -- -- (104,959)
------- --- ------- --- ------ -------- --------- ----- ------- ---------
Shareholders'
Equity (Deficit)
at December 31,
1996............ 15,115 2 74,696 7 -- 378,114 (285,471) (22) (3,153) 89,477
Conversion of
shares pursuant
to certain
shareholder
rights.......... 1,058 -- (1,058) -- -- -- -- -- -- --
Media credits
utilized........ -- -- -- -- -- -- -- -- (84) (84)
Media credits
canceled........ -- -- -- -- -- (3,237) -- -- 3,237 --
Unrealized gain
on investments.. -- -- -- -- -- -- -- 12 -- 12
Net loss......... -- -- -- -- -- -- (87,306) -- -- (87,306)
------- --- ------- --- ------ -------- --------- ----- ------- ---------
Shareholders'
Equity (Deficit)
at December 31,
1997............ 16,173 2 73,638 7 -- 374,877 (372,777) (10) -- 2,099
Conversion of
shares pursuant
to certain
shareholder
rights.......... 13,215 -- (13,215) -- -- -- -- -- -- --
Issuance of Class
A Common stock.. 2 -- -- -- -- 19 -- -- -- 19
Unrealized gain
on investments.. -- -- -- -- -- -- -- 15 -- 15
Net loss......... -- -- -- -- -- -- (56,603) -- -- (56,603)
------- --- ------- --- ------ -------- --------- ----- ------- ---------
Shareholders'
Equity (Deficit)
at December 31,
1998............ 29,390 $ 2 60,423 $ 7 -- $374,896 $(429,380) $ 5 -- $ (54,470)
======= === ======= === ====== ======== ========= ===== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-132
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31
-----------------------------------
1998 1997 1996
---------- ---------- -----------
(In thousands)
<S> <C> <C> <C>
Operating Activities
Net Loss................................... $ (56,603) $ (87,306) $ (104,959)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities--
Depreciation and amortization............. 17,316 18,426 19,687
Deferred loan origination fees charged to
expense in connection with termination
of Credit Agreement...................... -- -- 5,465
Early cancellation of contracts due to
merger................................... 9,030 -- --
Media credits utilized.................... -- (84) 243
Change in operating items:
Trade accounts receivable............... (2,850) (2,590) (25,532)
Prepaid expenses and other current
assets................................. 2,975 (6,969) (278)
Accounts payable and accrued expenses... 5,144 8,679 19,851
Contract cancellation payable........... 13,200 -- --
Deferred revenue........................ (3,200) 9,036 23,943
Manufacturer Incentive.................. 25,225 59,146 14,632
Other................................... 563 (3,829) (852)
---------- ---------- -----------
Net cash provided by (used in)
operating activities................. 10,800 (5,491) (47,800)
---------- ---------- -----------
Investing Activities
Purchase of and deposits on equipment...... (12,668) (14,854) (5,487)
Purchase of investments.................... (500)
Proceeds from sale of investments.......... -- 3,000 5,996
---------- ---------- -----------
Net cash provided by (used in)
investing activities................. (13,168) (11,854) 509
---------- ---------- -----------
Financing Activities
Advances from (repayments to) affiliated
companies................................. -- (527) (637)
Proceeds from debt borrowings.............. -- -- 485
Repayment of debt.......................... -- -- (91,922)
Proceeds from sale of common stock......... 19 -- 206,200
---------- ---------- -----------
Net cash provided by (used in)
financing activities................. 19 (527) 114,126
---------- ---------- -----------
Increase (decrease) in cash and cash
equivalents.......................... (2,349) (17,872) 66,835
Cash and Cash Equivalents, beginning of
period.................................... 68,646 86,518 19,683
---------- ---------- -----------
Cash and Cash Equivalents, end of period... $ 66,297 $ 68,646 $ 86,518
---------- ---------- -----------
Noncash Transactions
Conversion of notes and cancellation of
warrants.................................. $ -- $ -- $ 44,491
---------- ---------- -----------
Expiration of unused media credits......... $ -- $ 3,237 $ --
---------- ---------- -----------
Supplementary Cash Flow Information
Cash paid during the period for--
Interest.................................. $ -- $ -- $ --
Income taxes.............................. $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-133
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Organization And Summary Of Significant Accounting Principles
United States Satellite Broadcasting Company, Inc. and Subsidiaries ("USSB"
or the "Company") provide subscription television programming via a high-power
direct broadcast satellite ("DBS") to households throughout the continental
United States. The Company broadcasts a high quality digital television signal
using a digital satellite system ("DIRECTV/USSB System"). The Company's
programming is available to customers who have a DIRECTV/USSB unit, which
consists of an 18-inch satellite dish, a receiver/decoder and a remote control.
All of the Company's gross revenues and identifiable assets relate to the
Company's activities in this industry.
Hubbard Broadcasting, Inc. ("HBI") beneficially owned 51.8% of the Company
as of December 31, 1998 and 1997, and had approximately 73.4% of the total
voting power at December 31, 1998.
Until July 1, 1994, the Company was a development stage company. The Company
has incurred losses since its inception and had an accumulated deficit of
approximately $429.4 million as of December 31, 1998. Management anticipates
that losses will continue into 1999.
The Company has entered into an Agreement and Plan of Merger dated as of
December 11, 1998 (the "Merger Agreement") with General Motors Corporation, a
Delaware corporation ("GM"), and its subsidiary Hughes Electronics Corporation,
a Delaware corporation ("Hughes"), pursuant to which, if certain conditions are
satisfied, the Company will be merged with and into Hughes (the "Merger") (See
Note 2).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned Subsidiaries, including USSB II, Inc. ("USSB II"). USSB II
owns the Company's satellite transponders and holds the Company's FCC licenses
and permits (see Note 4). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents, which consist primarily of short-term United
States Treasury-backed securities with original maturities of less than 90
days, are stated at cost, which approximates fair value.
Investments
Long-term investments at December 31, 1998, consist primarily of a U.S.
Treasury security maturing in 1999, which the Company classifies as available-
for-sale. The Treasury security bears interest at 5.5% and its aggregate
amortized cost approximated its market value of $4,001,000 at December 31,
1998. Unrealized gains and losses are reported as other comprehensive income.
Manufacturer Incentive Program
The Company's costs under its financial incentive arrangements with
manufacturers of DIRECTV/USSB System equipment are charged to expense as
incurred. See Note 4 for additional disclosure regarding these arrangements.
F-134
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Retailer Commissions
The Company generally pays commissions to eligible retailers for their
customers who are current USSB subscribers. Commissions paid are charged to
expense over the related subscription period. Accrued retailer commissions
totaled $5,262,000 at December 31, 1998 and $5,996,000 at December 31, 1997.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided using
accelerated and straight-line methods based on estimated useful lives as
follows:
<TABLE>
<S> <C>
Satellite Transponders.......................................... 10 years
Other Equipment................................................. 5-10 years
Buildings & Improvements........................................ 31 years
</TABLE>
Financial Instruments
Unless otherwise indicated, the recorded value of the Company's financial
instruments approximates their fair value.
Revenue Recognition
Programming revenues are recorded when the respective services are rendered.
Subscriptions received in advance of the delivery of the related programming
are recorded as deferred revenue.
Advertising and Promotions
Costs for advertising and promotional materials and activities (including
the cost, if any, of programming provided to current or prospective customers
free of charge) are charged to expense as incurred.
Research and Development
Costs related to the Company's research and development efforts are charged
to expense as incurred.
Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities. These differences will result in taxable or deductible amounts in
the future based on enacted tax laws and are applicable to the periods in which
the differences are expected to affect taxable income.
Recently Issued Accounting Pronouncements
The Company adopted FASB Statement No. 130, "Reporting Comprehensive Income"
(SFAS No. 130), effective January 1, 1998. SFAS No. 130 establishes standards
for reporting and display of comprehensive earnings and its components in
financial statements. Comprehensive income is defined as changes in equity of a
business enterprise during a period except those resulting from investment by
owners and distributions to owners. The adoption of SFAS No. 130 had no impact
on the Company's statements of operations or shareholders' equity as of
December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). SFAS
F-135
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
No. 133 establishes accounting and reporting standards requiring that every
derivative financial instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet either as an
asset or liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. The Company will be required to adopt SFAS No.
133 no later than January 1, 2000. The Company has not entered into any
derivative financial instruments as of December 31, 1998. As a result, adoption
of SFAS No. 133 would currently have no impact on the Company. In the future,
if the Company were to enter into derivative financial instruments which are
covered by SFAS No. 133, volatility in earnings and other comprehensive income
could be increased.
2.Agreement and Plan of Merger
The Company has entered into an Agreement and Plan of Merger dated as of
December 11, 1998 (the "Merger Agreement") with General Motors Corporation, a
Delaware corporation ("GM"), and its subsidiary Hughes Electronics Corporation,
a Delaware corporation ("Hughes"), pursuant to which, if certain conditions are
satisfied, the Company will be merged with and into Hughes (the "Merger"). The
Merger, which is subject to regulatory and shareholder approval, and to the
satisfaction of other conditions contained in the Merger Agreement, is expected
to take place in the first half of 1999. If the Merger is completed, each share
of USSB stock will be converted, subject to certain limitations, into either
(i) a fraction of a share of Class H Common Stock of GM equal to the exchange
ratio provided in the Merger Agreement or (ii) cash equal to that exchange
ratio multiplied by the 20-day volume-weighted average price of the GM Class H
Common Stock (the "Merger Consideration"). The Merger Consideration is
dependent upon the GM Class H Common Stock price and will not exceed $18.00 per
share.
As required by the Merger Agreement, the Company has canceled contracts with
Lockheed Martin and Convergys Information Management Group Inc. In connection
with the cancellation of these contracts, the Company recorded a special one-
time charge in the fourth quarter of 1998 of $20.7 million. This charge
represents the total amount of the charge associated with such contract
cancellations. The fourth quarter charge includes non-cash write-offs of
satellite deposits of $7.6 million and development costs for subscriber
management and billing systems of $1.3 million. The remainder of the fourth
quarter charge consists of net contract termination fees, which were paid in
January 1999. The charge of $22.1 million included in the statement of
operations for the year ended December 31, 1998 also includes a write-off of
satellite deposits of $1.43 million recorded in June 1998.
3.Shareholders' Equity
Recapitalization and Initial Public Offering
In the third quarter of 1995, the Company decided to proceed with an initial
public offering of its Class A Common Stock. In connection with the offering,
on January 31, 1996, the Company effected a recapitalization of the Company's
capital structure.
Prior to the recapitalization, the Company's capitalization consisted of two
classes of common stock (referred to herein as "old common stock" and "old
class A common stock"). Terms of the recapitalization included (i) a change in
the authorized capital of the Company to consist of 100,000,000 shares of
Common Stock, 500,000,000 shares of Class A Common Stock and 50,000,000 shares
of undesignated Preferred Stock; (ii) the conversion of the Company's old
common stock and old class A common stock into shares of Common Stock; (iii)
the conversion of certain convertible subordinated promissory notes into shares
of Common Stock and the cancellation of warrants issued to the holders of those
notes; (iv) a 75-for-one split of the new capital
F-136
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock; and (v) the contribution by HBI of 8,300,000 shares of Common Stock in
connection with the public offering and 7,411,950 shares of Common Stock in
connection with conversion of the convertible subordinated promissory notes,
pursuant to HBI's agreements with certain current shareholders, in order to
prevent those shareholders from experiencing dilution in their ownership of the
Company. The Company's consolidated financial statements are presented as if
the above changes in authorized capital and the 75-for-one split of new capital
stock had been effective for all periods presented.
The offering (which closed on February 6, 1996) consisted of the sale by the
Company of 8,300,000 shares of Class A Common Stock at $27.00 per share,
generating proceeds of approximately $206.2 million, net of underwriting
commissions and other expenses incurred in connection with the offering.
Pursuant to the over-allotment provisions in the underwriting agreement,
certain shareholders who had purchased shares of the Company's capital stock in
previous private placements sold 1,245,000 shares of newly converted Class A
Common Stock in connection with the offering. The Company did not receive any
of the proceeds of such sales.
Conversion Rights
On May 1, 1996, approximately 3.1 million shares of the Company's Common
Stock, with 10 votes per share, automatically converted into Class A Common
Stock, with one vote per share, at a conversion ratio of 1:1. On July 30, 1996,
the remainder of the Company's Common Stock, with 10 votes per share, became
eligible, at the option of the holders thereof, to convert into Class A Common
Stock, with one vote per share, at a conversion ratio of 1:1.
In accordance with certain shareholder agreements, prior to the Company's
initial public offering, the ownership percentages of certain shareholders,
other than HBI, were protected from dilution, based on total outstanding shares
of 89,810,775, until the ownership of HBI was reduced to 51%. In connection
with the Company's initial public offering, 15,711,950 shares of old common
stock were contributed by HBI to the Company for no consideration in 1996. In
addition, certain shareholders holding 22,645,350 shares of Common Stock have
certain "piggy-back" rights to participate in certain public offerings of the
Company's stock and certain "co-sale" rights to include all or a portion of
their shares in certain sales by HBI of its stock of the Company.
Unused Media Credits
In connection with a sale of old class A common stock in 1994, the Company
received a $5.0 million media credit. The unused balance of the media credit at
December 31, 1997 ($3.2 million) was canceled by the Company. Such cancellation
was recorded as a reduction of additional paid-in capital to reflect the actual
net proceeds realized from the original stock sale.
Convertible Subordinated Promissory Notes
During 1994, the Company issued and sold unsecured convertible subordinated
promissory notes (the "Notes") for $34.5 million. The Notes were subject to
mandatory conversion into shares of old class A common stock equal to the face
amount of the Notes divided by $5.66 if the gross proceeds of an initial public
offering of the Company were to exceed $50 million at an offering price of at
least $7.00 per share. Such conversion occurred as part of the recapitalization
at which time the Notes (including cumulative accretion) had a recorded balance
of $37.1 million. Issued with the convertible subordinated promissory notes
were warrants valued at $7.5 million, which were canceled as a part of the
recapitalization.
F-137
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
In December 1995, the Company's shareholders approved a stock option plan
(the "1995 Plan") and, in November 1996, the Company's shareholders approved a
Non-Employee Director Stock Option Plan (the "1996 Non-Employee Director Plan")
(together, the "Option Plans"). The Option Plans authorize the granting of
options to purchase up to an aggregate of 2,150,000 shares of Class A Common
Stock. The 1995 Plan provides for employees, officers and consultants of the
Company to be granted options to purchase Class A Common Stock of two types:
(i) those that qualify as incentive stock options ("Incentive Options") within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended,
and (ii) those that do not qualify as Incentive Options ("Nonstatutory
Options"). All options granted under the 1996 Non-Employee Director Plan are
Nonstatutory Options. The Option Plans are administered by the Compensation
Committee. Under the 1995 Plan, the Compensation Committee determines the
persons who are to receive options, the terms and the number of shares subject
to each option and whether the option is to be an Incentive Option or a
Nonstatutory Option. The options vest equally over a four or five year period,
and are exercisable over ten years from the date of grant. The 1996 Non-
Employee Director Plan provides for the automatic, non-discretionary, grant of
options. Information regarding the Option Plans is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
Shares Weighted Shares Weighted Shares Weighted
Under Average Under Average Under Average
Option Exercise Option Exercise Option Exercise
Plan Exercise Price Price Plan Exercise Price Price Plan Exercise Price Price
------- -------------- -------- ------- -------------- -------- ------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year.. 690,000 $7.75-$36.00 $19.58 439,700 $11.50-$36.00 $26.55 -- -- --
Granted............. 60,000 $6.19-$10.00 $ 8.20 260,300 $ 7.75-$12.00 $ 8.04 475,300 $11.50-$36.00 $26.62
Exercised........... (2,500) $13.75 $13.75 -- -- -- -- -- --
Forfeited........... (42,600) $7.75-$27.00 $17.12 (10,000) $11.50-$27.00 $24.45 (35,600) $27.00-$28.50 $27.45
------- ------------ ------ ------- ------------- ------ ------- ------------- ------
Outstanding at end
of year............ 704,900 $6.19-$36.00 $18.82 690,000 $ 7.75-$36.00 $19.58 439,700 $11.50-$36.00 $26.55
Exercisable at end
of year............ 217,547 $7.75-$36.00 $21.87 103,946 $ 7.75-$36.00 $23.64 11,000 $11.50 $11.50
Weighted average
fair value of
options granted.... $5.92 $5.24 $17.72
</TABLE>
As of December 31, 1998, the outstanding stock options granted in 1996 have
a remaining contractual life of approximately seven years and the outstanding
stock options granted in 1997 have a remaining contractual life of
approximately eight years.
The Company accounts for the Option Plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for the
Option Plans been determined consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123),
the Company's pro forma net loss and pro forma loss per share would have been
as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C> <C>
Net loss........................... As Reported $(56,603) $(87,306) $(104,959)
Pro Forma $(58,418) $(88,670) $(112,750)
Net loss per share--basic and
diluted........................... As Reported $(.63) $(.97) $(1.17)
Pro Forma $(.65) $(.99) $(1.26)
</TABLE>
F-138
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rates of 5.1% in 1998 and 6.3% in 1997;
expected life of 10 years for 1998 and 1997; expected volatility of 57.3% in
1998 and 39.5% in 1997.
4.Commitments and Contingencies
Regulatory Matters
USSB II, Inc. (a wholly owned subsidiary of the Company) holds a license
from the Federal Communications Commission (the "FCC") to broadcast from five
transponders at 101(degrees) west longitude (the "License"). The Company must
continue to maintain the License to operate its business. The License expires
in June 2004 and is renewable at ten-year intervals. Although the Company
expects to obtain such renewals in the ordinary course, there can be no
assurance that such renewals will be granted.
The construction and launch of broadcasting satellites and the operation of
satellite broadcasting systems are subject to substantial regulation by the
FCC. Under the License, the Company is subject to FCC review primarily for the
following: (i) standards regarding individual satellites (e.g., meeting minimum
financial, legal and technical standards); (ii) avoiding interference with
other satellites; and (iii) complying with rules the FCC has established
specifically for high-power DBS satellite licenses. In addition, uplink
facilities are separately licensed by the FCC. The Company's National Broadcast
Center and the Auxiliary Broadcast Center have each received its FCC license.
FCC rules are subject to change in response to industry developments, new
technology and political considerations.
The FCC granted the Company a Construction Permit and Launch Authority (the
"Permit"), held by USSB II, for satellites with three transponders at
110(degrees) west longitude and eight transponders at 148(degrees) west
longitude. On June 24, 1998, the Company voluntarily returned to the FCC its
authorization for eight transponders at 148(degrees) west longitude. The return
of the authorization at 148(degrees) west longitude had no effect on the status
of the Company's Permit for the 110(degrees) orbital location.
The Permit requires the Company to comply with specified construction and
launch schedules. The FCC has the authority to revoke the Permit for the
110(degrees) orbital location if the Company fails to comply with the FCC
schedule for construction and launch. Under the Merger Agreement, the Company
and Hughes have agreed to cooperate and use their reasonable best efforts to
maintain the Permit at the 110(degrees) orbital location. In connection
therewith, the Company and Hughes have jointly filed an application for
modification of authorization to move the DBS-1 satellite, which presently
operates at the 101(degrees) orbital location, to the 110(degrees) orbital
location to satisfy the FCC's due diligence requirements. On April 1, 1999, the
FCC staff issued an order approving the transfer of control of the FCC
authorization for construction at the 110(degrees) orbital location to DIRECTV,
conditioned upon DIRECTV initiating service on the three transponders
authorized at the 110(degrees) orbital location by December 31, 1999.
Under the Merger Agreement, on December 17, 1998, Hughes, DIRECTV
Enterprises, Inc., a wholly-owned subsidiary of Hughes, and the Company also
filed applications with the FCC requesting consent to the transfer of control
of all of the FCC authorizations held by USSB II, Inc. to Hughes. The FCC
staff's April 1, 1999 order also approved the transfer of control of the FCC
license for five transponders at the 101(degrees) orbital location and related
earth station licenses to DIRECTV.
Any petition requesting reconsideration by the FCC staff, or application for
review by the full Commission, must be filed by May 3, 1999. In addition, the
FCC may determine to review the April 1, 1999 order on its own motion until May
11, 1999. Absent any of the foregoing, the April 1, 1999 order will become
final on May 12, 1999.
F-139
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
While the Company has generally been successful to date with respect to
compliance with regulatory matters, there can be no assurance that the Company
will succeed in obtaining and maintaining all requisite regulatory approvals
for its operations.
Lockheed Martin Astro Space Agreement
The Company originally entered into contracts with Lockheed Martin for the
construction of direct broadcast satellites at the 110(degrees) orbital
location (the "110(degrees) Contract") and at the 148(degrees) orbital location
(the "148(degrees) Contract"). As required by the Merger Agreement, the Company
has canceled the 110(degrees) Contract and has allowed the 148(degrees)
Contract to expire in accordance with its terms. Both actions were effective
December 31, 1998. The Company has recorded charges related to these
cancellations, which represent the total amount of the charges associated with
such cancellations (See Note 2).
Advertising and Promotions
The Company has entered into commitments to purchase or participate in joint
purchases of broadcast, print and other media for advertising and promotional
purposes. At December 31, 1998, such commitments totaled $4.0 million due
through June 30, 1999, with the non-cancelable portion of such commitments
totaling $3.0 million.
Insurance
The Company maintains business interruption and in-orbit insurance coverages
at levels management considers necessary to address the normal risks of
operating via communications satellite, including damage, destruction or
failure of the satellite or its transponders. Additionally, the Company
maintains general liability and directors' and officers' insurance coverages.
Satellite
All of the Company's programming is carried on a single satellite, DBS-1,
which the Company co-owns with DIRECTV, a subsidiary of Hughes Electronics
Corporation. As previously reported, a spacecraft control processor ("SCP")
aboard the DBS-1 satellite failed on July 4, 1998, and control of DBS-1 was
automatically switched to the spare SCP without interruption of service. In
connection with the execution of the Merger Agreement, DIRECTV and the Company
entered into a Channel Services Provision Agreement which provides that,
subject to the terms of that Agreement, DIRECTV will provide to USSB, on a full
time basis, channel capacity and related services on two other satellites owned
by Hughes at the 101(degrees) orbital location sufficient to transmit and
deliver a limited number of premium movie services to USSB subscribers. At the
same time, the Company and Hughes also entered into a Replacement Payload
Option Agreement which clarifies USSB's right to transponder capacity on a
replacement satellite, in the event the Merger Agreement is terminated due to
the failure of the transponders on DBS-1. The Replacement Payload Option
Agreement provides that USSB may elect to purchase five transponders at a fixed
price on DIRECTV 1-R, a satellite under construction by Hughes.
Litigation
In November 1996, Personalized Media Communications, L.L.C. ("PMC")
initiated legal proceedings against the Company and others before the United
States International Trade Commission ("ITC"), and in the United States
District Court for the Northern District of California. The Company does not
believe that PMC is entitled to damages or any remedies from the Company, and
management intends to vigorously defend both actions.
In June 1997, IPPV Enterprises, a Georgia partnership ("IPPV") initiated a
legal proceeding against the Company and others in the United States District
Court for the District of Delaware. The Company does not
F-140
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
believe that IPPV is entitled to damages or any remedies from the Company, and
management intends to vigorously defend the action.
In September 1998, WIC Premium Television, Ltd., an Edmonton, Alberta,
Canada corporation, ("WIC") initiated two separate legal proceedings in the
Federal Court of Canada Trial Division and in the Judicial District of Edmonton
against numerous retailers, programming providers, and programming
distributors, including the Company. This action is in the preliminary stages
of discovery and management has not reached a judgment regarding whether WIC
may be entitled to damages or any remedies from the Company.
Item 3 of this Report on Form 10-K contains additional information on these
matters.
The Company is also exposed to other litigation encountered in the normal
course of business. In the opinion of management, the resolution of these other
litigation matters of which the Company is aware will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
Manufacturer Incentive Program
On August 26, 1996, the Company, together with DIRECTV, entered into
financial incentive arrangements with certain manufacturers of DIRECTV/USSB
System equipment to assist these manufacturers in lowering the price of
DIRECTV/USSB Systems. Such arrangements, which run for up to four years
depending on manufacturer, commit the Company to pay the manufacturers over a
five-year period from the date new DIRECTV/USSB System households are
authorized to receive programming. The expense and liability for such future
commitments are established and recorded upon activation of the related
DIRECTV/USSB System. For the years ended December 31, 1998 and 1997, the
Company charged to expense $44.8 and $66.7 million, respectively, representing
the full amount of those future obligations for the Manufacturer Incentive
program incurred for the sale of DIRECTV/USSB Systems to new households. Cash
paid in 1998 related to the Manufacturers Incentive program was $21.8 million.
Future obligations totaled $102.7 million at December 31, 1998, payable in the
following years:
<TABLE>
<CAPTION>
In Thousands
------------
<S> <C>
1999.............................. $25,579
2000.............................. 25,417
2001.............................. 25,196
2002.............................. 18,250
2003.............................. 8,240
</TABLE>
While the amounts to be incurred in the future by the Company under these
arrangements cannot be precisely estimated, the Company expects that as the
level of retail DIRECTV/USSB system unit sales increase, the cash flow related
to these arrangements will increase accordingly.
The fair value of the future obligation at December 31, 1998 is
approximately $86.0 million and has been calculated by discounting the future
cash flows at the Company's estimated incremental borrowing rate.
5.Related-Party Transactions
Certain officers and directors of the Company are also employed by, and
spend a significant portion of their time on, the businesses of HBI and its
affiliates other than the Company. Each person who is a director has indicated
to the Company that, should a conflict of interest arise, he will promptly
disclose such conflict to the Company's Board of Directors and refrain from
voting on such matter as a director.
F-141
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Due to HBI
Debt due to HBI consists principally of amounts accrued for management
services valued at $10.0 million provided to the Company by HBI during the
years 1992 through 1994 under an agreement which expired June 30, 1994. The
balance does not bear interest. The Company was contingently obligated to pay
these amounts and they will not become due until, in the board of director's
opinion, adequate resources exist. As a result of certain significant financial
performance thresholds, USSB management discontinued accruing the $3.3 million
annual charge after 1992 and did not intend to accrue any additional charges
until and unless it was determined payment could be considered probable. When
the Company decided to proceed with its initial public stock offering, the
board of directors determined that it became likely that certain preconditions
would ultimately be satisfied, and therefore made payment of this obligation
probable. Accordingly, during the quarter ended September 30, 1995, the Company
accrued as an operating expense the remaining $6.7 million of its management
fee obligation. In connection with the execution of the Merger Agreement,
Hughes has agreed to pay the accrued management fee of $10 million to HBI on
the first anniversary of the closing date of the Merger, but not later than
April 1, 2000.
HBI provides certain general and administrative services to the Company
under an agreement that is renewed annually. The Company incurred a charge of
$1,252,000 for such services for the year ended December 31, 1998, $1,124,000
for 1997, and $978,000 for 1996. The Company also purchases programming,
engineering services and other services from other entities affiliated with
HBI. Amounts included in the accompanying consolidated statements of operations
which were purchased from these affiliated entities were $4.6 million in 1998,
$5.4 million in 1997, and $3.8 million in 1996. The Company believes that the
services provided between the Company and HBI and its subsidiaries and
affiliates, and by entities with which certain directors are affiliated, are on
terms comparable to those available from third parties and that such terms are
reasonable.
Other
The Company's employees participate in a 401(k) plan sponsored by HBI. Under
the terms of the plan, the Company may make annual base contributions and can
match participant contributions for each year. HBI made contributions to the
plan on behalf of the Company's employees (which amounts were reimbursed by the
Company) of $237,000 for the year ended December 31, 1998, $157,000 during 1997
and $116,000 during 1996.
F-142
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6.Income Taxes
The Company's deferred tax assets and liabilities, all of which are long-
term, are summarized as follows (in thousands):
Deferred Tax Asset (Liability)
<TABLE>
<CAPTION>
As of December 31
-------------------
1998 1997
-------- ---------
<S> <C> <C>
Deferred tax assets:
Manufacturer Incentive.............................. 41,073 $ 30,983
Preoperating capitalized costs...................... 314 2,201
Capitalized interest................................ -- 181
Management services................................. 4,000 4,337
Other............................................... 3,800 3,995
Net operating loss carryforward..................... 137,738 121,825
-------- ---------
Total deferred tax assets......................... 186,925 163,522
Deferred tax liabilities:
Depreciation........................................ (15,951) (15,149)
Total deferred tax liability...................... (15,951) (15,149)
-------- ---------
Valuation allowance................................... 170,974 (148,373)
-------- ---------
Net deferred tax balance.......................... $ -- $ --
======== =========
</TABLE>
The Company has net operating losses for federal tax reporting purposes
totaling $344.3 million available for carryover to subsequent years as of
December 31, 1998, expiring in years 2000 through 2014. The valuation allowance
applied against the Company's net deferred tax assets increased by $22.6
million for the year ended December 31, 1998, $37.5 million for 1997, and $39.3
million for 1996.
The Company and HBI file separate federal tax returns and a combined state
tax return in Minnesota and New Mexico. HBI has benefited from this unitary
relationship as it has utilized USSB losses to reduce its combined income
subject to apportionment in Minnesota and New Mexico through December 31, 1996.
The benefit that HBI realized was approximately $0.1 million for the year ended
December 31, 1998, $0.2 million for 1997, and $1.4 million for 1996. This
unitary relationship has reduced the Company's Minnesota net operating loss
carryforward. Benefits realized by HBI in years preceding 1994 were not
significant. Under a tax sharing agreement dated November 30, 1995, HBI has
agreed to reimburse the Company for such benefits in the year they would
otherwise have been realized by the Company. In connection with the execution
of the Merger Agreement, HBI has agreed to pay Hughes, as the successor to the
Company, an amount sufficient to satisfy this obligation on the first
anniversary of the closing date of the Merger, but not later than April 1,
2000.
F-143
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7.Quarterly Condensed Financial Information (Unaudited)
Summarized unaudited quarterly data for 1998 and 1997 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Full Year
------------- -------------- ------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
1998
Revenues................ $136,839 $132,710 $136,567 $144,685 $550,801
Cost of Sales........... 84,656 78,742 80,225 84,053 327,676
-------- -------- -------- -------- --------
Gross Margin............ 52,183 53,968 56,342 60,632 223,125
Operating Expenses...... 62,316 62,899 66,204 92,425 283,844
-------- -------- -------- -------- --------
Net Operating Loss...... (10,133) (8,931) (9,862) (31,793) (60,719)
Other (income) expense,
net.................... (1,004) (1,041) (1,132) (939) (4,116)
-------- -------- -------- -------- --------
Net Loss................ (9,129) (7,890) (8,730) (30,854) (56,603)
======== ======== ======== ======== ========
Weighted Average Shares
Outstanding............ 89,811 89,811 89,811 89,811 89,811
======== ======== ======== ======== ========
Net loss per share--
basic and diluted...... $ (0.10) $ (0.09) $ (0.10) $ (0.34) $ (0.63)
======== ======== ======== ======== ========
1997
Revenues................ $ 99,231 $114,236 $114,383 $128,769 $456,619
Cost of Sales........... 64,930 73,223 73,557 81,207 292,917
-------- -------- -------- -------- --------
Gross Margin............ 34,301 41,013 40,826 47,562 163,702
Operating Expenses...... 57,925 51,620 70,082 76,197 255,824
-------- -------- -------- -------- --------
Net Operating Loss...... (23,624) (10,607) (29,256) (28,635) (92,122)
Other (income) expense,
net.................... (1,174) (1,324) (1,109) (1,209) (4,816)
-------- -------- -------- -------- --------
Net Loss................ (22,450) (9,283) (28,147) (27,426) (87,306)
======== ======== ======== ======== ========
Weighted Average Shares
Outstanding............ 89,812 89,811 89,811 89,821 89,811
======== ======== ======== ======== ========
Net loss per share--
basic and diluted...... $ (0.25) $ (0.10) $ (0.31) $ (0.31) $ (0.97)
======== ======== ======== ======== ========
</TABLE>
F-144
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits No. Description Page No.
------------ ----------- --------
<C> <S> <C>
*2.1 Agreement and Plan of Merger among General Motors
Corporation, Hughes Electronics Corporation and United
States Satellite Broadcasting Company, Inc. dated
December 11, 1998 (incorporated by reference to
Exhibit 2(a) to the Current Report on Form 8-K of
General Motors Corporation filed December 17, 1998
(the "December 8-K")).
*2.2 Shareholders Agreement dated December 11, 1998 among
General Motors Corporation, Hughes Electronics
Corporation, Hubbard Broadcasting, Inc., Stanley S.
Hubbard, Stanley E. Hubbard and Robert W. Hubbard
(incorporated by reference to Exhibit 2(b) to the
December 8-K).
*2.3 Asset Purchase Agreement among PRIMESTAR, Inc.,
PRIMESTAR Partners L.P., PRIMESTAR MDU, Inc., the
stockholders of PRIMESTAR, Inc. and Hughes Electronics
Corporation, dated as of January 22, 1999
(incorporated by reference to Exhibit 99.1 to the
Current Report on Form 8-K of General Motors
Corporation filed February 2, 1999 (the "February 8-
K")).
*2.4 Asset Purchase Agreement among PRIMESTAR, Inc.,
PRIMESTAR Partners L.P., Tempo Satellite, Inc., the
stockholders of PRIMESTAR, Inc. and Hughes Electronics
Corporation, dated as of January 22, 1999
(incorporated by reference to Exhibit 99.2 to the
February 8-K).
**3.1 Amended and Restated Certificate of Incorporation of
Hughes Electronics Corporation.
**3.2 Bylaws of Hughes Electronics Corporation.
**4.1 Specimen form of certificate representing Common Stock
of Hughes Electronics Corporation.
**10.1 Revolving Credit Agreement (364-day Facility), dated
as of December 5, 1997 among Hughes Network Systems,
Inc. to be renamed Hughes Electronics Corporation, the
Banks named therein and Bank of America National Trust
and Savings Association as Administrative Agent,
Morgan Guaranty Trust Company of New York, as
Syndication Agent, Citicorp USA, Inc. and The Chase
Manhattan Bank as Documentation Agents (the "364-day
Facility").
**10.2 First Amendment to the 364-day Facility, dated as of
December 3, 1998.
**10.3 Revolving Credit Agreement (Multi-Year Facility),
dated as of December 5, 1997 among Hughes Network
Systems, Inc. to be renamed Hughes Electronics
Corporation, the Banks named therein and Bank of
America National Trust and Savings Association as
Administrative Agent, Morgan Guaranty Trust Company of
New York, as Syndication Agent, Citicorp USA, Inc. and
The Chase Manhattan Bank as Documentation Agents (the
"Multi-Year Facility").
**10.4 First Amendment to the Multi-Year Facility, dated as
of December 15, 1998.
**10.5 DBS Distribution Agreement between Hughes
Communications Galaxy, Inc. and National Rural
Telecommunications Cooperative, dated April 10, 1992
(the "DBS Agreement").+
**10.6 Addendum I to the DBS Agreement.
**10.7 Amendment No. 1 to the DBS Agreement, dated May 11,
1992.
**10.8 Amendment No. 2 to the DBS Agreement, dated May 26,
1992.
**10.9 Amendment No. 3 to the DBS Agreement, Letter of
Agreement, dated May 29, 1992.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Exhibits No. Description Page No.
------------ ----------- --------
<C> <S> <C>
**10.10 Amendment No. 4 to the DBS Agreement, dated December
1, 1992.
**10.11 Amendment No. 5 to the DBS Agreement, dated December
11, 1992.
**10.12 Amendment No. 6 to the DBS Agreement, dated December
23, 1992.
**10.13 Amendment No. 7 to the DBS Agreement, Letter of
Agreement, dated July 9, 1993.
**10.14 Amendment No. 8 to the DBS Agreement, Letter of
Agreement, dated February 14, 1994.+
**10.15 Amendment No. 9 to the DBS Agreement, Letter of
Agreement, dated June 22, 1994.
*10.16 Loan Agreement, dated May 15, 1997, between Hughes
Network Systems, Inc. and PanAmSat (incorporated by
reference to the Annual Report on Form 10-K for the
year ended December 31, 1997 of PanAmSat Corporation
(PanAmSat's "Form 10-K").
*10.17 First Amendment to Loan Agreement, dated December 23,
1997 (incorporated by reference to PanAmSat's Form 10-
K).
*10.18 Subordination and Amendment Agreement, dated as of
February 20, 1998, among Hughes Electronics
Corporation, PanAmSat and Citicorp USA Inc.
(incorporated by reference to PanAmSat's Form 10-K).
*10.19 Subordination Agreement, dated as of January 16, 1998,
between Hughes Electronics and PanAmSat (incorporated
by reference to PanAmSat's Form 10-K).
*10.20 Credit Agreement, dated February 20, 1998, among
PanAmSat, certain lenders and Citicorp USA
(incorporated by reference to PanAmSat's Form 10-K).
</TABLE>
- --------
* Incorporated by reference.
** Previously filed.
+ Confidential treatment requested for certain portions of this exhibit
pursuant to Rule 406 promulgated under the Securities Act.
2
