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As filed with the Securities and Exchange Commission on July 30, 1999
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements generally can
be identified by use of statements that include phrases such as we "believe,"
"expect," "anticipate," "intend," "plan," "foresee" or other similar words or
phrases. Similarly, statements that describe our objectives, plans or goals
also are forward-looking statements. All of these forward-looking statements
are subject to certain risks and uncertainties that could cause 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 nor 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.
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. We believe it is a meaningful measure of performance and is
commonly used by other large communications, entertainment and media service
providers. EBITDA does not give effect to cash used for debt service
requirements and thus does not reflect funds available for investment in our
business, dividends or other discretionary uses. In addition, EBITDA as
presented in this registration statement may not be comparable to similarly
titled measures reported by other companies. EBITDA margin is calculated by
dividing EBITDA by total revenues.
For the first quarter of 1999, EBITDA, excluding a one-time 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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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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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.
** Filed herewith.
+ 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 Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Hughes Electronics Corporation
By: /s/ Jan L. Williamson
----------------------------------
Name: Jan L. Williamson
Title: Secretary
July 30, 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>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HUGHES ELECTRONICS CORPORATION
Hughes Electronics Corporation, a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. The name of the corporation is Hughes Electronics Corporation. Hughes
Electronics Corporation was originally incorporated under the name Microwave
Associates Gaithersburg, Inc., and the original Certificate of Incorporation of
the Corporation was filed with the Secretary of State of the State of Delaware
on October 17, 1977.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Amended and Restated Certificate of Incorporation amends
and restates the Certificate of Incorporation of the Corporation in its
entirety. This Amended and Restated Certificate of Incorporation was duly
adopted by the Board of Directors of the Corporation and approved by its sole
stockholder.
3. The text of the Amended and Restated Certificate of Incorporation as
heretofore amended and supplemented is hereby amended and restated to read in
its entirety as follows:
ARTICLE I
NAME
The name of the corporation (the "Corporation") is Hughes Electronics
Corporation.
ARTICLE II
REGISTERED AGENT
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of the registered agent at such address is The
Corporation Trust Company.
<PAGE>
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware (the "DGCL").
ARTICLE IV
CAPITAL STOCK
Section 1. The Corporation is authorized to issue 11,000,000 shares of
capital stock, of which (a) 1,000,000 shares shall be Common Stock, $0.01 par
value per share ("Common Stock"), and (b) 10,000,000 shares shall be Preferred
Stock, $0.10 par value per share ("Preferred Stock").
Section 2. Except as otherwise provided by law, the shares of stock of the
Corporation, regardless of class, may be issued by the Corporation from time to
time in such amounts, for such consideration and for such corporate purposes as
the Board of Directors may from time to time determine.
Shares of Preferred Stock may be issued from time to time in one or
more series of any number of shares, provided that the aggregate number of
shares issued and not cancelled of any and all such series shall not exceed the
total number of shares of Preferred Stock authorized by this Amended and
Restated Certificate of Incorporation. The Board of Directors is hereby
authorized to provide by resolution from time to time and, by filing a
certificate pursuant to the DGCL, to establish from time to time the number of
shares to be included in each such series, and to fix the designations, powers,
privileges, preferences and rights of each such series and the qualifications,
limitations and restrictions thereof to the full extent now or hereafter
permitted by this Amended and Restated Certificate of Incorporation and the laws
of the State of Delaware.
Subject to the provisions of applicable law or of the By-laws of the
Corporation with respect to the closing of the transfer books or the fixing of a
record date for the determination of stockholders entitled to vote, and except
as otherwise provided by law or by the resolution or resolutions providing for
the issue of a particular series of Preferred Stock, the holders of outstanding
shares of Common Stock exclusively shall possess the voting power for the
election of directors and for all other purposes, each holder of record of
shares of Common Stock being entitled to one vote for each share of Common Stock
standing in his name on the books of the Corporation.
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase or subscribe for any unissued stock of any class or series or any
additional shares of any class or series to
2
<PAGE>
be issued by reason of any increase of the authorized capital stock of the
Corporation of any class or series, or bonds, certificates of indebtedness,
debentures or other securities convertible into or exchangeable for stock of the
Corporation of any class or series, or carrying any right to purchase stock of
any class or series, but any such unissued stock, additional authorized issue of
shares of any class or series of stock or securities convertible into or
exchangeable for stock, or carrying any right to purchase stock, may be issued
and disposed of pursuant to a resolution of the Board of Directors to such
persons, firms, corporation or associations, whether such holders or others and
upon such terms, as may be deemed advisable by the Board of Directors in the
exercise of its sole discretion.
Section 3. Series A Preferred Stock. The Board hereby authorizes the
------------------------
issuance of a series of 2,669,633 shares of Preferred Stock, par value $0.10 per
share, stated value $561.875 per share, designated as "Series A Preferred Stock"
as follows:
(a) Designation and Amount. The shares of such series shall be
----------------------
designated as "Series A Preferred Stock" (the "Series A Preferred Stock") and
the number of shares constituting such Series A Preferred Stock shall be
2,669,633. Such number of shares may be increased or decreased by resolution of
the Board of Directors; provided that no decrease shall reduce the number of
--------
shares of Series A Preferred Stock to a number less than the number of shares
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation convertible into Series A
Preferred Stock.
(b) Ranking. The Series A Preferred Stock shall rank, with respect to
-------
the payment of dividends and the distribution of assets, on a parity with any
series of the Corporation's Preferred Stock hereafter issued, except to the
extent that it shall be stated in the resolution or resolutions providing for
the issuance of such series of Preferred Stock that the Series A Preferred Stock
shall rank senior to or junior to such series of Preferred Stock.
(c) Dividends.
---------
(1) Holders of outstanding Series A Preferred Stock will be
entitled to receive, subject to the rights of holders of any series of Preferred
Stock of the Corporation ranking senior to the Series A Preferred Stock in
respect of dividends and distributions, when and as declared by the Board of
Directors out of funds legally available therefor, cumulative cash dividends at
the per share annual rate of 6.25% of the per share stated value (equivalent to
$35.1172 per annum per share of Series A Preferred Stock) ("Preferential
Dividends"), payable quarterly for each of the quarters ending March, June,
September and December of each year, payable in arrears on the day that is two
(2) Business Days prior to the first day that is not a legal holiday of each
succeeding May, August, November and February, respectively (each such date
being hereinafter referred to as a "Preferential Dividend Payment Date"). The
first dividend will be paid on July 29, 1999 with respect to the period
commencing on June 24, 1999 and ending on
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<PAGE>
June 30, 1999. The full amount of dividends payable on each share of Series A
Preferred Stock for each full quarterly period thereafter shall be computed by
dividing the annual dividend rate by four. Each such dividend will be payable to
holders of record as they appear on the stock books of the Corporation on such
record dates, as shall be fixed by the Board of Directors (each, a "Dividend
Record Date"). Dividends on the Series A Preferred Stock shall accrue on a daily
basis commencing on the date of issuance of the Series A Preferred Stock and
accrued dividends for each quarterly dividend period shall accumulate, to the
extent not paid, on the Preferential Dividend Payment Date first following the
quarter for which they accrue. Preferential Dividends shall accrue whether or
not the Corporation shall have earnings, whether or not there shall be funds
legally available for the payment of such dividends and whether or not such
dividends are declared. Accumulated dividends shall not bear interest. Dividends
(or cash amounts equal to accrued and unpaid dividends) payable on the Series A
Preferred Stock for any period longer or shorter than a quarterly dividend
period shall be computed on the basis of a 360-day year of twelve 30-day months.
(2) So long as any Series A Preferred Stock shall remain
outstanding, no dividend (other than a dividend payable in shares of common
stock of any class of the Corporation) shall be declared, nor shall the
Corporation make any other distribution or payment or set aside anything of
value for distribution or payment on, or redeem, repurchase or otherwise acquire
any shares of, the common stock of any class of the Corporation or any other
class of stock or series thereof ranking junior to the Series A Preferred Stock
in the payment of dividends (other than a redemption or purchase of shares of
any class of common stock of the Corporation made for purposes of an employee
incentive or benefit plan of the Corporation or any of its subsidiaries) unless
the full Preferential Dividends, if any, accumulated on all outstanding shares
of the Series A Preferred Stock through all past Preferential Dividend Payment
Dates shall have been paid. No dividend shall be declared on any share or shares
of any class of stock of the Corporation or series thereof ranking on a parity
with the Series A Preferred Stock in respect of payment of dividends for any
prior dividend payment period of said parity stock unless there shall have been
declared on all shares then outstanding of the Series A Preferred Stock, for all
dividend payment periods of the Series A Preferred Stock terminating with or
before such prior dividend payment period of said parity stock, like
proportionate dividends determined ratably in proportion to the respective
Preferential Dividends accumulated to date on all outstanding Series A Preferred
Stock and the preferential dividends accumulated on all outstanding shares of
said parity stock.
Section 4. Liquidation Rights.
------------------
(a) In the event of any dissolution, liquidation or winding up of the
affairs of the Corporation, whether voluntary or involuntary (collectively, a
"Liquidation"), after payment or provision for payment has been made of the
debts and other liabilities of the Corporation and payment or provision for
payment has been made for all amounts required to be paid in respect of all
outstanding shares of Preferred Stock or other class of stock of the Corporation
or series thereof ranking senior to the Series A Preferred Stock, the holders of
Series A Preferred Stock shall be entitled to receive, out of the net assets of
4
<PAGE>
the Corporation, for each share $561.875 plus an amount equal to all
Preferential Dividends (whether or not declared) accrued and unpaid thereon
(including dividends accumulated and unpaid) prior to the date fixed for
distribution, and no more. After such amount is paid in full, no further
distributions or payments shall be made in respect of Series A Preferred Stock,
such Series A Preferred Stock shall no longer be deemed to be outstanding or be
entitled to any other powers, preferences or rights, including any voting rights
available under law, and such Series A Preferred Stock shall be surrendered for
cancellation to the Corporation.
(b) The full amount payable to the holders of Series A Preferred Stock
shall be paid before any distribution shall be made to the holders of any class
of common stock of the Corporation or any other class of stock or series thereof
ranking junior to the Series A Preferred Stock with respect to the distribution
of assets upon a Liquidation. No payment on account of any Liquidation shall be
made to the holders of any class or series of stock ranking on a parity with the
Series A Preferred Stock in respect of the distribution of assets upon
Liquidation unless there shall likewise be paid at the same time to the holders
of the Series A Preferred Stock like proportionate amounts determined ratably in
proportion to the full amounts to which the holders of all outstanding Series A
Preferred Stock and the holders of all outstanding shares of such parity stock
are respectively entitled with respect to such distribution.
(c) If the assets distributable to the holders of Series A Preferred
Stock on any Liquidation shall be insufficient to permit the payment to such
holders of the full amounts to which they are entitled in such circumstances,
then such assets or the proceeds thereof shall be distributed among such holders
ratably in proportion to the sums which would be payable to such holders if all
such sums were paid in full.
(d) Neither the merger nor consolidation of the Corporation into or with
any other corporation, nor the merger or consolidation of any other corporation
into or with the Corporation, nor a sale, transfer or lease of all or any part
of the assets of the Corporation, shall be deemed to be a Liquidation for
purposes of this Section 4.
(e) Written notice of any Liquidation, stating the payment date or dates
when and the place or places where the amounts distributable in such
circumstances shall be payable, shall be given by first class mail, postage
prepaid, not less than thirty (30) days prior to any payment date stated
therein, to the holders of record of the Series A Preferred Stock at their
respective addresses as the same shall appear on the books of the Corporation or
any transfer agent for the Series A Preferred Stock.
Section 5. Voting Rights. Except as otherwise provided by law, the
-------------
holders of Series A Preferred Stock shall not be entitled to vote on any matter
on which the holders of any voting securities of the Corporation shall be
entitled to vote.
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<PAGE>
Section 6. Redemption.
----------
(a) Conversion of Series H Preference Shares. If and to the extent all
----------------------------------------
or any portion of the then outstanding shares of Series H 6.25% Automatically
Convertible Preference Stock, par value $0.10 per share (the "Series H
Preference Shares"), issued by General Motors Corporation, a Delaware
corporation ("GM"), are converted pursuant to the terms of the Certificate of
Designations of the Series H Preference Shares (the "Certificate of
Designations") into shares of Class H Common Stock, par value $0.10 per share,
of GM ("Class H Shares"), or other securities, cash or other property into which
the Class H Shares have been converted or exchanged as contemplated by Section
6(iv)(a) of the Certificate of Designations, the Corporation shall
automatically, upon and as of the effective time of such conversion of Series H
Preference Shares, redeem the same number of shares of Series A Preferred Stock
as shall equal the number of Series H Preference Shares that have been so
converted, for cash in the amount of the Redemption Price per share of Series A
Preferred Stock hereinafter provided. The "Redemption Price" for a share of
Series A Preferred Stock shall equal the Fair Market Value (as hereinafter
defined), on the date of conversion of the Series H Preference Shares giving
rise to the redemption of Series A Preferred Stock, of the Class H Shares, or
other securities, cash or other property into which each Series H Preference
Share has been converted.
(b) Tax Redemption of Series H Preference Shares. In the event that the
--------------------------------------------
Series H Preference Shares are to be redeemed as a result of a Tax Redemption
(as defined in the Certificate of Designations), the following provisions shall
apply.
(1) In the event that the Tax Redemption Price (as defined in the
Certificate of Designations) is to be paid in cash by GM, then the redemption
price for each share of Series A Preferred Stock shall be the amount in cash
equal to the redemption price to be paid for each Series H Preference Share.
(2) In the event that the Tax Redemption Price is to be paid in
Hughes Preference Shares (as defined in the Certificate of Designations) by GM,
then the redemption price for each share of Series A Preferred Stock shall be
such number of Hughes Preference Shares as shall be delivered in respect of such
redemption of each Series H Preference Share and the shares of Series A
Preferred Stock shall be redeemed automatically upon and as of the date of
redemption of the Series H Preference Shares giving rise to the redemption of
the Series A Preferred Stock.
(3) In the event that the Tax Redemption Price is to be paid in
shares of Common Stock of the Corporation by GM, then the redemption price for
each share of Series A Preferred Stock shall be such number of shares of Common
Stock of the Corporation as shall be delivered in respect of such redemption of
each Series H Preference Share and the shares of Series A Preferred Stock shall
be redeemed automatically upon and as of the date of redemption of the Series H
Preference Shares giving rise to the redemption of the Series A Preferred Stock.
6
<PAGE>
(4) In the event that the Tax Redemption Price is to be paid in
Class H Shares by GM, then the redemption price for each share of Series A
Preferred Stock shall be cash in an amount equal to the Redemption Price (as
defined in Section 6(a) above).
(5) In the event that the Series H Preference Shares are to be
acquired by the Corporation in consideration for the payment of the Tax
Redemption Price by the Corporation, then the redemption price for each share of
Series A Preferred Stock shall be one Series H Preference Share so acquired by
the Corporation in connection with such Tax Redemption.
(6) In the event that the Tax Redemption Price is to be paid in
any consideration other than cash or Hughes Preference Shares, then the
redemption price for each share of Series A Preferred Stock shall include, in
addition to the payment required by the foregoing provisions of this Section 6,
an amount in cash (or, at GM's option, the equivalent value in Class H Shares or
Common Stock of the Corporation) equal to the present value of the remaining
Preferential Dividends on the Series A Preferred Stock calculated from the date
of such Tax Redemption through June 24, 2002 discounted at an annual rate equal
to the interest rate on U.S. Treasury obligations having comparable maturities
plus 50 basis points, as provided by Section 8 of the Certificate of
Designations.
(c) Special Distributions. In the event that GM determines to effect
---------------------
either (i) a dividend or distribution to holders of Class H Shares of Equity
Units (as defined in the Certificate of Designations) in Spinco (as defined in
the Certificate of Designations) or (ii) an exchange of Equity Units in Spinco
for Class H Shares on a pro rata basis, in either case as contemplated by
Section 6(iii)(d)(II) of the Certificate of Designations, then, except as
otherwise provided in this Section 6(c), effective as of the date of the payment
or making of such dividend, distribution or exchange, (x) the Corporation shall
make a special distribution, in respect of each share of Series A Preferred
Stock, of such number of Spinco Preference Shares (as defined in the Certificate
of Designations) as in such event are to be distributed by GM in respect of each
Series H Preference Share, and (y) the liquidation preference and stated value
of each share of Series A Preferred Stock shall be reduced by the amount by
which the liquidation preference and stated value of each Series H Preference
Share shall be reduced in respect of such event, all as provided by Section
6(iii)(d)(II) of the Certificate of Designations; provided, however, that (1) if
-------- -------
GM elects pursuant to the second paragraph of Section 6(iii)(d)(II) of the
Certificate of Designations, in lieu of making a special distribution on the
Series H Preference Shares of Spinco Preference Shares, to adjust the Exchange
Rate (as defined in the Certificate of Designations) and Optional Conversion
Rate (as defined in the Certificate of Designations) of the Series H Preference
Shares, then no special distribution in respect of the Series A Preferred Stock
and no reduction in the liquidation preference and stated value thereof shall be
required and (2) if GM elects pursuant to the third paragraph of Section
6(iii)(d)(II) of the Certificate of Designations to issue Greater Spinco
Preference Shares (as defined in the Certificate of Designations), then the
Corporation shall, effective as of the date of payment or making of such
dividend, distribution or exchange
7
<PAGE>
and delivery of Greater Spinco Preference Shares to GM in cancellation of the
Series H Preference Shares, redeem all of the Series A Preferred Stock for such
Greater Spinco Preference Shares.
(d) Definition of Fair Market Value. For purposes of this Section 6,
-------------------------------
unless otherwise agreed by GM and the Corporation, "Fair Market Value" shall
mean: (1) with respect to Class H Shares, in the event that the Class H Shares
are publicly traded, "Fair Market Value" as defined in Section 13 of the
Certificate of Designations or (2) with respect to Class H Shares, in the event
that the Class H Shares are not publicly traded, and with respect to any other
securities, cash or other property, the fair market value thereof as mutually
agreed by the Board of Directors of the Corporation and GM.
(e) Miscellaneous. Except as provided in this Section 6, the Series A
-------------
Preferred Stock is not otherwise redeemable. In the event that less than all of
the Series A Preferred Stock are to be redeemed at any time, selection of the
shares of Series A Preferred Stock to be so redeemed shall be made on a pro rata
basis, by lot or by such method that the Board deems fair and appropriate.
Section 7. Outstanding Shares. Upon any redemption date, the Series A
------------------
Preferred Stock subject thereto shall cease to be outstanding and shall
automatically be canceled effective as of the time specified in this Article,
and each holder of a certificate previously evidencing any such Series A
Preferred Stock shall cease to have any rights with respect thereto, other than
the right to receive the redemption payment provided therefor. If any Series A
Preferred Stock shall cease to be outstanding for any reason, such shares shall
be retired and thereupon restored to the status of authorized but unissued
shares of Preferred Stock, par value $0.10 per share, of the Corporation
undesignated as to series.
Section 8. Severability of Provisions. Whenever possible, each provision
--------------------------
hereof shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision hereof is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof. If a court of competent
jurisdiction should determine that a provision hereof would be valid or
enforceable if a period of time were extended or shortened or a particular
percentage were increased or decreased, then such court may make such change as
shall be necessary to render the provision in question effective and valid under
applicable law.
Section 9. Reversion to Corporation. Subject to applicable escheat laws,
------------------------
any monies set aside by the Corporation in respect of any payment with respect
to shares of the Series A Preferred Stock, or dividends thereon, and unclaimed
at the end of two years from the date upon which such payment is due and payable
shall revert to the general funds of the Corporation, after which reversion the
holders of such shares shall look only to the general funds of the Corporation
for the payment thereof. Any interest accrued on funds so deposited shall be
paid to the Corporation from time to time.
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<PAGE>
Section 10. Definitions. For purposes of the Series A Preferred Stock,
-----------
the term "Business Day" shall mean any day other than a Saturday or Sunday or
------------
any other day on which banks in the State of New York or the State of California
are authorized or required by law or executive order to close.
Section 11. Miscellaneous.
-------------
(a) All notices referred to herein shall be in writing, and all notices
hereunder shall be deemed to have been given upon the earlier of receipt thereof
or three (3) Business Days after the mailing thereof if sent by registered mail
(unless first-class mail shall be specifically permitted for such notice under
the terms of this Article) with postage prepaid, addressed: if to the
Corporation, to its offices at 200 North Sepulveda Boulevard, El Segundo,
California 90245 (Attention: Secretary), or to the transfer agent for the
Series A Preferred Stock, as provided by Section 11(d) below, or other agent of
the Corporation designated as permitted by this Article, or, if to any holder of
the Series A Preferred Stock, to such holder at the address of such holder as
listed in the stock record books of the Corporation (which may include the
records of any transfer agent for the Series A Preferred Stock, if appropriate),
or to such other address as the Corporation or holder, as the case may be, shall
have designated by notice similarly given.
(b) In the event a holder of Series A Preferred Stock shall not by
written notice designate the name to whom payment upon redemption of Series A
Preferred Stock should be made or the address to which the certificate or
certificates representing, or other evidence of ownership of, such shares, or
such payment, should be sent, the Corporation shall be entitled to register such
shares, and make such payment, in the name of the holder of such Series A
Preferred Stock as shown on the records of the Corporation and to send the
certificate or certificates representing such shares, or such payment, to the
address of such holder shown on the records of the Corporation.
(c) All payments in the form of dividends and distributions upon any
Liquidation or otherwise made upon the Series A Preferred Stock and any other
shares of stock ranking on a parity with the Series A Preferred Stock with
respect to such dividend or distribution shall be made pro rata, so that amounts
paid per share on the Series A Preferred Stock and such other shares of stock
shall in all cases bear to each other the same ratio that the required
dividends, distributions or payments, as the case may be, payable per share on
the Series A Preferred Stock and such other shares of stock bear to each other.
(d) The Corporation may appoint, and from time to time discharge and
change, a transfer agent for the Series A Preferred Stock. Initially, the
Secretary of the Corporation shall serve as the transfer agent, registrar and
dividend disbursing agent for the Series A Preferred Stock.
9
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ARTICLE V
BY-LAWS
The Board of Directors of the Corporation is expressly authorized to make,
alter or repeal by-laws of the Corporation, but the stockholders may make
additional by-laws and may alter or repeal any by-law whether adopted by them or
otherwise.
ARTICLE VI
DIRECTORS
Section 1. Elections. Elections of directors need not be by written
---------
ballot except and to the extent provided by the by-laws of the Corporation.
ARTICLE VII
LIMITED LIABILITY; INDEMNIFICATION
Section 1. Right to Indemnification. Each person who was or is made a
-------------------------
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative in
nature, including any appeal (hereinafter a "proceeding"), by reason of the fact
that such person (or a person of whom such person is the legal representative)
is or was a director or officer of the Corporation or, while a director or
officer of the Corporation, is or was serving at the request or for the benefit
of the Corporation as a director, officer, trustee, partner, member, employee,
other fiduciary or agent of another corporation or of a partnership, joint
venture, limited liability company, trust or other enterprise, including service
with respect to employee benefit plans or public service or charitable
organizations, whether the basis of such claim or proceeding is any actual or
alleged action or omission in any such capacity or otherwise as a result of
serving in any such capacity, shall be indemnified and held harmless by the
Corporation to the fullest extent from time to time permitted by the DGCL
against all expense and liability (including without limitation, attorneys' fees
and disbursements, court costs, damages, fines, amounts paid or to be paid in
settlement, and excise taxes or penalties) reasonably incurred or suffered by
such person in connection therewith and such indemnification may continue as to
a person who has ceased to be a director, officer, employee or agent of the
Corporation and may inure to the benefit of such person's heirs, executors and
administrators. The Corporation, by provisions in its Bylaws or by agreement,
may accord to any current or former director, officer, employee or agent of the
Corporation the right to, or regulate the manner of providing to any current or
former director, officer, employee or agent of the Corporation, indemnification
to the extent permitted by law.
Section 2. Advance of Expenses. The Corporation to the fullest extent
-------------------
permitted by the DGCL shall advance to any person who is or was a director or
officer of the Corporation (or to the legal representative thereof) any and all
expenses (including,
10
<PAGE>
without limitation, attorneys fees and disbursements and court costs) reasonably
incurred by such person in respect of any proceeding to which such person (or a
person of whom such person is a legal representative) is made a party or
threatened to be made a party by reason of the fact that such person is or was a
director or officer of the Corporation or, while a director or officer of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, trustee, partner, member, employee, other fiduciary or agent of another
corporation or a partnership, joint venture, limited liability company, trust or
other enterprise, including service with respect to employee benefit plans or
public service or charitable organizations; provided, however, that, to the
-------- -------
extent the DGCL requires, the payment of such expenses in advance of the final
disposition of the proceeding shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such person, to repay all
amounts so advanced if it shall ultimately be determined that such person is not
entitled to be indemnified against such expense under this Section (2) or
otherwise. The Corporation by provisions in its Bylaws or by agreement may
accord any current or former director, officer, employee or agent of the
Corporation the right to, or regulate the manner of providing to any such
person, such advancement of expenses to the fullest extent permitted by law.
Section 3. Right of Claimant to Bring Suit. If a claim under section (1)
-------------------------------
or (2) of this Article Seventh is not paid in full by the Corporation within 60
calendar days after a written claim therefor has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also to the expense
of prosecuting such claim. It shall be a defense to any such action (other than
an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation) that the claimant has
not met the standard of conduct which makes it permissible under the DGCL for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because the claimant has met the applicable standard of conduct set forth in the
DGCL, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
Section 4. Non-Exclusivity of Rights. Any right to indemnification and
-------------------------
advancement of expenses conferred as permitted by this Article Seventh shall not
be exclusive of any other right which any person may have or hereafter acquire
under any statute (including the DGCL), any other provision of the certificate
of incorporation of the Corporation, any agreement, any vote of stockholders or
the Board of Directors or otherwise.
11
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Section 5. Insurance. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any director, officer, employee or agent of the
Corporation or of another corporation or a partnership, joint venture, limited
liability company, trust or other enterprise against any expense, liability or
loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the DGCL.
Section 6. Severability. If any provision of this Article shall be held
------------
to be invalid, illegal or unenforceable as applied to any circumstance for any
reason whatsoever: (1) the validity, legality and enforceability of such
provision in any other circumstance and of the remaining provisions of this
Article (including, without limitation, each portion of any paragraph of this
Article containing any such provision held to be invalid, illegal or
unenforceable that is not itself held to be invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby and (2) to the fullest
extent possible, the provisions of this Article (including, without limitation,
each such portion of any paragraph of this Article containing any such provision
held to be invalid, illegal or unenforceable) shall be construed so as to permit
the Corporation to protect its directors, officers, employees and agents from
personal liability in respect of their good faith service to or for the benefit
of the Corporation to the fullest extent permitted by law.
Section 7. Limited Liability. A director of the Corporation shall not be
-----------------
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for any liability imposed by
law (as in effect from time to time) (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders, (ii) for any act or omission
not in good faith or which involved intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit.
Neither the amendment nor the repeal of this Article Seventh shall eliminate or
reduce the effect thereof in respect of any matter occurring, or any cause of
action, suit or claim that, but for this Article Seventh would accrue or arise,
prior to such amendment or repeal.
12
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IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
has been signed by Jan Williamson, Secretary, the Corporation's authorized
officer, this 30th day of June 1999.
HUGHES ELECTRONICS CORPORATION
/s/ Jan Williamson
________________________________
By: Jan Williamson
Title: Secretary
13
<PAGE>
Exhibit 3.2
[LOGO]
HUGHES ELECTRONICS CORPORATION
BY-LAWS
================================================================================
Dated as of May 2, 1999
<PAGE>
HUGHES ELECTRONICS CORPORATION
BY-LAWS
================================================================================
Dated as of May 2, 1999
TABLE OF CONTENTS
ARTICLE I - MEETINGS OF STOCKHOLDERS
1.1. Annual................................................... 1
1.2. Special.................................................. 1
1.3. Notice of Meetings....................................... 1
1.4. List of Stockholders Entitled to Vote.................... 1
1.5. Quorum................................................... 1
1.6. Organization............................................. 2
1.7. Voting; Proxies.......................................... 2
1.8. Fixing Date for Determination of Stockholders of Record.. 2
1.9. Adjournments............................................. 2
1.10. Judges.................................................. 2
ARTICLE II - BOARD OF DIRECTORS
2.1. Responsibility and Number................................ 2
2.2. Election; Resignation; Vacancies......................... 2
2.3. Regular Meetings......................................... 2
2.4. Special Meetings......................................... 2
2.5. Quorum; Vote Required for Action......................... 2
2.6. Organization............................................. 2
2.7. Transactions with Corporation............................ 2
2.8. Ratification............................................. 2
2.9. Informal Action by Directors............................. 2
2.10. Telephonic Meetings Permitted........................... 2
ARTICLE III - COMMITTEES
3.1. Committees of the Board of Directors..................... 2
3.2. Committees of the Corporation............................ 2
3.3. Election and Vacancies................................... 2
3.4. Procedure; Quorum........................................ 2
3.5. Executive Committee...................................... 2
3.6. Executive Compensation Committee......................... 2
3.7. Audit Committee.......................................... 2
<PAGE>
ARTICLE IV - OFFICERS
4.1. Elected Officers......................................... 2
4.2. Chairman of the Board of Directors....................... 2
4.3. Vice Chairmen of the Board of Directors.................. 2
4.4. President................................................ 2
4.5. Executive Vice Presidents................................ 2
4.6. Senior Vice Presidents................................... 2
4.7. Vice Presidents.......................................... 2
4.8. Chief Financial Officer.................................. 2
4.9. Treasurer................................................ 2
4.10. Secretary............................................... 2
4.11. Controller.............................................. 2
4.12. General Counsel......................................... 2
4.13. Subordinate Officers.................................... 2
4.14. Resignation, Removal, Suspension and Vacancies.......... 2
ARTICLE V - INDEMNIFICATION
5.1. Right to Indemnification of Directors and Officers....... 2
5.2. Advancement of Expenses of Directors and Officers........ 2
5.3. Claims by Officers or Directors.......................... 2
5.4. Indemnification of Employees............................. 2
5.5. Advancement of Expenses of Employees..................... 2
5.6. Non-Exclusivity of Rights................................ 2
5.7. Other Indemnification.................................... 2
5.8. Insurance................................................ 2
5.9. Amendment or Repeal...................................... 2
ARTICLE VI - MISCELLANEOUS
6.1. Offices.................................................. 2
6.2. Certificates............................................. 2
6.3. Seal..................................................... 2
6.4. Fiscal Year.............................................. 2
6.5. Notice................................................... 2
6.6. Waiver of Notice......................................... 2
6.7. Voting of Stocks Owned by the Corporation................ 2
6.8. Form of Records.......................................... 2
6.9. Amendment of By-Laws..................................... 2
6.10. Gender Pronouns......................................... 2
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HUGHES ELECTRONICS CORPORATION
A Delaware Corporation
BY-LAWS
ARTICLE I - MEETINGS OF STOCKHOLDERS
1.1. Annual. The annual meeting of stockholders for the election of directors
and the transaction of such other business as may properly be brought before the
meeting shall be held on such date and at such place and time as the chairman of
the board or the board of directors shall designate.
1.2. Special. Special meetings of stockholders may be called by the board of
directors or the chairman of the board of directors at such place, date and time
and for such purpose or purposes as shall be set forth in the notice of such
meeting.
1.3. Notice of Meetings. Written notice of each meeting of stockholders shall
be given by the chairman of the board and/or the secretary in compliance with
the provisions of Delaware law.
1.4. List of Stockholders Entitled to Vote. The secretary shall prepare, at
least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof and may be
inspected by any stockholder who is present.
1.5. Quorum. At each meeting of stockholders, except where otherwise provided
by law or the certificate of incorporation or these by-laws, the holders of one-
third of the voting power of the outstanding shares of stock entitled to vote at
the meeting, present in person or by proxy, shall constitute a quorum. In the
absence of a quorum, the stockholders so present may, by majority vote, adjourn
the meeting from time to time in the manner provided in Section 1.9 of these by-
laws until a quorum shall attend. Shares of its own stock belonging to the
corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the corporation, shall neither be entitled to vote nor be counted
for quorum purposes; provided, however, that the foregoing shall not limit the
right of the corporation to vote stock, including but not limited to its own
stock, held by it in a fiduciary capacity.
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1.6. Organization. The chairman of the board of directors, a vice chairman, the
president or an executive vice president, or in their absence a vice president,
shall preside at meetings of the stockholders. The secretary of the corporation
shall act as secretary, but in the secretary's absence the presiding officer may
appoint a secretary.
1.7. Voting; Proxies. Each stockholder shall be entitled to vote in accordance
with the number of shares and voting powers of the voting shares held of record
by the stockholder. Each stockholder entitled to vote at a meeting of
stockholders may authorize another person or persons to act for the stockholder
by proxy, but such proxy, whether revocable or irrevocable, shall comply with
the requirements of Delaware law. Voting at meetings of stockholders, on other
than the election of directors, need not be by written ballot unless the holders
of a majority of the outstanding shares of all classes of stock entitled to vote
thereon present in person or by proxy at such meeting shall so determine. At
all meetings of stockholders for the election of directors a plurality of the
voting power of the shares of stock present in person or represented by proxy
and entitled to vote shall be sufficient. All other elections and questions
shall, unless otherwise provided by law or by the certificate of incorporation
or these by-laws, be decided by the vote of the holders of a majority of the
voting power of the shares of stock entitled to vote thereon present in person
or by proxy at the meeting.
1.8. Fixing Date for Determination of Stockholders of Record. In order that the
corporation may determine the stockholders entitled: (a) to notice of or to vote
at any meeting of stockholders or any adjournment thereof; (b) to express
consent to corporate action in writing without a meeting; (c) to receive payment
of any dividend or other distribution or allotment of any rights; or (d) to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the board of directors may fix a
record date. The record date shall not precede the date upon which the
resolution fixing the record date is adopted by the board of directors and which
record date: (a) in the case of determination of stockholders entitled to vote
at any meeting of stockholders or adjournment thereof, shall not be more than
sixty nor less than ten days before the date of such meeting; (b) in the case of
determination of stockholders entitled to express consent to corporate action in
writing without a meeting, shall not be more than ten days from the date upon
which the resolution fixing the record date is adopted by the board of
directors; and (c) in the case of any other action, shall not be more than sixty
days prior to such other action. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the board of directors may
fix a new record date for the adjourned meeting.
1.9. Adjournments. Any meeting of stockholders, annual or special, may adjourn
from time to time to reconvene at the same or some other place, and notice need
not be given of any such adjourned meeting if the time and place thereof are
announced at the meeting at which the
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adjournment is taken. At the adjourned meeting the corporation may transact any
business which might have been transacted at the original meeting. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
1.10. Judges. All votes by ballot or at any meeting of the stockholders shall
be conducted by two judges appointed for the purpose, either by the directors or
by the chairman of the meeting. The judges shall decide upon the qualifications
of voters, count the votes and declare the results.
ARTICLE II - BOARD OF DIRECTORS
2.1. Responsibility and Number. The business and affairs of the corporation
shall be managed by or under the direction of a board of directors. The number
of directors shall be determined from time to time by resolution of the board of
directors.
2.2. Election; Resignation; Vacancies. At each annual meeting of stockholders,
the stockholders shall elect directors each of whom shall hold office for a term
commencing on the date of the annual meeting of stockholders, or such later date
as shall be determined by the board of directors and ending on the next annual
meeting of stockholders or until a successor is elected and qualified. Any
director may resign at any time upon written notice to the chairman of the board
or to the secretary. Any vacancy occurring in the board of directors for any
cause may be filled by a majority of the remaining members of the board of
directors, although such majority is less than a quorum. Each director so
elected shall hold office concurrent with the term of other directors or until a
successor is elected and qualified.
2.3. Regular Meetings. Unless otherwise determined by resolution of the board
of directors, a meeting of the board of directors for the election of officers
and the transaction of such other business as may come before it shall be held
as soon as practicable following the annual meeting of stockholders, and other
regular meetings of the board of directors shall be held on a day and at such
place and time as the chairman of the board shall designate.
2.4. Special Meetings. Special meetings of the board of directors may be called
by the chairman of the board of directors, a vice chairman or the president, and
shall be called by the secretary at the request in writing of one-third of the
directors then in office. Notice of a special meeting of the board of directors
shall be given by the secretary at least twenty-four hours before the special
meeting.
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2.5. Quorum; Vote Required for Action. At all meetings of the board of
directors, a majority of the whole board shall constitute a quorum for the
transaction of business, with no less than one outside board member in
attendance as a part of the quorum. Except in cases in which applicable law,
the certificate of incorporation or these by-laws otherwise provide, the vote of
a majority of the directors present at a meeting at which a quorum is present
shall be the act of the board of directors.
2.6. Organization. The chairman of the board of directors, or in the chairman's
absence the president, or in their absence a member of the board selected by the
members present, shall preside at meetings of the board. The secretary of the
corporation shall act as secretary of the meetings of the board of directors,
but when absence the presiding officer may appoint a secretary for the meeting.
2.7. Transactions with Corporation. No contract or transaction between the
corporation and one or more of its directors, or between the corporation and any
other corporation, partnership, association, or other organization in which one
or more of its directors or officers are directors or officers, or have a
financial interest, shall be void or voidable for this reason, or solely because
the director or officer is present at or participates in the meeting of the
board or committee thereof which authorizes the contract or transaction, or
solely because their votes are counted for such purpose: (1) if the material
facts as to the director's relationship or interest and as to the contract or
transaction are disclosed or are known to the board of directors or the
committee, and the board or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or (2)
if the material facts as to the director's relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (3) if the contract or
transaction is fair as to the corporation as of the time it is authorized,
approved or ratified, by the board of directors, a committee thereof, or the
stockholders.
Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the board of directors or of a committee which authorizes
the contract or transaction.
2.8. Ratification. Any transaction questioned in any stockholders' derivative
suit on the ground of lack of authority, defective or irregular execution,
adverse interest of director, officer or stockholder, non-disclosure,
miscomputation, or the application of improper principles or practices of
accounting may be ratified before or after judgment, by the board of directors
or by the stockholders in case less than a quorum of directors are qualified;
and, if so ratified, shall have the same force and effect as if the questioned
transaction had been originally duly authorized, and said ratification shall be
binding upon the corporation and its stockholders and shall constitute a bar to
any claim or execution of any judgment in respect of such questioned
transaction.
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2.9. Informal Action by Directors. Unless otherwise restricted by the
certificate of incorporation or these by-laws, any action required or permitted
to be taken at any meeting of the board of directors, or of any committee
thereof, may be taken without a meeting if all members of the board or such
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the board or committee.
2.10. Telephonic Meetings Permitted. Members of the board of directors, or any
committee designated by the board, may participate in a meeting of such board or
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this by-law shall constitute presence
in person at such meeting.
ARTICLE III - COMMITTEES
3.1. Committees of the Board of Directors. The board of directors may, by
resolution passed by a majority of the whole board, designate one or more
committees, consisting of one or more of the directors of the corporation, to be
committees of the board of directors ("committees of the board"). All
committees of the board may authorize the seal of the corporation to be affixed
to any papers which may require it. To the extent provided in any resolution of
the board of directors or these by-laws, and to the extent permissible under the
laws of the State of Delaware and the certificate of incorporation, any such
committee shall have and may exercise all the powers and authority of the board
of directors in the management of the business and affairs of the corporation.
The following committees may be standing committees of the board: the executive
committee, the executive compensation committee and the audit committee. The
board of directors may designate, by resolution adopted by a majority of the
whole board, additional committees of the board and may prescribe for each such
committee such powers and authority as may properly be granted to such
committees in the management of the business and affairs of the corporation.
3.2. Committees of the Corporation. The board of directors or the chairman of
the board may designate committees of the corporation. Such committees shall
consist of such officers of the corporation or a parent corporation as the board
of directors or the chairman shall determine.
Each committee of the corporation shall have and may exercise such powers,
authority and responsibilities as the board of directors, the executive
committee, or the chairman shall determine, and as may properly be granted to
such committee under the laws of the State of Delaware, the certificate of
incorporation and these by-laws. The powers, authority and responsibilities
thereby granted may include the powers, authority and responsibilities which may
be granted to officers of the corporation.
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3.3. Election and Vacancies. The members and chairmen of each standing
committee of the board shall be elected annually by the board of directors at
its first meeting after each annual meeting of stockholders or at any other time
the board of directors shall determine. The members of other committees of the
board may be elected at such time as the board may determine. Vacancies in any
committee of the board may be filled at such time and in such manner as the
board of directors shall determine.
3.4. Procedure; Quorum. Except to the extent otherwise provided in these by-
laws or any resolution of the board of directors, each committee of the board
and each committee of the corporation may fix its own rules of procedure.
The members necessary to constitute a quorum of any committee of the board or
committee of the corporation shall be a majority of the members thereof, or such
larger number as shall be set forth in the by-laws, or as shall be determined
from time to time by resolution of the board of directors but in no event less
than two. The vote of a majority of the members present at a meeting of a
committee of the board or committee of the corporation at which meeting a quorum
is present shall be the act of the committee unless the certificate of
incorporation, the by-laws or a resolution of the board of directors shall
require the vote of a greater number.
3.5. Executive Committee. The chairman of the board shall be the chairman of
the executive committee. Other members of the executive committee shall be
selected by the board of directors. During the interval between meetings of the
board of directors, the executive committee shall have and may exercise all the
powers, authority and responsibilities of the board of directors in the
management of the business and affairs of the corporation, to the extent
permissible under the laws of the State of Delaware or the certificate of
incorporation. The executive committee shall have the power and authority to
declare both regular and special dividends.
3.6. Executive Compensation Committee. The board of directors shall select the
members of the executive compensation committee and shall designate the chairman
of the committee. No officer of the corporation shall be a member of the
committee. No member of the committee shall be eligible to participate in any
plan falling within the jurisdiction of the committee. The committee shall have
and may exercise the powers and authority granted to it by any incentive
compensation plan for employees of the corporation or any of its subsidiaries,
and such other powers, authority and responsibilities as may be determined by
the board of directors.
The committee shall determine the compensation of: (a) employees of the
corporation who are directors of the corporation; and (b) after receiving and
considering the recommendation of the chairman of the board of directors and the
president of the corporation, all other employees of the
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corporation who are officers of the corporation or who occupy such other
positions as may be designated by the committee.
Where any employee benefit or incentive compensation plan affects employees of
the corporation or its subsidiaries and the compensation of such employees is
determined or subject to review by the committee, such plan shall first be
submitted to the committee for its review. Any such plan or amendment or
modification shall be made effective with respect to such employees only if and
to the extent approved by the committee.
3.7. Audit Committee. The board of directors shall select the members of the
audit committee and shall designate the chairman of the committee. No officer
of the corporation shall be a member of the audit committee. The members of the
audit committee shall not be eligible to participate in any incentive
compensation plan for employees of the corporation or any of its subsidiaries.
The selection by the committee of accountants for the ensuing calendar year
shall be made annually in advance of the annual meeting of stockholders and
shall be submitted to the stockholders for ratification or rejection at such
meeting. The audit committee shall have and may exercise such powers, authority
and responsibilities as are normally incident to the functions of an audit
committee or as may be determined by the board of directors.
ARTICLE IV - OFFICERS
4.1. Elected Officers. The officers of the corporation shall be elected
annually by the board of directors. There shall be a chairman of the board, a
president, one or more vice presidents, a chief financial officer, a secretary,
a treasurer, a controller and a general counsel. The chairman of the board and
the president shall be members of the board of directors. The board of
directors may also elect persons to hold such other offices as the board of
directors shall determine, including one or more vice chairmen of the board,
executive vice presidents and senior vice presidents. A person may hold any
number of offices. Elected officers shall hold their offices at the pleasure of
the board of directors, or until their earlier resignation.
4.2. Chairman of the Board of Directors. The chairman of the board of directors
shall be the chief executive officer of the corporation and shall have the
general executive responsibility for the conduct of the business and affairs of
the corporation. The chairman of the board shall preside at meetings of the
stockholders and shall have and exercise such other powers, authority and
responsibilities as the board of directors may determine.
In the absence of or during the disability of the chairman of the board, the
president shall have and exercise the powers, authority and responsibilities of
the chairman of the board.
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4.3. Vice Chairmen of the Board of Directors. The board of directors may elect
one or more vice chairmen of the board of directors who shall be members of the
board of directors. Each vice chairman shall have such powers and shall perform
such duties as may be assigned to the Vice Chairmen by the board of directors or
the chairman of the board.
4.4. President. The president shall be the chief operating officer of the
corporation and shall have general operational responsibility for the world-wide
operations of the corporation and the production and marketing of the
corporation's principal products and services. The president shall have and
exercise such other powers, authority and responsibilities as the board of
directors may determine.
In the absence of or during the disability of the president, the chairman of the
board shall have and exercise the powers, authority and responsibilities of the
president.
4.5. Executive Vice Presidents. The board of directors may elect one or more
executive vice presidents of the corporation with such powers, authority and
responsibilities as may be determined by the board of directors.
4.6. Senior Vice Presidents. The board of directors may elect one or more
senior vice presidents of the corporation with such powers, authorized
responsibilities as may be determined by the board of directors.
4.7. Vice Presidents. The board of directors may elect one or more vice
presidents of the corporation with such powers, authority and responsibilities
as may be determined by the board of directors.
4.8. Chief Financial Officer. The board of directors may elect a chief
financial officer with such powers, authority and responsibilities as may be
determined by the board of directors.
4.9. Treasurer. The board of directors may elect a treasurer with such powers,
authority and responsibilities as may be determined by the board of directors.
The treasurer shall have custody of all funds and securities of the corporation
and shall perform all acts incident to the position of treasurer. The records
books and accounts of the office of the treasurer shall, during the usual hours
for business at the office of the treasurer, be open to the examination of any
director.
4.10. Secretary. The board of directors shall elect a secretary of the
corporation with such powers, authority and responsibilities as may be
determined by the board of directors or the chairman of the board. The
secretary shall keep the minutes of all meetings of stockholders and
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directors and of such committees as directed. The secretary shall give all
required notices and shall have charge of such books and papers as the board of
directors may require. The secretary shall submit such reports to the board of
directors or to any of the committees of the board or committees of the
corporation as the board of directors or any such committee may require. Any
action or duty required to be performed by the secretary may be performed by an
assistant secretary.
4.11. Controller. The board of directors may elect a controller with such
powers, authority and responsibilities as may be determined by the board of
directors. The controller shall be in charge of the accounts of the corporation
and shall perform all acts incident to the position of controller. The
controller shall submit such reports and records to the board of directors or to
any of the committees of the board or committees of the corporation as the board
of directors or any such committee may require.
4.12. General Counsel. The board of directors shall elect a general counsel who
shall be the chief legal officer of the corporation. The general counsel shall
have general control of all matters of legal import concerning the corporation
and shall have such other powers, authority and responsibilities as may be
determined by the board of directors or the chairman of the board.
4.13. Subordinate Officers. The board of directors may, from time to time,
appoint one or more assistant secretaries, assistant treasurers, assistant
controllers, and such other subordinate officers as the board of directors may
deem advisable. Such subordinate officers shall have such powers, authority and
responsibilities as the board of directors may from time to time determine. The
board of directors may grant to any other committee of the board, committee of
the corporation or chairman of the board the power and authority to appoint
subordinate officers and to prescribe their respective terms of office, powers,
authority and duties. Such subordinate officers shall hold their positions at
the pleasure of the board of directors or the appropriate committee.
In the interval between annual organizational meetings of the board of directors
the chairman of the board shall have the power and authority to appoint such
subordinate officers. Such subordinate officers shall serve until the first
meeting of the board of directors immediately following the annual meeting of
stockholders.
4.14. Resignation, Removal, Suspension and Vacancies. Any officer may resign at
any time by giving written notice to the chairman of the board, the president or
the secretary. Unless stated in the notice of resignation, the acceptance
thereof shall not be necessary to make it effective. It shall take effect at
the time specified therein or, in the absence of such specification, it shall
take effect upon the receipt thereof.
Any officer elected by the board of directors may be suspended or removed at any
time by the affirmative vote of a majority of the whole board. Any subordinate
officer of the corporation
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appointed by the board of directors or a committee of the board, or committee of
the corporation, may be suspended or removed at any time by a majority vote of a
quorum of the board of directors, or of the committee appointing such
subordinate officer.
The chairman of the board may suspend the powers, authority, responsibilities
and compensation of any elected officer or appointed subordinate officer for a
period of time sufficient to permit the board or the appropriate committee a
reasonable opportunity to consider and act upon a resolution relating to the
reinstatement, further suspension or removal of such person.
As appropriate, the board of directors or the chairman of the board may fill any
vacancy created by the resignation, death, retirement or removal of an officer
in the same manner as provided for the election or appointment of such person.
ARTICLE V - INDEMNIFICATION
5.1. Right to Indemnification of Directors and Officers. Subject to the other
provisions of this article, the corporation shall indemnify and advance expenses
to every director and officer (and to such person's heirs, executors,
administrators or other legal representatives) in the manner and to the full
extent permitted by applicable law as it presently exists, or may hereafter be
amended, against any and all amounts (including judgments, fines, payments in
settlement, attorneys' fees and other expenses) reasonably incurred by or on
behalf of such person in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative ("a proceeding"), in which such director or officer was or is made
or is threatened to be made a party or is otherwise involved by reason of the
fact that such person is or was a director or officer of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee, fiduciary or member of any other corporation, partnership, joint
venture, trust, organization or other enterprise. The corporation shall not be
required to indemnify a person in connection with a proceeding initiated by such
person if the proceeding was not authorized by the board of directors of the
corporation.
5.2. Advancement of Expenses of Directors and Officers. The corporation shall
pay the expenses of directors and officers incurred in defending any proceeding
in advance of its final disposition ("advancement of expenses"); provided,
however, that the payment of expenses incurred by a director or officer in
advance of the final disposition of the proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should be ultimately determined that the director or officer is
not entitled to be indemnified under this article or otherwise.
5.3. Claims by Officers or Directors. If a claim for indemnification or
advancement of expenses by an officer or director under this article is not paid
in full within ninety days after a written claim therefor has been received by
the corporation, the claimant may file suit to recover
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the unpaid amount of such claim and, if successful in whole or in part, shall be
entitled to be paid the expense of prosecuting such claim. In any such action
the corporation shall have the burden of proving that the claimant was not
entitled to the requested indemnification or advancement of expenses under
applicable law.
5.4. Indemnification of Employees. Subject to the other provisions of this
article, the corporation may indemnify and advance expenses to every employee
who is not a director or officer (and to such person's heirs, executors,
administrators or other legal representatives) in the manner and to the full
extent permitted by applicable law as it presently exists, or may hereafter be
amended against any and all amounts (including judgments, fines, payments in
settlement, attorneys' fees and other expenses) reasonably incurred by or on
behalf of such person in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative ("a proceeding"), in which such employee was or is made or is
threatened to be made a party or is otherwise involved by reason of the fact
that such person is or was an employee of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee, fiduciary or
member of any other corporation, partnership, joint venture, trust, organization
or other enterprise. The ultimate determination of entitlement to
indemnification of employees who are not officers and directors shall be made by
the board of directors or by a committee of the board of directors in such
manner as the board or such committee shall determine. The corporation shall
not be required to indemnify a person in connection with a proceeding initiated
by such person if the proceeding was not authorized by the board of directors of
the corporation.
5.5. Advancement of Expenses of Employees. The advancement of expenses of an
employee who is not an officer or director shall be made by or in the manner
provided by resolution of the board of directors or by a committee of the board
of directors or of the corporation.
5.6. Non-Exclusivity of Rights. The rights conferred on any person by this
Article V shall not be exclusive of any other rights which such person may have
or hereafter acquire under any statute, provision or the certificate of
incorporation, these by-laws, agreement, vote of stockholders or disinterested
directors or otherwise.
5.7. Other Indemnification. The corporation's obligation, if any, to indemnify
any person who was or is serving at its request as a director, officer or
employee of another corporation, partnership, joint venture, trust, organization
or other enterprise shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture, trust,
organization or other enterprise.
5.8. Insurance. The board of directors may, to the full extent permitted by
applicable law as it presently exists, or may hereafter be amended from time to
time, authorize an appropriate officer
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or officers to purchase and maintain at the corporation's expense insurance: (a)
to indemnify the corporation for any obligation which it incurs as a result of
the indemnification of directors, officers and employees under the provisions of
this Article V; and (b) to indemnify or insure directors, officers and employees
against liability in instances in which they may not otherwise be indemnified by
the corporation under the provisions of this Article V.
5.9. Amendment or Repeal. Any repeal or modification of the foregoing
provisions of this Article V shall not adversely affect any right or protection
hereunder of any person in respect of any act or omission occurring prior to the
time of such repeal or modification.
ARTICLE VI - MISCELLANEOUS
6.1. Offices. The registered office of the corporation shall be located at 1209
Orange Street, Wilmington, New Castle County, Delaware, and the name of the
registered agent in charge thereof shall be The Corporation Trust Company. The
corporation may also have other offices without as well as within the State of
Delaware. The books of the corporation may be kept outside the State of
Delaware.
6.2. Certificates. Every holder of stock shall be entitled to have a
certificate signed by or in the name of the corporation by the chairman or a
vice chairman of the board of directors, or the president or a vice president,
and by the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of the corporation, certifying the number of shares owned in the
corporation. The form of such certificates and the signatures thereon shall
comply with the requirements of Delaware law. The corporation shall maintain a
record of the holders of each certificate and transfer stock and issue new
certificates to replace lost, stolen or destroyed certificates only pursuant to
the applicable requirements of Delaware law as they presently exist, or may be
amended from time to time.
6.3. Seal. The corporate seal shall have inscribed upon it the name of the
corporation, the year of its organization and the words "Corporate Seal," and
"Delaware." The seal shall be in the charge of the secretary. Duplicate seals
may be kept and used by any assistant secretary.
6.4. Fiscal Year. The fiscal year of the corporation shall be such fiscal year
as is established from time to time by resolution of the board of directors.
6.5. Notice. Any notice required to be given by these by-laws may be given
personally or it may be given in writing by depositing the notice in the post
office or letter box in a postpaid envelope directed to such address as appears
on the books of the corporation, or, in default of other
12
<PAGE>
address, to the general post office in Wilmington, New Castle County, Delaware.
Such notice shall be deemed to be given at the time of mailing, except as
otherwise provided in these by-laws. In addition, except as otherwise required
by law or these by-laws, notice need not be given of any adjourned meeting other
than by announcement at the meeting which is being adjourned.
6.6. Waiver of Notice. Whenever any notice is required to be given, a waiver
thereof in writing, signed by the person or persons entitled to the notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto. Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders, directors, or members of a committee of directors need be
specified in any written waiver of notice.
6.7. Voting of Stocks Owned by the Corporation. The board of directors or the
chairman of the board may authorize any person, and delegate to one or more
other officers, the authority to authorize any person in behalf of the
corporation to attend, vote and grant proxies to be used at any meeting of
stockholders of any corporation in which the corporation may hold stock.
6.8. Form of Records. Any records maintained by the corporation in the regular
course of its business, including its stock ledger, books of account, and minute
books, may be kept on, or be in the form of, punch cards, magnetic tape,
photographs, microphotographs, or any other information storage device, provided
that the records so kept can be converted into clearly legible form within a
reasonable time. The corporation shall so convert any records so kept upon the
request of any person entitled to inspect the same.
6.9. Amendment of By-Laws. The board of directors shall have power to adopt,
amend or repeal the by-laws at any regular or special meeting of the directors.
The stockholders shall also have power to adopt, amend or repeal the by-laws at
any annual or special meeting.
6.10. Gender Pronouns. Whenever the masculine pronoun is used herein it shall
be deemed to refer to either the masculine or the feminine gender.
13
<PAGE>
SPECIMEN COMMON STOCK CERTIFICATE (FRONT)
- -------------------------------------------------------------------------------
Number Shares
- --------------------- [LOGO] ---------------------
Common Stock
HUGHES ELECTRONICS CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP
THIS CERTIFIES THAT
SEE REVERSE FOR
CERTAIN DEFINITIONS
SPECIMEN
is the owner of
FULLY PAID AND NONASSESSABLE OF THE $.01 PAR VALUE COMMON STOCK OF
HUGHES ELECTRONICS CORPORATION
transferable only on the books of the corporation by the holder hereof in person
or by attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this certificate to
be signed by its duly authorized offers and its Corporate Seal to be forever
affixed this ____ day of ____, ____.
Dated:
CORPORATE SEAL
SPECIMEN SPECIMEN
/s/ Signature /s/ Signature
- ----------------------------- -----------------------------
Secretary President
SPECIMEN COMMON STOCK CERTIFICATE (REVERSE)
- -------------------------------------------------------------------------------
HUGHES ELECTRONICS CORPORATION
The shares represented by this Certificate have not been registered under the
Securities Act of 1933, as amended, and may not be transferred in the absence of
such registration or any exemption therefrom under such Act, and in compliance
with all applicable state securities or blue sky laws.
FOR VALUE RECEIVED, _______________________ hereby sell, assign and
transfer unto ________ ________ Shares represented by the written Certificate
and do hereby irrevocably constitute and appoint _____________, Attorney to
transfer the said Shares on the books of the written named Corporation with full
power of substitution in the premises.
Dated ______________
In presence of
___________________________________________________
<PAGE>
EXHIBIT 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 herein
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
Arranged by
BancAmerica Robertson Stephens
_____________________________________________________________
[LOGO APPEARS HERE]=============================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1 DEFINITIONS................................................................................... 1
1.1 Definitions.................................................................................... 1
SECTION 2 THE CREDIT.................................................................................... 8
2.1 The Commitments................................................................................ 8
2.2 The Loans...................................................................................... 9
2.3 Requests for Base Rate and Eurodollar Loans.................................................... 9
2.4 Requests for Bid Rate Loans.................................................................... 9
2.5 Interest and Principal on Base Rate Loans...................................................... 10
2.6 Interest and Principal on Eurodollar Loans..................................................... 11
2.7 Interest and Principal on Bid Rate Loans....................................................... 11
2.8 Loan Accounts.................................................................................. 11
2.9 Master Bid Rate Notes.......................................................................... 12
2.10 Conversion of Loans Between Eurodollar Loans and Base Rate Loans and Conversion of
Interest Periods of Eurodollar Loans........................................................... 12
2.11 Disbursements and Payments...................................................................... 13
2.12 Facility Fee.................................................................................... 13
SECTION 3 PAYMENT OF COSTS AND REDUCTION OF THE COMMITMENT.............................................. 14
3.1 Indemnification Upon Failure to Pay Eurodollar Loan or Bid Rate Loan........................... 14
3.2 Increased Costs................................................................................ 14
3.3 Taxes.......................................................................................... 15
3.4 Prepayment..................................................................................... 16
3.5 Pro Rata Reduction of Commitments by Borrower.................................................. 16
3.6 Reduction of One Bank's Commitment by Borrower................................................. 16
3.7 Notice of Reductions........................................................................... 17
3.8 Designation of Replacement Bank................................................................ 17
3.9 Effect of Reduction of Commitment.............................................................. 17
3.10 Accrued Fees................................................................................... 18
3.11 Survival....................................................................................... 18
SECTION 4 CHANGE IN CIRCUMSTANCES AFFECTING LOANS....................................................... 18
4.1 Inability to Determine Eurodollar Rate......................................................... 18
4.2 Illegality..................................................................................... 18
SECTION 5 CONDITIONS PRECEDENT.......................................................................... 19
5.1 Initial Conditions Precedent................................................................... 19
5.2 Conditions Precedent to Loans.................................................................. 19
5.3 Conditions Precedent to Loans.................................................................. 20
SECTION 6 REPRESENTATIONS AND WARRANTIES................................................................ 20
6.1 Authority of Borrower.......................................................................... 21
6.2 Binding Obligations............................................................................ 21
6.3 Incorporation of Restricted Subsidiaries....................................................... 21
6.4 No Contravention............................................................................... 21
6.5 Notices........................................................................................ 21
6.6 Financial Statements........................................................................... 22
6.7 Erisa.......................................................................................... 22
6.8 Regulation U................................................................................... 22
6.9 Taxes.......................................................................................... 22
6.10 Insurance...................................................................................... 22
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
6.11 Liens.......................................................................................... 23
SECTION 7 AFFIRMATIVE COVENANTS OF BORROWER............................................................. 23
7.1 Use of Proceeds of Loans....................................................................... 23
7.2 Management of Business......................................................................... 23
7.3 Notice of Certain Events....................................................................... 23
7.4 Records........................................................................................ 24
7.5 Information Furnished.......................................................................... 24
7.6 Execution of Other Documents................................................................... 24
7.7 Erisa.......................................................................................... 25
7.8 Administrative Agent's Fees.................................................................... 25
7.9 Compliance with Law............................................................................ 25
SECTION 8 NEGATIVE COVENANTS OF BORROWER................................................................ 25
8.1 Liens.......................................................................................... 25
8.2 Mergers, Liquidations and Sales of Assets...................................................... 27
8.3 Defaults....................................................................................... 27
8.4 Compliance with Regulations.................................................................... 27
SECTION 9 EVENTS OF DEFAULT............................................................................. 28
9.1 Events of Default.............................................................................. 28
9.2 Recovery of Amounts Due........................................................................ 31
9.3 Rights Cumulative.............................................................................. 31
SECTION 10 THE BANKS.................................................................................... 31
10.1 Administration of Loan......................................................................... 31
10.2 Representations by Banks....................................................................... 31
SECTION 11 MISCELLANEOUS PROVISIONS..................................................................... 32
11.1 Amendments and Waivers......................................................................... 32
11.2 Notices........................................................................................ 32
11.3 Waiver......................................................................................... 33
11.4 California Law................................................................................. 33
11.5 Headings....................................................................................... 33
11.6 Accounting Terms............................................................................... 33
11.7 Counterparts................................................................................... 33
11.8 Written Disclosure............................................................................. 33
11.9 Singular; Plural............................................................................... 33
11.10 Illegality..................................................................................... 33
11.11 Assignments.................................................................................... 34
11.12 Obligations Several............................................................................ 34
11.13 Participations................................................................................. 34
11.14 Fees and Expenses.............................................................................. 35
11.15 Indemnity...................................................................................... 36
11.16 Confidentiality................................................................................ 36
</TABLE>
EXHIBITS
A-1 Form of Loan Request
A-2 Form of Loan Request - Bid Rate Loans
B Master Bid Rate Loan Note
-ii-
<PAGE>
C Relations Among the Banks and Agents
D Addresses and Lending Offices of Banks
E Existing Liens
F Form of Opinion of General Counsel
SCHEDULE
1 Name of Banks and Commitments
-iii-
<PAGE>
REVOLVING CREDIT AGREEMENT
(364-DAY FACILITY)
THIS REVOLVING CREDIT AGREEMENT (364-DAY FACILITY) ("Agreement") is entered
into as of December 5, 1997 (the "Signing Date") among HUGHES NETWORK SYSTEMS,
INC. (to be renamed HUGHES ELECTRONICS CORPORATION upon completion of the
Reorganization), a corporation organized and existing under the laws of Delaware
("Borrower"), the banks named herein (collectively, together with any other
lenders that become parties hereto pursuant to Section 3.8 or 11.11, the "Banks"
and individually a "Bank"), Bank of America National Trust and Savings
Association, as administrative agent for the Banks (in such capacity
"Administrative Agent"), Morgan Guaranty Trust Company of New York, as
Syndication Agent (in such capacity "Syndication Agent"), and Citicorp USA, Inc.
and The Chase Manhattan Bank as Documentation Agents (in such capacity
"Documentation Agents").
SECTION 1
DEFINITIONS
1.1 Definitions.
-----------
"Applicable Amount" means, for the facility fee and Eurodollar Loans, the
amount (expressed in basis points per annum) set forth in the chart below
opposite the Applicable Level then in effect:
<TABLE>
<CAPTION>
================================================================================
Applicable Amount
(in basis points per annum)
---------------------------------------
Applicable Debt Ratings
Level
Eurodollar Rate Facility Fee
+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
greater than or equal to
1 A+/A1 14.5 4.0
- --------------------------------------------------------------------------------
2 A/A2 15.5 4.5
- --------------------------------------------------------------------------------
3 A-/A3 17.5 5.0
- --------------------------------------------------------------------------------
4 BBB+/Baa1 20.5 7.0
- --------------------------------------------------------------------------------
5 BBB/Baa2 23.5 9.0
- --------------------------------------------------------------------------------
6 BBB-/Baa3 33.0 12.0
================================================================================
</TABLE>
-1-
<PAGE>
"Applicable Level" means the level set forth opposite the Debt Ratings then
in effect. Any change in the Applicable Level shall become effective upon any
public announcement of any change in any Debt Rating that requires a change in
the Level in accordance with the above chart.
"Approved Bank Affiliate" means a Person that is a subsidiary of a Bank or
of a Person of which a Bank is a subsidiary, and which is either engaged
primarily in the business of commercial banking or, if not so engaged, which has
been approved by the Borrower and Administrative Agent (provided that Borrower's
--------
consent shall not be unreasonably withheld).
"Arranger" means BancAmerica Robertson Stephens.
"Authorized Designee" means the chief executive officer, the vice chairman,
the chief financial officer, treasurer or the assistant treasurer of Borrower,
or any other officer of Borrower specified as being an Authorized Designee in
the certificate delivered pursuant to Section 5.2(c).
"Availability Period" means the period commencing on the Effective Date and
ending on the Termination Date.
"Bank of America" means Bank of America National Trust and Savings
Association in its capacity as a Bank.
"Base Rate" means the higher of: (a) the rate of interest publicly
announced from time to time by Bank of America in San Francisco, California, as
its "reference rate," which is a rate set by Bank of America based upon various
factors including Bank of America's costs and desired return, general economic
conditions and other factors, and is used as a reference point for pricing some
loans, which may be priced at, above, or below such announced rate; and (b) one-
half percent per annum above the Federal Funds Rate. Any change in the
reference rate announced by Bank of America shall take effect at the opening of
business on the day specified in the public announcement of such change.
"Base Rate Loan" means a Loan bearing interest based on the Base Rate
calculated pursuant to Section 2.5.
"Bid Rate" means an interest rate offered by a Bank in its sole discretion
and in response to the Borrower's Loan Request for a Bid Rate Loan pursuant to
Section 2.4, which interest rate shall include all applicable reserve and other
adjustments when being advised by such Bank to Administrative Agent.
"Bid Rate Loan" means a Loan bearing interest at a Bid Rate.
"Borrowing Date" means a date on which funds are advanced to Borrower by
one or more Banks pursuant to a Loan Request.
"Business Day" means a day other than a Saturday or Sunday on which banks
are open for business in both San Francisco, California and New York, New York.
-2-
<PAGE>
"Commercial Paper" means short term commercial paper (with a maturity date
not in excess of 270 days from the date of its issuance) issued by Borrower (a)
pursuant to the exemption from registration contained in Section 4(2) of the
Securities Act of 1933, as amended or modified from time to time, or (b)
pursuant to the exemption from registration contained in Section 3(a)(3) of the
Securities Act of 1933, as amended or modified from time to time, with respect
to which a recognized rating agency has taken this Agreement into account in the
rating of such short term commercial paper.
"Commitment" of each Bank means the dollar amount set forth opposite such
Bank's name on Schedule 1 hereto, as such amount may be reduced or changed
pursuant to Sections 3.5 and 3.6. "Total Commitment" means the aggregate amount
of the Commitments.
"Consolidated Adjusted Net Worth" means, as of the date of determination
thereof, the consolidated stockholders equity of Borrower and its Subsidiaries
in accordance with GAAP adjusted by adding back the amount by which such
consolidated stockholders equity has been reduced (or by subtracting the amount
by which stockholders equity has been increased) on account of (a) changes
subsequent to December 31, 1992 in the long term liability of Borrower and its
Subsidiaries for post-retirement benefits other than pensions and (b) specified
material non-cash adjustments resulting from the adoptions of future
pronouncements of the Financial Accounting Standards Board.
"Consolidated Tangible Net Worth" means, at any date of determination,
Consolidated Adjusted Net Worth less the consolidated intangible assets of
----
Borrower and its Subsidiaries, determined in accordance with GAAP.
"Debt Rating" means, as of any date of determination, the rating as
determined by either Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. (collectively, the "Debt Ratings"); of (a) the Borrower's senior
unsecured long-term debt or (b) if the foregoing debt is not outstanding, then
the rating of this bank credit facility or the implied rating of senior
unsecured debt securities, provided that if both ratings in this clause (b) have
-------------
been issued then both shall apply; or (c) if neither (a) nor (b) apply, then the
rating of long-term debt issued by equipment trust guaranteed by Borrower;
provided that if a Debt Rating is issued by both of such rating agencies, then
- -------------
the more credit worthy of such credit ratings shall apply unless the split in
credit ratings is more than one level, in which case the level one level higher
than the lower rating shall apply. Initially, the Debt Ratings shall be
determined from the certificate delivered pursuant to Section 5.2(d).
Thereafter the credit ratings shall be determined from the most recent public
announcement of any changes in such credit ratings.
"Effective Date" means the date the conditions set forth in Section 5.2 are
satisfied or waived by the Banks.
"Eligible Assignee" means a Person which can lawfully fulfill all of the
obligations of a Bank hereunder and is (a) a commercial bank organized under the
laws of the United States, or any state thereof, and having a combined capital
and surplus of at least $100,000,000; (b) a commercial bank organized under the
laws of any other country which is a member of the Organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any such
country, and having a combined capital and surplus of at least
-3-
<PAGE>
$100,000,000, provided that such bank is acting through a branch or agency
located in the country in which it is organized or another country which is also
a member of the OECD; or (c) any Person engaged primarily in the business of
commercial banking and that is a subsidiary of a Bank or of a Person of which a
Bank is a subsidiary.
"ERISA" means the Employee Retirement Income Security Act of 1974, as in
effect from time to time.
"ERISA Affiliate" means any trade or business (whether or not incorporated)
under common control with Borrower or any Subsidiary of Borrower within the
meaning of Section 414(b), 414(c) or 414(m) of Internal Revenue Code of 1986, as
amended.
"Eurodollar Banking Day" means a day on which banks are open for business
in San Francisco, California, New York, New York and the applicable offshore
dollar interbank market and dealing in U. S. Dollar deposits.
"Eurodollar Loan" means a Loan at the rate of interest calculated pursuant
to Section 2.6.
"Eurodollar Rate" means for each Interest Period of a Eurodollar Loan the
arithmetic mean of the rates of interest rounded to the nearest 1/100 of one
percent as notified to the Administrative Agent by the Reference Banks at which
U.S. Dollar deposits for such Interest Period and in an amount comparable to the
Principal Amount of such Eurodollar Loan would be offered by such Reference
Banks to major banks in the London offshore dollar interbank market upon request
of such banks at approximately 11:00 a.m. London time two Eurodollar Banking
Days prior to the first day of such Interest Period.
"Event of Default" means any event specified in Section 9.1.
"Existing Agreements" means (a) the Revolving Credit Agreement dated as of
January 4, 1995, as amended, among Borrower, the banks party thereto and Bank of
America National Trust and Savings Association, as agent for such banks; (b) the
Revolving Promissory Note dated June 16, 1997 in favor of Bank of America
National Trust and Savings Association; (c) the Note dated June 30, 1997 in
favor of Morgan Guaranty Trust Company of New York, and (d) the Promissory Note
dated July 1, 1997 in favor of Citicorp USA, Inc.
"Federal Funds Rate" means, for any day, the rate set forth in the weekly
statistical release designated as H.15(519), or any successor publication,
published by the Federal Reserve Board (including any such successor,
"H.15(519)") for such day opposite the caption "Federal Funds (Effective)". If
on any relevant day such rate is not yet published in H.15(519), the rate for
such day will be the rate set forth in the daily statistical release designated
as the Composite 3:30 p.m. Quotations for U.S. Government Securities, or any
successor publication, published by the Federal Reserve Bank of New York
(including any such successor, the "Composite 3:30 p.m. Quotation") for such day
under the caption "Federal Funds Effective Rate". If on any relevant day the
appropriate rate for such day is not yet published in either H.15(519) or the
Composite 3:30 p.m. Quotations, the rate for such day will be the arithmetic
mean of the rates for the last transaction in overnight Federal funds arranged
prior to 9:00 a.m. (New York time) on that day by each of three leading brokers
of Federal funds transactions in New York City selected by Administrative Agent.
-4-
<PAGE>
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System, or any successor thereto.
"GAAP" means generally accepted accounting principles set forth from time
to time in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the accounting
profession), or in such other statements by such other entity as may be in
general use by significant segments of the U.S. accounting profession, which are
applicable to the circumstances as of the date of determination.
"Interest Payment Date" means, with respect to each Bid Rate Loan and each
Eurodollar Loan, the last day of each Interest Period; provided, however, that
-------- -------
if any Interest Period (a) in the case of a Bid Rate Loan exceeds 90 days and
(b) in the case of a Eurodollar Loan exceeds three months, "Interest Payment
Date" shall mean the 90th day and the last day of the third month of such
Interest Period, respectively, as well as the last day of the relevant Interest
Period; and, with respect to each Base Rate Loan, means the 10th day of each
January, April, July, and October and the Termination Date. If any day
specified herein is not a Business Day or, in the case of a Eurodollar Loan, a
Eurodollar Banking Day, then the relevant Interest Payment Date shall be the
next succeeding Business Day or Eurodollar Banking Day, as applicable, except as
otherwise provided in the definition of Interest Period.
"Interest Period" means: (a) with respect to each Bid Rate Loan, a period
of 7 to 180 days as selected by Borrower by a Loan Request delivered to
Administrative Agent in accordance with Section 2.4, and (b) with respect to
each Eurodollar Loan, a period of one, two, three or six months as selected by
Borrower by a Loan Request delivered to Administrative Agent in accordance with
Section 2.3, subject to the following:
(i) If the term of an Interest Period is not designated, a period of
30 days shall be deemed selected for the relevant Bid Rate Loan and a
period of one month shall be deemed selected for the relevant Eurodollar
Loan;
(ii) The first Interest Period for each Loan shall commence on the
date such Loan is disbursed and each succeeding Interest Period for such
Loan shall commence on the last day of the preceding Interest Period for
such Loan;
(iii) In the case of a Bid Rate Loan, if the last day of an Interest
Period falls on a day that is not a Business Day, the Interest Period
involved shall be extended to the next succeeding Business Day, and the
next succeeding Interest Period shall be measured from the last day of the
Interest Period as so adjusted;
(iv) In the case of a Eurodollar Loan, if the last day of an Interest
Period falls on a day that is not a Eurodollar Banking Day, the Interest
Period involved shall be extended to the next following Eurodollar Banking
Day unless as a result thereof it would fall into the next calendar month,
in which case the end of the Eurodollar Interest Period shall be the
preceding Eurodollar Banking Day, and in either case the next succeeding
-5-
<PAGE>
Eurodollar Interest Period shall be measured from the last day of the
Interest Period as so adjusted;
(v) If an Interest Period for a Eurodollar Loan commences on the last
Eurodollar Banking Day of a calendar month, it shall end on the last
Eurodollar Banking Day of a calendar month; and
(vi) No Interest Period shall end on a day later than the Termination
Date.
"Investment Grade" means a Debt Rating by S&P of BBB- or better and Debt
Rating of Moody's of Baa3 or better.
"Lending Office" means with respect to any Bank as the context shall
require, the branch office of such Bank designated as the Lending Office of such
Bank in Exhibit D attached hereto and incorporated herein by reference; or any
other branch office or affiliate of such Bank hereafter selected and notified to
Borrower and Administrative Agent from time to time by such Bank; provided that
any Bank may from time to time by notice to Borrower and Administrative Agent
designate separate Lending Offices for its Bid Rate Loans, its Eurodollar Loans
and/or its Base Rate Loans, in which case any reference to the Lending Office of
such Bank shall be deemed to refer to any or all of such offices, branches or
affiliates as the context may require.
"Letter Agreement" means that letter agreement among Arranger,
Administrative Agent and Borrower dated October 23, 1997 specifying Arranger's
and Administrative Agent's compensation for services hereunder as such letter
agreement may from time to time be amended, restated, reissued or otherwise
modified.
"Lien" means any trust deed, mortgage, pledge, hypothecation, assignment,
security interest, lien, charge or encumbrance, or preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, the lien of an attachment, judgment or
execution, or any conditional sale or other title retention agreement, any
capitalized lease, and the filing of, or agreement to give, any financing
statement under the Uniform Commercial Code or comparable law of any
jurisdiction, but excluding financing statements filed to give notice of leases
in the ordinary course of business).
"Loan" or "Loans" means the loans described in Section 2, any of which may
be at any time Base Rate Loans, Eurodollar Loans or Bid Rate Loans.
"Loan Request" means a notice given by Borrower pursuant to Section 2.3 or
2.4.
"Majority Banks" means those Banks whose Commitments constitute at least
60% of the Total Commitment as such Total Commitment may be adjusted from time
to time pursuant to the terms of this Agreement.
"Master Bid Rate Note" means a promissory note of Borrower payable to order
of a Bank in substantially the form of Exhibit B hereto in favor of such Bank
evidencing the indebtedness of the Borrower to such Bank resulting from a Bid
Rate Loan made by such Bank.
-6-
<PAGE>
"Material Change" means any adverse change which could reasonably be
expected to materially impair Borrower's ability to timely and fully perform its
obligations under this Agreement, provided that the Reorganization shall not be
deemed a Material Change..
"Moody's" means Moody's Investors Service, Inc.
"Normal Percentage" means, with respect to each Bank, the percentage under
the heading "Normal Percentage" set forth opposite such Bank's name on Schedule
1 hereto, as such amount may be reduced or changed pursuant to Section 3.6 or
Section 11.11.
"Note" means any promissory note delivered pursuant to Section 2.8 or any
Master Bid Rate Note (collectively, the "Notes").
"Person" means any individual, firm, company, corporation, joint venture,
joint-stock company, trust, unincorporated organization, governmental or state
entity, or any association or partnership (whether or not having separate legal
personality) of two or more of the foregoing.
"Plan" means any employee benefit pension plan which is subject to the
provisions of Title IV of ERISA and which is maintained for employees of
Borrower or any Subsidiary.
"Principal Amount" means, when used with reference to any Loan, the amount
requested in the Loan Request relating thereto and made available to Borrower by
the Banks hereunder.
"Principal Repayment Date" means, with respect to each Base Rate Loan, the
Termination Date, and with respect to each Bid Rate Loan and each Eurodollar
Loan, the last day of the Interest Period for such Loan.
"Reference Banks" means Bank of America, Morgan Guaranty Trust Company of
New York and The Chase Manhattan Bank.
"Reorganization" means the transactions contemplated by that certain
Agreement and Plan of Merger dated as of January 16, 1997 by and between HE
Holdings and Raytheon Company including, without limitation the "GM
Transactions" defined therein.
"Reportable Event" means any of the events set forth in Section 4043(b) of
ERISA or the regulations thereunder excluding those events for which the 30-day
notice requirement is waived, a withdrawal from a Plan described in Section 4063
of ERISA, or a cessation of operations described in Section 4062(e) of ERISA.
"Restricted Subsidiaries" means each Subsidiary (i) having assets exceeding
10% of the Consolidated Tangible Net Worth of Borrower and its Subsidiaries on a
consolidated basis or (ii) having operating revenues exceeding 10% of the
operating revenues of Borrower and its Subsidiaries on a consolidated basis, in
each case as shown on the pro forma financial statements dated as of June 30,
1997 and, thereafter, as shown on the audited consolidated financial statements
of Borrower and its Subsidiaries as of the end of the fiscal year immediately
preceding the date of determination; provided, however, that "Restricted
-------- -------
Subsidiary" shall not include any Subsidiary which is a corporation created
solely to purchase receivables from Borrower or any of
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its Subsidiaries, and which would not, in accordance with GAAP, be included in
the consolidated financial statements of Borrower.
"S&P" means Standard & Poor's Ratings Group.
"Signing Date" means the date of this Agreement.
"Subsidiaries" (individually a "Subsidiary") means those corporations or
entities of which Borrower owns more than 50% of the voting securities. If
Borrower, subject to the terms hereof, permits its ownership to fall to 50% or
below of outstanding voting shares of any Subsidiary, such Subsidiary shall
thereupon cease to be a Subsidiary for all purposes hereof.
"Tax" and "Taxes" mean all taxes, levies, imposts, duties, fees or other
charges of whatsoever nature however imposed by any country or any subdivision
or authority of or in that country in any way connected with this Agreement or
any instrument or agreement required hereunder, and all interest, penalties or
similar liabilities with respect thereto, except such taxes as are imposed on or
measured by any Bank's net income or capital and franchise taxes, by the country
or any subdivision or authority of or in that country in which such Bank's
principal office or actual Lending Office is located.
"Termination Date" means December 3, 1998 or if such day is not a Business
Day, the next preceding Business Day.
"Unmatured Event of Default" means an event which with the passage of time
or the giving of notice, or both, would become an Event of Default.
"Voting Stock" means capital stock of Borrower having voting power under
ordinary circumstances to elect directors of Borrower.
"Withdrawal Liability" means, as of any determination date, the aggregate
amount of the liabilities, if any, pursuant to Section 4201 of ERISA if the
Borrower or any ERISA Affiliate made a complete withdrawal from all Plans and
any increase in contributions pursuant to Section 4243 or ERISA.
SECTION 2
THE CREDIT
2.1 The Commitments. (a) From time to time, during the Availability
---------------
Period, each Bank severally agrees to lend to Borrower in U. S. Dollars the
amount set forth opposite such Bank's name on Schedule 1 hereto, subject to
reduction of such amount at Borrower's option, pursuant to Sections 3.5 and 3.6
or otherwise pursuant to Section 2.1(c).
(b) Except as provided in subsection 2.1(d), each Bank shall make
available to Borrower Base Rate Loans and Eurodollar Loans up to the amount of
such Bank's Commitment. In addition, each Bank may, but shall not be required
under any circumstances whatsoever to, make available to Borrower Bid Rate
Loans. Except as provided in subsection 2.1(c), the
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Commitment of any Bank making a Bid Rate Loan shall not be reduced by the amount
of any such Loan or Loans made by such Bank or by any other Bank.
(c) The Principal Amount of Bid Rate Loans made by any Bank may exceed
such Bank's Commitment; provided, however, that the aggregate Principal Amount
-------- -------
of all Bid Rate Loans outstanding under this Agreement shall not exceed the
Total Commitment. The Total Commitment shall be reduced by the Principal Amount
of Bid Rate Loans outstanding so long as such Bid Rate Loans remain outstanding;
and the Commitment of each Bank shall be reduced pro rata.
(d) During any period of time when Bid Rate Loans are outstanding,
additional Eurodollar Loans and Base Rate Loans requested by Borrower shall be
allocated among the Banks in accordance with their Normal Percentage as set
forth in Schedule 1 and without regard to any Bid Rate Loans such Bank may have
outstanding to Borrower. In no event shall Eurodollar Loans, Base Rate Loans
and Bid Rate Loans outstanding hereunder exceed the Total Commitment as adjusted
from time to time pursuant to this Section 2.1.
2.2 The Loans. Each Loan shall be a Base Rate Loan, a Eurodollar Loan or a
---------
Bid Rate Loan and shall be in U. S. Dollars. Each Loan shall be in the minimum
amount of $5,000,000 with any additional amounts in integral multiples of
$1,000,000. This is a revolving credit, and Borrower may, during the
Availability Period, reborrow amounts repaid or prepaid. No Loan nor any part of
any Loan shall be repaid except at the times and in the manner expressly
provided herein.
2.3 Requests for Base Rate and Eurodollar Loans. Each Base Rate Loan and
-------------------------------------------
Eurodollar Loan shall be made upon irrevocable written or telephonic notice,
confirmed promptly in writing, substantially in the form of Exhibit A-1 hereto,
by Borrower to Administrative Agent received by Administrative Agent not later
than 9:00 a.m. California time not less than three (3) Eurodollar Banking Days
prior to the Borrowing Date (which must be a Eurodollar Banking Day) of a
Eurodollar Loan and not later than 9:00 a.m. California time on the proposed
Borrowing Date (which must be a Business Day) of a Base Rate Loan. Upon receipt
of a request for a Base Rate Loan and Eurodollar Loan, Administrative Agent
shall promptly notify the Banks of the amount, the Interest Period(s), if
applicable, and the Borrowing Date requested by Borrower. After giving effect to
any borrowing of Eurodollar Loans or any conversion or continuation of
Eurodollar Loans, there shall not be more than 10 different Interest Periods for
Eurodollar Loans and Bid Rate Loans in the aggregate at any time.
2.4 Requests for Bid Rate Loans. (a) Each Bid Rate Loan shall be made upon
---------------------------
irrevocable written or telephonic notice, confirmed promptly in writing,
substantially in the form of Exhibit A-2 hereto, by Borrower and must be
received by Administrative Agent not later than 9:00 a.m. California time one
Business Day prior to the Borrowing Date for such Loan, specifying the Borrowing
Date (which must be a Business Day), the amount, and the Interest Period. In
requesting a Bid Rate Loan, Borrower may specify up to a maximum of three
alternative Interest Periods for the Bid Rate Loan. After giving effect to any
borrowing of Bid Rate Loans, there shall not be more than 10 different Interest
Periods for Bid Rate Loans and Eurodollar Loans in the aggregate at any one
time.
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(b) Upon receipt of a request for a Bid Rate Loan pursuant to paragraph
(a) above, Administrative Agent shall promptly notify the Banks of the amount,
the Interest Period(s) and the Borrowing Date requested by Borrower. If Bank of
America elects to advance a Bid Rate Loan it shall notify Borrower and
Administrative Agent of the amount, the Interest Period(s) and the Bid Rate
(with any fraction of a percentage expressed as a decimal to the nearest
1/10,000 of one percent) upon which Bank of America desires to advance such a
Bid Rate Loan by 7:00 a.m. California time on such Borrowing Date. By 7:15 a.m.
California time on the Borrowing Date, each other Bank shall notify
Administrative Agent whether or not it will submit an offer in response to
Borrower's request for a Bid Rate Loan and each Bank submitting an offer shall
notify Administrative Agent of the amount, the Interest Period(s) and the Bid
Rate (with any fraction of a percentage expressed as a decimal to the nearest
1/10,000 of one percent) upon which such Bank desires to advance a Bid Rate
Loan. By 7:30 a.m. California time on the Borrowing Date Administrative Agent
shall give notice to Borrower, of the amount, the Interest Period and the Bid
Rate upon which each Bank desires to advance a Bid Rate Loan. Borrower shall,
before 7:45 a.m. California time on such Borrowing Date, elect which of the
offered Bid Rate Loans it desires to accept and notify Administrative Agent of
each offer that is being accepted by Borrower. Such acceptance by Borrower shall
be irrevocable. If Borrower accepts any of the offers for Bid Rate Loans,
Borrower must accept offers strictly based upon pricing and no other criteria.
If two or more Banks submit offers at identical pricing and Borrower accepts any
of such offers but does not wish to borrow the total amount offered by such
Banks, Borrower shall accept offers from all of such Banks on amounts allocated
among them pro rata (in multiples of $1,000,000) according to the amounts
offered by such Banks.
(c) If Borrower accepts one or more of the offers made by any Bank or
Banks pursuant to subsection (b) above, Administrative Agent shall, by 8:15 a.m.
California time on such Borrowing Date, notify each Bank as to the identity of
each Bank which is to make a Bid Rate Loan, the amount of the Loan to be made by
each Bank, the Interest Period, and the Bid Rate applicable to each such Loan.
Administrative Agent shall also notify each Bank by 8:15 a.m. California time on
such Borrowing Date if Administrative Agent has either received no offers in
response to Borrower's Loan Request for a Bid Rate Loan or if Borrower has
elected not to accept any of the offers received.
(d) Each Bank whose offer for a Bid Rate Loan has been accepted pursuant
to Section 2.4(b) shall determine for itself whether the conditions precedent in
Section 5.2 have been or will be satisfied on the Borrowing Date. On or before
11:00 a.m. California time on the Borrowing Date, each such Bank's Lending
Office will make available to Administrative Agent the principal amount of the
Bid Rate Loan in immediately available funds and Administrative Agent shall
promptly credit Borrower's account at Administrative Agent in immediately
available funds.
2.5 Interest and Principal on Base Rate Loans. The outstanding Principal
-----------------------------------------
Amount of each Base Rate Loan shall bear interest until payment is due in full
(computed daily on the basis of a 365 or 366, as the case may be, day year and
actual days elapsed) at the rate per annum equal to the Base Rate. Borrower
shall pay interest on each Base Rate Loan on each Interest Payment Date for the
interest accruing since the previous Interest Payment Date on such Base Rate
Loan. Borrower shall repay in full the Principal Amount of each Base Rate Loan
on the Termination Date or as provided in Section 2.10(c).
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2.6 Interest and Principal on Eurodollar Loans. (a) The outstanding
------------------------------------------
Principal Amount of each Eurodollar Loan shall bear interest until payment is
due in full (computed daily on the basis of a three hundred sixty (360) day year
and actual days elapsed) at a rate per annum equal to the Eurodollar Rate plus
the Applicable Amount therefor. Borrower shall pay interest on each Eurodollar
Loan on each Interest Payment Date for such Eurodollar Loan. Borrower shall
repay in full the Principal Amount of each Eurodollar Loan on the last day of
the Interest Period for such Eurodollar Loan or as provided in Section 2.10(c).
(b) If any Reference Bank's Commitment shall terminate (otherwise than on
termination of all the Commitments), or for any reason whatsoever the Reference
Bank shall cease to be a Bank hereunder, that Reference Bank shall thereupon
cease to be a Reference Bank, and the Eurodollar Rate shall be determined on the
basis of the rates as notified by the remaining Reference Banks. Each Reference
Bank shall use its best efforts to furnish quotations of rates to the
Administrative Agent as contemplated hereby. If any of the Reference Banks
shall be unable or otherwise fails to supply such rates to the Administrative
Agent upon its request, the rate of interest shall be determined on the basis of
the quotations of the remaining Reference Banks or Reference Bank.
2.7 Interest and Principal on Bid Rate Loans. The outstanding principal
----------------------------------------
amount of each Bid Rate Loan shall bear interest until payment is due in full
(computed daily on the basis of a 360-day year and actual days elapsed) at a
rate per annum equal to the Bid Rate. Borrower shall pay interest on each Bid
Rate Loan on each Interest Payment Date for such Bid Rate Loan. Borrower shall
repay in full the Principal Amount of each Bid Rate Loan on the last day of the
Interest Period of such Bid Rate Loan.
2.8 Loan Accounts. Each Bank shall open and maintain on its books one or
-------------
more loan accounts in Borrower's name. Each loan account shall show (without
duplication) as debits thereto each Bank's portion of each Base Rate Loan and/or
Eurodollar Loan and as credits thereto all Base Rate Loan and/or Eurodollar Loan
payments received by such Bank for the account of such Bank and applied to
principal so that the balance of the loan account(s) at all times reflect the
principal amount due each Bank from Borrower as Base Rate Loans and Eurodollar
Loans. All entries in said books shall be presumptive evidence of the making of
each Base Rate Loan and Eurodollar Loan, the obligation of Borrower to repay
each Base Rate Loan and Eurodollar Loan, and all payments received and disbursed
by such Bank. Borrower agrees that if, in the opinion of any Bank, a promissory
note or other evidence of debt is required or appropriate to reflect or enforce
any Loans outstanding to or to be made by such Bank, then Borrower shall
promptly execute and deliver to such Bank one or more promissory notes payable
to such Bank to evidence the Loans outstanding to such Bank under this Agreement
from time to time, together with such documents as such Bank may reasonably
request to evidence the due authorization, execution, delivery and
enforceability of such notes. If any notes are issued hereunder, Administrative
Agent and Borrower may treat the payee of that note as the owner of such note
for all purposes.
2.9 Master Bid Rate Notes. Borrower shall execute a Master Bid Rate Note
---------------------
in the form of Exhibit B hereto in favor of each Bank. The Master Bid Rate Note
of each Bank shall evidence the outstanding principal amount of Bid Rate Loans
made by such Bank, and shall be dated the first day of the Availability Period.
Each Bank is authorized to indicate upon the grid
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attached to its Master Bid Rate Note the principal amount, interest rate and
Interest Period of each Bid Rate Loan and all payments of principal and interest
thereon. Such notations shall be presumptively correct as to the aggregate
unpaid principal amount of the Bid Rate Loan made by such Bank, and interest due
thereon, but the failure by such Bank to make such notations shall not affect
the obligations of Borrower hereunder or under the Master Bid Rate Notes.
2.10 Conversion of Loans Between Eurodollar Loans and Base Rate Loans and
--------------------------------------------------------------------
Conversion of Interest Periods of Eurodollar Loans. (a) On any Eurodollar
- --------------------------------------------------
Banking Day Borrower may convert on a pro rata basis among the Banks any
outstanding Base Rate Loans or Eurodollar Loans (but not Bid Rate Loans) into
any other type of Loan available to Borrower hereunder (but not to a Bid Rate
Loan), or Borrower may change the Interest Period of any Eurodollar Loan to
another Interest Period available under this Agreement, subject to the following
limitations:
(i) No conversion of any Eurodollar Loan into any other Loan and no
conversion of the Interest Period of any Eurodollar Loan may be made except
on the last day of an Interest Period with respect thereto; and
(ii) Any conversion shall be preceded by an irrevocable written or
telephonic notice from Borrower that it elects such conversion, which
notice shall be received by Administrative Agent at least three (3)
Eurodollar Banking Days prior to the date requested for such conversion
from or into a Eurodollar Loan or conversion of the Interest Period of a
Eurodollar Loan.
(b) Banks shall not be obligated to make or continue any Eurodollar Loan
when any Event of Default has occurred and is continuing, but any outstanding
Eurodollar Loan shall be automatically converted to a Base Rate Loan on the last
day of the Interest Period for which a Eurodollar Rate was determined by
Administrative Agent following occurrence of such Event of Default, and, unless
Section 2.11(f) is applicable, Borrower shall be obligated to pay interest at
the Base Rate from the date any Loan is so converted until such Loan is repaid
in full regardless of the date when Administrative Agent obtains knowledge of
such Event of Default.
(c) Each conversion of a Loan into a Base Rate Loan or a Eurodollar Loan,
as the case may be, shall be effected by each Bank, on behalf of Borrower, as
applicable, by making a simultaneous payment of the relevant Eurodollar Loan, or
Base Rate Loan, as the case may be, from the proceeds of the new Loans,
procedures with respect thereto to be governed by the provisions of Section 2.3,
except that disbursement shall be made by means of such payment rather than
directly to Borrower to the extent applicable with respect to each Bank.
(d) If upon the expiration of any Interest Period applicable to
Eurodollar Loans, Borrower has failed to select a new Interest Period to be
applicable thereto, or if any Event of Default or Unmatured Event of Default
shall then exist, Borrower shall be deemed to have elected to convert such
Eurodollar Loans into Base Rate Loans effective as of the expiration date of
such current Interest Period.
2.11 Disbursements and Payments. (a) Each Base Rate Loan and Eurodollar
--------------------------
Loan shall be made on a pro rata basis by Banks, and each Bank's portion of each
Loan shall be determined
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by application of its Normal Percentage. Each Bid Rate Loan shall be made
entirely by the Bank whose offer was accepted by Borrower pursuant to Section
2.4. Each Bank's interest in each Loan and each payment to such Bank under this
Agreement shall be for the account of such Bank's Lending Office.
(b) Each Loan and each payment of principal, interest and other sums
under this Agreement shall be made in immediately available funds (or such other
funds as Administrative Agent may require) at Bank of America's Agency
Administrative Services #5596, 1850 Gateway Blvd., Concord, California 94520,
Acct No. 12337-15346, Ref: Hughes Electronics Corporation or such other office
designated by Administrative Agent from time to time.
(c) Each Bank agrees it will make the funds which it is to advance
hereunder available to Bank of America's Agency Administrative Services #5596,
1850 Gateway Blvd., Concord, California 94520, Acct No. 12337-15346, Ref: Hughes
Electronics Corporation or such other office designated by Administrative Agent
from time to time not later than 11:00 a.m. California time on the Borrowing
Date, and Administrative Agent will thereupon promptly advance to Borrower the
amount so received from Banks.
(d) Payment of all sums under this Agreement shall be made by Borrower to
Administrative Agent, and the latter shall promptly distribute to each Bank its
share of such payments. Each payment by Borrower shall be made without setoff
or counterclaim and not later than 11:00 a.m. California time on the day such
payment is due. All sums received after such time shall be deemed received on
the next Business Day.
(e) If Administrative Agent makes available to Borrower an amount due
from any Bank which such Bank fails to make available to Administrative Agent,
or if Administrative Agent makes available to any Bank an amount due from
Borrower which Borrower fails to make available to Administrative Agent,
Borrower or such Bank, as the case may be, shall, on demand, refund such amount
to Administrative Agent, together with interest thereon for the period during
which such amount was available to Borrower or such Bank, as the case may be, at
the Federal Funds Rate.
(f) Any sum of principal or interest payable by Borrower hereunder if not
paid when due shall bear interest (payable on demand) from its due date until
payment in full (computed daily on the basis of a 365 or 366, as the case may
be, day year and actual days elapsed) at a rate per annum equal to the Base Rate
plus one percentage point.
2.12 Facility Fee. Borrower shall pay Administrative Agent for the
------------
account of the Banks, a facility fee at the rate per annum equal to the
Applicable Amount therefor on the Total Commitment (without regard to the amount
of Loans outstanding at any time hereunder and without giving effect to any
reduction pursuant to Section 2.1(c)) during the Availability Period; provided,
however, following any reduction in the Total Commitment pursuant to Section 3.5
or 3.6 (but not a reduction pursuant to Section 2.1(c)) the computation of the
facility fee shall be based upon such reduced Total Commitment as of the
effective date of such reduction. The facility fee shall be computed on a
calendar quarter basis. The facility fee shall be calculated on the basis of a
360-day year and actual days elapsed, which results in a higher fee than if a
365/366-day year were used, and shall be payable on the 10th day of each
January, April, July
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and October (for the facility fee accrued during the previous calendar quarter)
and on the Termination Date.
SECTION 3
PAYMENT OF COSTS AND REDUCTION
OF THE COMMITMENT
3.1 Indemnification Upon Failure to Pay Eurodollar Loan or Bid Rate Loan.
--------------------------------------------------------------------
If Borrower makes any payment of principal with respect to any Eurodollar
Loan or Bid Rate Loan on a day other than the last day of the then current
Interest Period applicable to such Loan (including without limitation any
payment upon reduction of the Commitments) or fails to borrow, continue,
convert, pay or prepay its Eurodollar Loan or Bid Rate Loan on a date designated
to Administrative Agent in a notice pursuant to this Agreement (if such failure
does not result from the application of Sections 4.1 or 4.2), Borrower shall
reimburse each Bank within 15 days after receipt of written demand for any loss
incurred by it as a result of the timing of such payment or non-borrowing not
reflected in the Eurodollar Rate or the Bid Rate, including without limitation
any loss incurred in liquidating or employing deposits from third parties and
loss of profit for the period after such payment or non-borrowing. A
certificate of such Bank setting forth the amounts reasonably necessary so to
reimburse it in respect of any loss shall be conclusive and binding absent
manifest error.
3.2 Increased Costs. (a) If after the date hereof, any applicable law,
---------------
rule or regulation or any change therein or in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof or compliance
by any Bank (or its Lending Office) with any request or directive of any such
authority, central bank or comparable agency, whether or not having the force of
law, shall impose, modify or deem applicable:
(i) any reserve (including, without limitation, any imposed by the Board
of Governors of the Federal Reserve System), special deposit, compulsory loan or
similar requirements against assets, commitments or deposits or other
liabilities with, of or for the account of, or credit extended by, or any
acquisition of funds by or for the account of any Bank or its Lending Office or
the London interbank market or any other condition affecting its obligations to
make the Loans to Borrower hereunder;
(ii) any capital or similar requirements against (or against any class of
or change in or the amount of) assets or liabilities of, or commitments or
extensions of credit by, such Bank;
each Bank which is so affected shall give prompt notice to Borrower describing
such reserves or requirements at least four Business Days prior to the date such
Bank will begin to implement such additional charges with respect to Borrower.
If the result of any of the foregoing is to increase the cost or reduce the
profit to such Bank (or its Lending Office) under this Agreement by an amount
deemed by such Bank to be material, then, within 15 days after written demand by
such Bank, Borrower will pay to such Bank such additional amount or amounts as
will compensate such Bank for such increased cost incurred or reduction in
profit suffered by such Bank. Such Bank will designate a different Lending
Office if such designation will avoid the
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need for, or reduce the amount of, such compensation and will not be otherwise
disadvantageous to such Bank in the sole discretion of such Bank. A certificate
of such Bank setting forth the basis for determining such additional amount or
amounts necessary to compensate the Bank shall be conclusive in the absence of
manifest error.
(b) Without limiting the effect of the foregoing (but without
duplication), upon any Bank's prior written request, Borrower shall pay to such
Bank on the last day of each Interest Period, so long as such Bank may be
required to maintain reserves against "eurocurrency liabilities" under
Regulation D (as at any time amended) of the Board of Governors of the Federal
Reserve System, as additional interest on the unpaid principal amount of each
Eurodollar Loan by such Bank outstanding during such Interest Period, an
additional amount (determined by such Bank and notified to Borrower in writing)
up to but not exceeding such amount as would, together with payments of interest
on such Eurodollar Loan for such Interest Period, result in the receipt by such
Bank of total interest on such Eurodollar Loan, for such Interest Period at a
rate determined by such Bank to be equal to the sum of:
(i) the Eurodollar Rate divided by a sum equal to (a) 1 minus (b) the rate
(expressed as a decimal) of such reserves required by Regulation D, plus
(ii) the Applicable Amount for Eurodollar Loans.
In determining the additional amount payable for an Interest Period
pursuant to this Section, such Bank shall take into account any transitional
adjustment or phase-in provisions of such reserve requirements applicable during
such Interest Period, which would reduce the reserve requirement otherwise
applicable to eurocurrency liabilities during such Interest Period; provided,
however, each Bank in its sole discretion may determine the allocation of
reserve requirements to its Eurodollar Loans. Each such determination made by
such Bank, and each such notification by such Bank to Borrower under this
Section, shall be conclusive as to the matters set forth therein in the absence
of manifest error.
3.3 Taxes. All payments or reimbursements under this Agreement and any
-----
instrument or agreement required hereunder shall be made without setoff or
counterclaim and free and clear of and without deduction for any and all present
and future Taxes. Borrower agrees to cause all such Taxes to be paid on behalf
of any Bank or Administrative Agent directly to the appropriate governmental
authority. If Borrower is legally prohibited from complying with this
subsection, payments due to such Bank or Administrative Agent under this
Agreement and any instrument or agreement required hereunder shall be increased
so that, after provisions for Taxes and all Taxes on such increase, the amounts
received by such Bank or Administrative Agent will be equal to the amounts
required under this Agreement and any instrument or agreement required hereunder
as if no Taxes were due on such payments. Borrower shall indemnify each Bank
and Administrative Agent for the full amount of Taxes payable by such Bank or
Administrative Agent and any liabilities (including penalties, interest and
expenses) arising from such Taxes within 30 days from any written demand by such
Bank. Borrower shall provide evidence that all applicable Taxes have been paid
to the appropriate taxing authorities by delivering to Administrative Agent
official tax receipts or notarized copies or other evidence thereof satisfactory
to Administrative Agent, within 90 days after the due date for such Tax payment.
Such Bank will designate a different Lending Office if such designation will
avoid the
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need for, or reduce the amount of, such payment or reimbursement and will not be
otherwise disadvantageous to such Bank in the sole discretion of such Bank.
3.4 Prepayment. Upon the irrevocable written notice of Borrower received
----------
by Administrative Agent by 11:00 a.m. California time at least one Business Day
prior to the prepayment of a Base Rate Loan and at least five Eurodollar Banking
Days prior to the prepayment of a Eurodollar Loan, Borrower may prepay any
Eurodollar Loan or Base Rate Loan; but such prepayment shall be in an amount of
at least $5,000,000 or multiple integrals of $1,000,000 in excess thereof. The
notice of prepayment shall specify the date of the prepayment, the amount of the
prepayment and the Loan to be prepaid. Each such prepayment shall be made on
the date specified and, in the case of a prepayment of any Eurodollar Loan shall
be accompanied by the payment of accrued interest on the amount prepaid.
Subject to compliance with the foregoing procedures, Base Rate Loans may be
prepaid at any time without cost or penalty of any kind. If Borrower elects to
prepay a Eurodollar Loan, Borrower shall, on demand by each Bank, pay such Bank
the amount (if any) by which (a) the additional interest which would have been
payable on the amount prepaid on such Bank's portion of such Loan had it not
been paid until the last day of the Interest Period of such Loan exceeds (b) the
interest which would have been recoverable by such Bank by placing such prepaid
amount on deposit in the offshore Dollar interbank markets for a period starting
on the date on which it was prepaid and ending on the last day of the Interest
Period for such Loan. Bid Rate Loans may not be prepaid.
3.5 Pro Rata Reduction of Commitments by Borrower. Borrower may, upon
---------------------------------------------
30 days' prior written notice (which notice shall be irrevocable) to Banks
through Administrative Agent, reduce the Total Commitment on a pro rata basis
among the Banks. Such a reduction shall be in an integral multiple of
$5,000,000. Borrower shall, on the effective date of each such reduction, repay
to each Bank through Administrative Agent that portion of each Loan which
exceeds the amount of each Bank's Commitment as reduced, together with accrued
interest on the amount paid and accrued facility fees subject to such reduction.
After the effective date of each reduction, the Banks' obligations under this
Agreement shall be based on the reduced Commitments.
3.6 Reduction of One Bank's Commitment by Borrower. If the amount of any
----------------------------------------------
payment to be made to or for the account of any Bank is increased under Section
3.3 or any Bank makes a claim under Section 3.2, then:
(a) Borrower may, within 60 days after the notice thereof and by not less
than five Business Days' written notice to Administrative Agent, cancel such
Bank's Commitment, whereupon such Bank shall cease to be obligated to
participate in further Loans hereunder and its Commitment shall be reduced to
the amount of its outstanding Loans until such Loans are repaid by Borrower
either on the Principal Repayment Date for such Loans or pursuant to Section
3.6(b), at which time such Bank's Commitment shall be reduced to zero;
(b) if Borrower cancels such Bank's Commitment pursuant to clause (a)
above and if Borrower so elects by written notice to Administrative Agent given
at the same time as the notice referred to in clause (a) above, Borrower shall
prepay such Bank's portion of each outstanding Loan together with any accrued
interest thereon plus all costs and expenses (including break and funding costs
in connection with the relending, reborrowing, funding or other employing of
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<PAGE>
funds) incurred by such Bank as a result of such cancellation or prepayment on a
date other than the Principal Repayment Date for such Loan; and
(c) Borrower shall repay all Bid Rate Loans from such Bank on the
Principal Repayment Date for such Loans and shall not request any additional Bid
Rate Loans from such Bank.
3.7 Notice of Reductions. Each notice of reduction or prepayment given
--------------------
pursuant to Section 3.4,.3.5 or 3.6 shall be irrevocable, shall specify the date
upon which such reduction or prepayment is to be made and, in the case of a
notice of prepayment, shall obligate Borrower to make such prepayment on such
date. Borrower may not give a notice of reduction of a part of the Commitment
pursuant to Section 3.6 at any time prior to the date so specified in any
previous such notice.
3.8 Designation of Replacement Bank. If the Commitment of any Bank is
-------------------------------
cancelled by Borrower pursuant to Section 3.6 or if any Bank terminates its
Commitment with respect to Eurodollar Loans pursuant to Section 4.2, Borrower,
with the consent of Administrative Agent, may designate an Eligible Assignee
(or, if it deems appropriate, more than one Eligible Assignee) acceptable to
Administrative Agent to act as a Bank hereunder and upon execution of a written
agreement in form satisfactory to Administrative Agent by such Eligible Assignee
in which it agrees to abide by all of the terms, conditions and obligations
applicable to a Bank herein and to have a Commitment as specified in such
agreement, such Eligible Assignee shall be deemed a Bank hereunder to the same
extent as if it were a signatory hereto and, thereafter, such Eligible Assignee
shall for all purposes be considered a "Bank" hereunder.
3.9 Effect of Reduction of Commitment. If, at any time:
---------------------------------
(a) the Commitment of any Bank is reduced to zero in accordance with the
terms of this Agreement;
(b) all indebtedness and other amounts owed to such Bank by Borrower
hereunder or in connection herewith have been satisfied in full; and
(c) such Bank is under no further actual or contingent obligation
hereunder,
then such Bank shall cease to be a party hereto and a Bank for the purposes
hereof; provided, however, that the obligations of Borrower under Sections 3.1,
-------- -------
3.2, 3.3, 11.14, 11.15 and 11.16 shall survive the cancellation of the
Commitment and the termination of this Agreement.
3.10 Accrued Fees. On the date of the cancellation of any portion of the
------------
Total Commitment in accordance with Section 3.5 or of any Bank's Commitment
under Section 3.6, all accrued facility fees for such portion of the Total
Commitment or of such Bank's Commitment shall be paid in full by Borrower.
3.11 Survival. The agreements and obligations of Borrower in this Section
--------
3 shall survive the termination of this Agreement.
SECTION 4
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<PAGE>
CHANGE IN CIRCUMSTANCES AFFECTING LOANS
4.1 Inability to Determine Eurodollar Rate. If any Reference Bank
--------------------------------------
determines (which determination shall be made in good faith and shall be
conclusive and binding upon Borrower) that (a) by reason of circumstances then
affecting the Eurodollar interbank market, adequate and reasonable means do not
or will not exist for ascertaining the interest rate applicable to any
Eurodollar Loans, or (b) Dollar deposits in the relevant amounts and for the
relevant Interest Period are not available to the Banks in the Eurodollar
interbank market, then it shall notify the Administrative Agent who shall
forthwith give written notice of such determination to Borrower and each Bank at
least one Business Day prior to the first day of any Interest Period so
affected; whereupon, until Administrative Agent shall notify Borrower that the
circumstances giving rise to such suspension no longer exist, (i) the
obligations of the Banks to make Eurodollar Loans shall be suspended and (ii)
Borrower shall repay in full, without premium or penalty, the then outstanding
principal amount of the Eurodollar Loans, together with accrued interest
thereon, on the last day of the then current Interest Period pursuant to the
next sentence. Unless Borrower notifies Administrative Agent to the contrary
within one Business Day after receiving a notice from Administrative Agent
pursuant to this Section, Borrower shall, concurrently with prepaying the
Eurodollar Loans pursuant to this Section, be deemed automatically without any
further notice to Administrative Agent or the Banks to have requested and
received Base Rate Loans in an equal principal amount from the Banks, the
proceeds of which are deemed to have been used to repay the other Loans.
4.2 Illegality. If, after the Effective Date, the introduction of or any
----------
change in any applicable law, rule or regulation or in the interpretation or
administration thereof by any governmental authority charged with the
interpretation or administration thereof or compliance by any Bank with any
request or directive (whether or not having the force of law) of any such
authority shall make it unlawful or impossible for such Bank (or its Lending
Office) to make, maintain or fund its Eurodollar Loans, such Bank shall
forthwith give written notice thereof to Administrative Agent and to Borrower.
Before giving any notice pursuant to this Section, such Bank shall designate a
different Lending Office if such designation will avoid the need for giving such
notice and will not be otherwise disadvantageous to such Bank in the sole
judgment of such Bank. Upon receipt of such notice (a) if such Bank has received
a request with respect to Eurodollar Loans and has not yet made such Loan, a
Base Rate Loan shall be deemed to have been designated without any further
notice; (b) all Loans which would otherwise be made by such Bank as Eurodollar
Loans shall be made instead as Base Rate Loans; and (c) Borrower shall prepay in
full, without premium or penalty, the then outstanding principal amount of such
Bank's Eurodollar Loans, together with accrued interest, on either (i) the last
day of the then-current Interest Period if such Bank may lawfully continue to
fund and maintain such Eurodollar Loans, to such day or (ii) immediately if such
Bank may not lawfully continue to fund and maintain such Eurodollar Loans to
such day together with an amount, if any, calculated as set forth in the last
sentence of Section 3.4. Concurrently with prepaying each such Eurodollar Loan
Borrower shall borrow a Base Rate Loan from such Bank in an amount equal to the
principal amount of such Bank's Eurodollar Loans, the proceeds of which are
deemed to have been used to repay such Bank's Eurodollar Loans. If circumstances
subsequently change so that such Bank is not further affected, and no Eligible
Assignee has been appointed pursuant to Section 3.8, such Bank shall so notify
Borrower and Administrative Agent and such Bank's obligation to make and
continue Eurodollar Loans shall be reinstated upon written request of Borrower.
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<PAGE>
SECTION 5
CONDITIONS PRECEDENT
5.1 Conditions Precedent to Signing Date. The occurrence of the Signing
------------------------------------
Date is subject to the condition that on the Signing Date this Agreement, duly
executed and delivered by the parties hereto, shall have been delivered to
Administrative Agent with counterparts for each Bank and in form and substance
satisfactory to Banks.
5.2 Conditions Precedent to Effective Date. The obligation of Banks to
--------------------------------------
make the initial Loans hereunder is subject to the condition that on the
Effective Date there shall have been delivered to the Administrative Agent with
counterparts for each Bank:
(a) The Notes, duly executed and delivered by the Borrower.
(b) The favorable written opinions, dated the Effective Date, of the
General Counsel or Assistant General Counsel of Borrower in the form set out in
Exhibit F.
(c) Certificate of the Secretary or an Assistant Secretary of Borrower
dated the Effective Date as to (i) the Certificate of Incorporation and the By-
laws of Borrower, (ii) the resolution of the Board of Directors of Borrower or
its Executive Committee in connection with this Agreement, and (iii) the
incumbency and signatures of the person authorized to execute and deliver this
Agreement and any other instrument, document or other agreement required
hereunder on the Effective Date.
(d) A certificate, signed by a vice president of Borrower dated the
Effective Date certifying: (i) that since December 31, 1996, there has been no
change in the financial condition, business, operations or properties of
Borrower and its Subsidiaries taken as a whole which constitutes a Material
Change; (ii) the unaudited pro forma condensed combined financial statements for
the nine months ended September 30, 1997 contained in the General Motors
Corporation. Registration Statement on form S-4 dated November 19, 1997, as
amended (the "GMC S-4") give effect to the Reorganization as set forth in the
GMC S-4; (iii) that no event has occurred and is continuing or would result from
the making of a Loan which constitutes or would constitute an Event of Default
or an Unmatured Event of Default; and (iv) the Debt Ratings as of the Effective
Date.
(e) Certificate of Good Standing in relation to Borrower issued by the
Secretary of the State of Delaware, dated not more than one month prior to the
Effective Date.
(f) Evidence satisfactory to Administrative Agent that all obligations of
Borrower outstanding under the Existing Agreements have been repaid in full and
all commitments thereunder have been terminated.
(g) Evidence of Borrower's Debt Ratings from both S&P and Moody's.
(h) Evidence satisfactory to Administrative Agent that the Reorganization
has been completed in accordance with the GMC S-4.
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<PAGE>
(i) The Master Bid Rate Notes, as referred to in Section 2.9, duly
executed by Borrower, shall have been delivered by Borrower to Administrative
Agent.
(j) The Administrative Agent shall have received all fees payable to it on
the Effective Date under the Letter Agreement.
5.3 Conditions Precedent to Loans. The obligation of Banks to disburse
-----------------------------
each Loan (including the first Loan) is subject to the following conditions and
by communicating a Loan Request Borrower is deemed to certify that: (a) to the
best knowledge of the Authorized Designee making such Loan Request, the
representations and warranties (excluding Section 6.6) contained in this
Agreement and any other documents delivered pursuant hereto are true and correct
in all material respects on the date of such Loan Request; (b) the financial
statements delivered to Administrative Agent by Borrower pursuant to Section 7.5
on the date most nearly preceding the Loan Request present fairly the financial
position and results of operation and changes in financial position of Borrower
and its consolidated Subsidiaries as at the end of, and for the fiscal period to
which such statements relate, (subject, in the case of unaudited financial
statements to year end adjustments); and (c) to the best knowledge of the
Authorized Designee making such Loan Request, no Event of Default or Unmatured
Event of Default has occurred and is continuing except such Events of Default or
Unmatured Events of Default as have been expressly waived by or on behalf of the
Banks.
SECTION 6
REPRESENTATIONS AND WARRANTIES
6. Borrower represents and warrants that as of the Effective Date:
6.1 Authority of Borrower. Borrower (a) is a corporation duly organized
---------------------
and existing under the laws of the State of Delaware, with its principal place
of business in Los Angeles, California, (b) has the corporate power to own its
property and carry on its business as now being conducted, (c) is duly qualified
and authorized to do business, and is in good standing in every state, country
or other jurisdiction where the failure to be so qualified, authorized and in
good standing would have a material adverse effect on Borrower, (d) has full
power and authority to borrow the sums provided for in this Agreement, to
execute, deliver and perform this Agreement and any instrument or agreement
required hereunder, and to perform and observe the terms and provisions hereof
and thereof, (e) has taken all corporate action on the part of Borrower, its
directors or stockholders, necessary for the authorization, execution, delivery
and performance of this Agreement, and any instrument or agreement required
hereunder on the date hereof, (f) requires no consent or approval of any trustee
or holder of any indebtedness or obligation of Borrower to enter into, deliver
or perform its obligations under this Agreement and the Notes, and (g) requires
no consent, permission, authorization, order or license of any governmental
authority in connection with the execution and delivery and performance of this
Agreement and any instrument or agreement required hereunder, or any transaction
contemplated hereby, except as may have been obtained and certified copies of
which have been delivered to Banks through Administrative Agent.
6.2 Binding Obligations. This Agreement is the legal, valid and binding
-------------------
obligation of Borrower, enforceable against it in accordance with its terms, and
any instrument or agreement
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<PAGE>
required hereunder, when executed and delivered, will be similarly valid,
binding and enforceable.
6.3 Incorporation of Restricted Subsidiaries. Each Restricted Subsidiary
----------------------------------------
of Borrower is a corporation duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and, to the
best of Borrower's knowledge, is duly licensed or qualified as a foreign
corporation in all jurisdictions where the failure to be so qualified,
authorized and in good standing would have a material adverse effect on Borrower
and its Restricted Subsidiaries taken as a whole.
6.4 No Contravention. There is no charter, by-law, or capital stock
----------------
provision of Borrower and no provision of any indenture or material agreement,
written or oral, to which Borrower is a party or under which Borrower is
obligated, nor is there any statute, rule or regulation, or any judgment, decree
or order of any court or agency binding on Borrower which would be contravened
by the execution, delivery and performance of this Agreement, or any instrument
or agreement required hereunder, or by the performance of any provision,
condition, covenant or other term hereof or thereof.
6.5 Notices. Except as previously disclosed in writing to Administrative
-------
Agent, no event has occurred which, to the best of its knowledge, would require
Borrower to notify Administrative Agent and the Banks pursuant to Section 7.3
hereof.
6.6 Financial Statements. The financial statements dated December 31,
--------------------
1996 furnished by Hughes Electronics Corporation (as in effect prior to the
Reorganization) to the Administrative Agent and Banks, present fairly the
financial position and results of operation and changes in financial position of
Hughes Electronics Corporation and its consolidated Subsidiaries as at the end
of, and for the fiscal periods to which such statements relate, and such
financial statements were prepared in accordance with GAAP. The unaudited pro
forma condensed combined financial statements for the nine months ended
September 30, 1997 contained in the GMC S-4 give effect to the Reorganization as
set forth therein. Since the date of the unaudited pro forma condensed combined
statements, there has been no Material Change. Neither Borrower nor any
Subsidiary had any contingent obligations, liabilities for taxes or other
outstanding financial obligations at September 30, 1997 on a pro forma basis
which are material in the aggregate, except as disclosed in such unaudited pro
forma condensed combined statements.
6.7 ERISA. Based upon ERISA and the regulations and published
-----
interpretations thereunder, the Plans of Borrower and its Subsidiaries and, to
the knowledge of Borrower, the Plans of any other ERISA Affiliates, are in
material and substantial compliance in all material respects with the applicable
provisions of ERISA and Borrower and its Subsidiaries are in compliance with
such Plans in all material respects. No Reportable Event which has or could be
reasonably be expected to result in termination thereof by the Pension Benefit
Guaranty Corporation or for the appointment by the appropriate United States
District Court of a trustee to administer such Plan has occurred and is
continuing with respect to any Plan.
6.8 Regulation U. Borrower is not engaged principally, or as one of its
------------
important activities, in the business of extending credit for the purposes of
purchasing or carrying any
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<PAGE>
"margin stock" within the meaning of Regulation U of the Board of Governors of
the Federal Reserve System; and neither Borrower nor any of its Subsidiaries is
an "investment company" within the meaning of the Investment Company Act of
1940.
6.9 Taxes. Borrower has filed all federal and state tax returns which
-----
to the knowledge of the financial officers of Borrower are required to have been
filed, and has paid prior to delinquency all taxes that have become due pursuant
to said returns or pursuant to any assessment, except as are being contested in
good faith by appropriate proceedings and as to which adequate reserves have
been provided on the books of Borrower in accordance with GAAP.
6.10 Insurance. Borrower and its Restricted Subsidiaries maintain
---------
insurance with responsible insurance companies, in such amounts and against such
risks as is customarily carried by owners of similar businesses and property,
including protection against loss of use and occupancy, to the extent such
insurance is reasonably available at commercially reasonable rates, and it will
furnish Administrative Agent, upon written request, with full information as to
the insurance carrier; provided, however, that Borrower and its Restricted
-------- -------
Subsidiaries may self insure to the extent they deem prudent.
6.11 Liens. The properties and assets of Borrower and its Restricted
-----
Subsidiaries, real, personal and mixed, are not subject to any Liens, except for
Liens permitted by this Agreement.
SECTION 7
AFFIRMATIVE COVENANTS OF BORROWER
7. Borrower covenants and agrees that so long as the credit hereby
granted shall remain available in whole or in part or until the full and final
payment of all indebtedness incurred hereunder, unless Majority Banks waive
compliance in writing:
7.1 Use of Proceeds of Loans. It will use the proceeds of the Loans
------------------------
made by Banks to Borrower hereunder for the repayment of Commercial Paper and
for its general working capital requirements, including acquisition and
improvement of plant, property and equipment and acquisitions.
7.2 Management of Business. It will manage its business and conduct its
----------------------
affairs such that the representations and warranties contained in Sections 6.1
through 6.3 and 6.7 through 6.9 remain true and correct at all times during the
Availability Period.
7.3 Notice of Certain Events. It will, and it will cause each of its
------------------------
Restricted Subsidiaries to, give prompt written notice to Administrative Agent
(who shall promptly notify the Banks) of:
(a) all Events of Default or Unmatured Events of Default under any of the
terms or provisions of this Agreement;
(b) any event of default under any other agreement, contract, indenture,
document or instrument entered, or which may be entered, into by it that could,
if settled unfavorably, result in a Material Change;
-22-
<PAGE>
(c) all material changes in senior management otherwise publicly
announced;
(d) all litigation, arbitration or administrative proceedings involving
Borrower or any of its Subsidiaries which could in the reasonable opinion of
Borrower be expected to result in a Material Change;
(e) any other matter which has resulted in, or might in the reasonable
opinion of Borrower result in, a Material Change;
(f) concurrently with the public announcement thereof, any proposed Merger
or Disposition affecting any Restricted Subsidiary; and
(g) any change in any Debt Rating by S&P or Moody's.
7.4 Records. It will, and it will cause each of its Restricted
-------
Subsidiaries to, keep and maintain full and accurate accounts and records of its
operations according to GAAP and will permit Administrative Agent, and its
designated officers, employees, agents, and representatives, to have access
thereto and to make examination thereof at all reasonable times, to make audits,
and to inspect and otherwise check its properties, real, personal and mixed;
provided, however, that such examination and access shall be in compliance with
- -------- -------
security and confidentiality requirements of all governmental authorities and,
subject to Section 11.16, Borrower's corporate policies.
7.5 Information Furnished. It will furnish to Banks and Administrative
---------------------
Agent:
(a) Within 60 days after the close of each quarter, except for the last
quarter of each fiscal year, its consolidated balance sheet as of the close of
such quarter and its consolidated profit and loss statement and cash flow
statement for that quarter and for that portion of the fiscal year ending with
such quarter, all prepared in accordance with GAAP, and all certified by its
Treasurer or an Assistant Treasurer as presenting fairly the financial position
and results of operation and changes in financial position of Borrower and its
consolidated Subsidiaries as at the end of, and for the fiscal period to which
such statements relate, subject to normal year-end adjustments.
(b) Within 120 days after the close of each fiscal year, a complete copy
of its annual financial statements, which statements shall include at least its
consolidated balance sheet as of the close of such fiscal year and its
consolidated profit and loss statement and cash flow statement for such fiscal
year, prepared by Deloitte & Touche (or such other independent certified public
accountants of recognized international standing selected by Borrower) in
accordance with GAAP applied on a basis consistent with that of the previous
year, and which statements shall include the opinion of such accountants, such
opinion not to be qualified or limited because of any restricted or limited
nature of examination made by such accountants or because of a "going concern"
qualification.
(c) Within 60 days after the close of each quarter except for the last
quarter of each fiscal year, (and within 120 days after the close of each fiscal
year) its certificate executed by Borrower's Treasurer or an Assistant Treasurer
that (i) the representations and warranties set forth in Section 6 (with the
exception of Section 6.6) are true and correct in all material respects;
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<PAGE>
and (ii) no Event of Default or Unmatured Event of Default has occurred and is
continuing except such Events of Default or Unmatured Events of Default as have
been expressly waived by or on behalf of the Banks.
(d) Such other information concerning its affairs as Administrative Agent
or the Majority Banks may reasonably request.
7.6 Execution of Other Documents. It will promptly, upon demand by
----------------------------
Administrative Agent, execute all such additional agreements, documents and
instruments in connection with this Agreement as Administrative Agent or
Majority Banks may deem necessary.
7.7 ERISA. It will, and it will cause each of its Subsidiaries to:
-----
(a) At all times, make prompt payment of contributions required to meet
the minimum funding standard set forth in ERISA with respect to its Plans,
except to the extent that waivers are granted by the appropriate governmental
agencies;
(b) Notify Administrative Agent immediately of (i) any Reportable Event
which could reasonably be expected to result in aggregate liability to Borrower
and its Subsidiaries in excess of $75,000,000 and (ii) any other fact arising in
connection with any of its Plans or a Plan of any ERISA Affiliate which has
resulted, or could reasonably be expected to result, in termination thereof by
the Pension Benefit Guaranty Corporation or for the appointment by the
appropriate United States District Court of a trustee to administer such Plan,
in each case together with a statement, if requested by Administrative Agent, as
to the reasons therefor and the action, if any, which Borrower or such ERISA
Affiliate proposes to take with respect thereto; and
(c) Furnish to Administrative Agent, upon its written request, such
information concerning any of its Plans as may be reasonably requested.
7.8 Administrative Agent's Fees. It will compensate Administrative Agent
---------------------------
as set forth in the Letter Agreement.
7.9 Compliance with Law. It will, and will cause each of its Subsidiaries
-------------------
to, comply with the requirements of all applicable laws, rules, regulations, and
orders of any governmental or regulatory authority, a breach of which would
result in a Material Change, except where contested in good faith by appropriate
proceedings diligently pursued.
SECTION 8
NEGATIVE COVENANTS OF BORROWER
8. Borrower covenants and agrees that so long as the credit hereby
granted shall remain available in whole or in part or until the full and final
payment of all indebtedness incurred hereunder, unless Majority Banks waive
compliance in writing:
8.1 Liens.
-----
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<PAGE>
(a) Borrower will not, nor will it permit any Restricted Subsidiary to,
issue, incur, guaranty or assume any indebtedness for money borrowed secured by
a Lien upon any property or assets of Borrower or any Restricted Subsidiary or
upon any shares of stock or indebtedness of any Restricted Subsidiary (whether
such property, assets, shares of stock or indebtedness are now owned or
hereafter acquired) without in any such case effectively providing concurrently
with the issuance, incurrence, guarantee or assumption of any such indebtedness
that the Commitments and Loans and any other obligations of Borrower to the
Banks (together with, if Borrower shall so determine, any other indebtedness of
Borrower or such Restricted Subsidiary ranking equally with the Commitments and
Loans and such other obligations and then existing or thereafter created) shall
be secured equally and ratably with or prior to such indebtedness by a Lien upon
such property, assets, shares of stock or indebtedness, unless the aggregate
amount of such indebtedness for money borrowed secured by such Liens, together
with all other indebtedness for money borrowed of Borrower and its Subsidiaries
which (if originally issued, incurred, guaranteed or assumed at such time) would
otherwise be subject to the foregoing restrictions (but not including
indebtedness for money borrowed permitted to be secured under sub-clauses (1)
through (7) of Section 8.1(b)), does not at the time exceed 5% of Consolidated
Adjusted Net Worth.
(b) The above restrictions shall not apply to indebtedness of Borrower or
any of its Restricted Subsidiaries secured by:
(1) Liens existing as of the date hereof and listed in Exhibit E;
(2) Liens on property, assets, shares of stock or indebtedness of any
corporation existing at the time such corporation becomes a Restricted
Subsidiary;
(3) Liens on property existing at the time of acquisition of such
property by Borrower or a Restricted Subsidiary, or Liens to secure the
payment of all or any part of the purchase price of property upon the
acquisition of such property by Borrower or a Restricted Subsidiary or to
secure any indebtedness incurred or guaranteed prior to, at the time of, or
within 180 days after, the later of the date of acquisition of such
property and the date such property is placed in service, for the purpose
of financing all or any part of the purchase price thereof, or Liens to
secure any indebtedness incurred or guaranteed for the purpose of financing
the cost to Borrower or a Restricted Subsidiary of improvements to such
acquired property; provided, however, that for purposes of this clause 3,
-------- -------
(i) a satellite will be treated as a newly-acquired asset as of the date it
is placed in service and (ii) any satellite transponder acquired through
the exercise of an early buy-out option shall be treated as a newly-
acquired asset as of the date such option is exercised;
(4) Liens securing indebtedness of a Restricted Subsidiary owing to
Borrower or to another Restricted Subsidiary;
(5) Liens on property of a corporation existing at the time such
corporation is merged or consolidated with Borrower or a Restricted
Subsidiary (in accordance with Section 8.2) or at the time of a sale, lease
or other disposition of the properties of a corporation as an entirety or
substantially as an entirety to Borrower or a Restricted Subsidiary;
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<PAGE>
(6) Liens on property of Borrower or a Restricted Subsidiary in favor
of the United States of America or any state thereof, or any department,
agency or instrumentality or political subdivision of the United States of
America or any state thereof, or in favor of any other country, or any
political subdivision thereof, to secure partial, progress, advance or
other payments pursuant to any contract or statute or to secure any
indebtedness incurred for the purpose of financing all or any part of the
purchase price or the cost of construction of the property subject to such
Liens; or
(7) any extension, renewal or replacement (or successive extensions,
renewals or replacements) in whole or in part of any Liens referred to in
the foregoing sub-clauses (1) to (6), inclusively; provided, however, that
-------- -------
the principal amount of indebtedness secured thereby shall not exceed the
principal amount of indebtedness so secured at the time of the incurrence
or guarantee thereof and that such extension, renewal or replacement shall
be limited to all or a part of the property which secured the Lien so
extended, renewed or replaced (plus improvements on such property).
8.2 Mergers, Liquidations and Sales of Assets. It will not, nor will it
-----------------------------------------
permit any of its Restricted Subsidiaries to liquidate or dissolve or enter into
any consolidation, merger, partnership, joint venture, syndicate, pool or other
combination which results in a Material Change in the nature of Borrower's
business taken as a whole (collectively, the "Mergers") or convey, sell or lease
all or substantially all of its assets or business (collectively,
"Dispositions"), except for:
(a) mergers between Subsidiaries, or between Subsidiary and Borrower where
Borrower is the surviving corporation;
(b) mergers where Borrower is the surviving corporation;
(c) transfers of assets from one Restricted Subsidiary to another
Restricted Subsidiary or from any Restricted Subsidiary to Borrower;
(d) sales, leases, transfers or assignments of operating rights, licenses
or franchises in transactions which do not result in a Material Change different
from changes heretofore publicly disclosed;
(e) Dispositions of any Restricted Subsidiary provided both Debt Ratings
remain Investment Grade on the effective date of any such dispositions; and
(f) the Reorganization;
provided, however, no Disposition or Merger otherwise permitted by clauses (a)
- -------- -------
through (e) above shall take place if before, or after giving effect to any such
Disposition or Merger, an Event of Default or Unmatured Event of Default exists
is or would exist.
8.3 Defaults. It will not, nor will it permit any of its Restricted
--------
Subsidiaries to, commit or do any act or thing which would constitute an event
of default under any of the material terms or provisions of any other material
agreement, contract, indenture, document or
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<PAGE>
instrument executed, or to be executed by any of them, except those that may be
contested in good faith and would not, if settled unfavorably, result in a
Material Change.
8.4 Compliance with Regulations. Borrower will not engage principally,
---------------------------
or as one of its important activities, in the business of extending credit for
the purposes of purchasing or carrying any "margin stock" within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System; and it
will not use the proceeds of any Loan for the purpose, directly or indirectly,
whether immediate, incidental or ultimate, (a) to purchase or carry, within the
meaning of such Regulation U, any such margin stock or to extend credit to
others for the purpose of purchasing or carrying any such margin stock, unless
done in strict compliance with such Regulation U and other applicable law and
Borrower shall have executed and delivered to each Bank prior to such use a Form
U-1 statement evidencing compliance with such Regulation U and such other
documents relating thereto as Administrative Agent or any Bank shall request, or
(b) in a manner which would violate, or result in a violation of, Regulation G,
T, U, or X of the Board of Governors of the Federal Reserve System.
SECTION 9
EVENTS OF DEFAULT
9.1 Events of Default. If one or more of the following described Events
-----------------
of Default shall occur:
(a) Borrower shall default in the due and punctual payment of (i) the
principal of or the interest on any Loan within two Business Days of its due
date, (ii) any fee due hereunder within 10 Business Days of its due date; or,
(iii) any other amount due from it hereunder within 30 Business Days of its due
date; or
(b) Borrower or any of its Restricted Subsidiaries shall fail to perform
or observe any of the terms, provisions, covenants, conditions, agreements or
obligations contained herein (other than Section 7.3, and Sections 8.1 through
8.4), and such failure shall continue for more than 20 days after written notice
from Administrative Agent to Borrower of the existence and character of such
failure to perform or observe; or
(c) Borrower or any of its Restricted Subsidiaries shall fail to perform
or observe any of the terms, provisions, covenants, conditions agreements or
obligations contained in Section 7.3 and Sections 8.1 through 8.4; or
(d) (i) Borrower, or any of its Restricted Subsidiaries shall become
insolvent, or be unable, or admit in writing its inability, to pay its debts as
they become due; or (ii) Borrower or any Restricted Subsidiary shall make an
assignment for the benefit of creditors or to an agent authorized to liquidate
any substantial amount of its properties or assets; or (iii) Borrower or any
Restricted Subsidiary shall file or have filed against it a petition in
bankruptcy or seeking reorganization or to effect a plan or other arrangement
with creditors or winding up or dissolution and such filing against it shall not
be dismissed within 60 days after the date of such filing; or (iv) Borrower or
any Restricted Subsidiary shall apply for or consent to the appointment of or
consent that an order be made appointing any receiver or trustee for any of its
or their properties, assets or business, or if a receiver or a trustee shall be
appointed for all or a
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<PAGE>
substantial part of its or their properties, assets or business; or (v) an order
for relief shall be entered against Borrower or any Restricted Subsidiary under
the United States federal bankruptcy laws as now or hereafter in effect; or (vi)
Borrower or any Restricted Subsidiary shall take any action indicating its
consent to, approval of or acquiescence in, any of the foregoing; or
(e) Any representation or warranty made by Borrower herein or in any
certificate or financial or other statement heretofore or hereafter furnished by
Borrower or any of its officers to Administrative Agent or the Banks proves to
be in any material respect false or misleading as of the date when made, deemed
made or reaffirmed; or
(f) Any final judgment, decrees, writs of execution, attachments or
garnishments or any Liens, or any other legal processes shall be issued or
levied against any of the assets or property of Borrower or any of its
Restricted Subsidiaries (and shall not have been vacated, discharged or stayed)
in amounts which in the aggregate would result in a Material Change (without
limiting the generality of the foregoing, a judgment in excess of $75,000,000 in
the aggregate shall, for purposes only of this Section 9.1(f), be deemed to
result in a Material Change); provided, however, that such aggregate amount
-------- -------
shall include only amounts in excess of (i) insurance coverage therefor and (ii)
reserves on the books of Borrower or any of its Restricted Subsidiaries
therefore; provided, further, that such aggregate amount shall not include any
-------- -------
amounts with respect to matters subject to appeal conducted in good faith and
diligently pursued or other further legal process by Borrower or any of its
Restricted Subsidiaries or any amounts with respect to any such legal process
which Borrower or any of its Restricted Subsidiaries has detached from such
property by posting of a bond or equivalent process; or
(g) All, or substantially all, of the assets and property of Borrower or
any of its Restricted Subsidiaries shall be condemned, seized or otherwise
appropriated; or
(h) Any fact or circumstance (including without limitation a Reportable
Event), which results in, or which Majority Banks determine in good faith could
reasonably be expected to result in, the termination of any Plan of Borrower,
any of its Subsidiaries or any ERISA Affiliate by the Pension Benefit Guaranty
Corporation or the appointment by an appropriate United States District Court of
a trustee to administer any such Plan, shall occur and shall continue for 30
days after written notice of such determination shall have been given to
Borrower or any of its Subsidiaries by Administrative Agent, or a trustee shall
be appointed by the appropriate United States District Court to administer any
Plan of Borrower or any of its Subsidiaries, or the Pension Benefit Guaranty
Corporation shall institute proceedings to terminate any Plan of Borrower or any
of its Subsidiaries or to appoint a trustee to administer any such Plan and,
upon the occurrence of any of the foregoing, the aggregate amount of the
unfunded vested liability for the benefits guaranteed by the Pension Benefit
Guaranty Corporation under all such Plans and the present value of any
Withdrawal Liability which remains unpaid is reasonably estimated to be in
excess of $75,000,000 and such liability is not covered by insurance; or
(i) Borrower or any of its Restricted Subsidiaries (i) fails to make any
payment (or otherwise satisfy) in respect of any indebtedness for money borrowed
when due (whether by scheduled maturity, required prepayment, acceleration,
demand, or otherwise) and such failure continues after the applicable grace or
notice period, if any, specified in the document relating
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<PAGE>
thereto on the date of such failure; or (ii) an event of default shall occur
which permits the acceleration of indebtedness for money borrowed under any
other agreement, contract, indenture, document or instrument executed, or which
may be executed, by Borrower or any of its Restricted Subsidiaries, which
failure or event of default has not been waived or cured; provided, however,
-------- -------
that no Event of Default shall exist hereunder if the amount of the indebtedness
which is not paid or may be accelerated with respect to the defaulted
obligations shall not exceed in the aggregate $75,000,000; or
(j) Either Debt Rating is less than Investment Grade;
(k) Any disposition of any Restricted Subsidiary shall have occurred, and:
(i) prior to such disposition, either S&P or Moody's shall have
publicly announced that Borrower's Debt Rating will be below Investment
Grade after giving effect to such disposition; or
(ii) as soon as reasonably practicable after its public announcement
of such disposition, Borrower shall not have requested S&P and Moody's to
publicly announce, prior to or no later than concurrently with the
consummation of such disposition, that Borrower's Debt Rating will remain
at least Investment Grade after giving effect to such disposition; or
(iii) notwithstanding clause (ii), either S&P or Moody's shall not
have publicly announced within 10 days after the consummation of such
disposition that Borrower's Debt Ratings will remain at least Investment
Grade after giving effect to such disposition; or
(l) Any sale, spin-off, disposition or other transaction whereby General
Motors Corporation will no longer beneficially own directly or indirectly at
least 51 percent of the issued and outstanding capital stock of Borrower having
voting power under ordinary circumstances to elect directors of Borrower (a
"transaction") shall have occurred and:
(i) prior to such transaction, either S&P or Moody's shall have
publicly announced that its Debt Rating will be below Investment Grade
after giving effect to such transaction; or
(ii) as soon as reasonably practicable after its public announcement
of such transaction, Borrower shall not have requested S&P and Moody's to
publicly announce, prior to or no later than concurrently with the
consummation of such transaction, that Borrower's Debt Rating will remain
at least Investment Grade after giving effect to such transaction; or
(iii) notwithstanding clause (ii), either S&P or Moody's shall not
have publicly announced within 10 days after the consummation of such
transaction that its Debt Ratings will remain at least Investment Grade
after giving effect to such transaction.
Then (a) automatically upon the occurrence of an Event of Default under Section
9.1(d), the Commitments shall immediately terminate, and all Loans and other
liabilities and obligations
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<PAGE>
outstanding under this Agreement shall, without presentment, demand, protest, or
notice of any kind, all of which are hereby expressly waived, be forthwith due
and payable, if not herein otherwise then due and payable, together with all
costs and expenses (including break and funding costs and other costs in
connection with the relending, reborrowing, funding or other employing of funds)
incurred by the Banks as a result thereof, anything herein or in any agreement,
contract, indenture, document or instrument contained to the contrary
notwithstanding; and (b) at any time after the occurrence of an Event of Default
other than under Section 9.1(d), and in each and every such case, unless such
Event of Default shall have been remedied by Borrower to the satisfaction of
Majority Banks or waived in writing by Majority Banks (except in the case of an
Event of Default under Section 9.1(a), the waiver of which shall require the
consent of all the Banks), Administrative Agent may, with the consent of the
Majority Banks, or shall, upon the direction of Majority Banks, immediately
terminate the Commitments, whereupon the same shall be cancelled and reduced to
zero and any Loan Request given in respect of a Borrowing Date occurring on or
after the date of such notice of cancellation shall cease to have effect and all
Loans and all accrued interest thereon and all other liabilities and obligations
outstanding under this Agreement shall, thereupon, without presentment, demand,
protest, or notice of any kind, all of which are hereby expressly waived, be
forthwith due and payable, if not otherwise then due and payable, together with
all reasonable costs and expenses (including break and funding costs and other
costs in connection with the relending, reborrowing, funding or other employing
of funds) incurred by the Banks as a result thereof, anything herein or in any
other agreement, contract, indenture, document or instrument contained to the
contrary notwithstanding. Thereafter any Bank or the Banks may immediately, and
without expiration of any period of grace, enforce payment of all liabilities
and obligations of Borrower under this Agreement and under any other agreements,
contracts, indentures, documents and instruments between Borrower and the Banks.
9.2 Recovery of Amounts Due. If any amount payable hereunder is not paid
-----------------------
as and when due, Borrower hereby authorizes Administrative Agent, each Bank and
their respective affiliates to proceed, to the fullest extent permitted by
applicable law, without prior notice, by right of set-off, banker's lien or
counterclaim, against any moneys or other assets of Borrower in any currency
that may at any time be in the possession of Administrative Agent or any of its
affiliates or such Bank or any of its affiliates, at any branch or office
thereof, to the full extent of all amounts payable to Administrative Agent and
the Banks hereunder. Any Bank that so proceeds or that has an affiliate that so
proceeds shall forthwith give notice to Administrative Agent of any action taken
by such Bank or affiliate pursuant to this Section 9.2.
9.3 Rights Cumulative. The rights of Administrative Agent and the Banks
-----------------
provided for herein are cumulative and are not exclusive of any other rights,
powers, privileges or remedies provided by law or in equity.
SECTION 10
THE BANKS
10.1 Administration of Loan. The general administration of the Loans
----------------------
shall be by Administrative Agent and shall be governed by the provisions set
forth in Exhibit C attached hereto and incorporated herein by reference.
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<PAGE>
10.2 Representations By Banks. Each Bank hereby represents that it will
------------------------
make each Loan hereunder in the ordinary course of its business and not with a
view to engage in any distribution of any evidence of indebtedness to the public
and any participation or disposition of the Master Bid Rate Note shall not,
without the consent of Borrower, require Borrower to file a registration
statement with the Securities and Exchange Commission or apply to qualify any
Master Bid Rate Note under the blue sky law of any state; provided, however,
disposition of any evidence of indebtedness held by such Bank shall at all times
be within its exclusive control subject only to the provisions of Section 11.11
and Section 10 of Exhibit C.
SECTION 11
MISCELLANEOUS PROVISIONS
11.1 Amendments and Waivers. No amendment or waiver of any provision of
----------------------
this Agreement, and no consent with respect to any departure by the Borrower
therefrom, shall be effective unless the same shall be in writing and signed by
the Majority Banks (or by the Administrative Agent at the written request of the
Majority Banks) and the Borrower and acknowledged by the Administrative Agent,
and then any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given; provided, however, that
-------- -------
no such waiver, amendment, or consent shall, unless in writing and signed by all
the Banks and the Borrower and acknowledged by the Administrative Agent, do any
of the following: (a) increase or extend the Commitment of any Bank (or
reinstate any Commitment terminated pursuant to Section 9.1); (b) postpone or
delay any date fixed by this Agreement for any payment of principal, interest,
fees or other amounts due to the Banks (or any of them) hereunder; (c) reduce
the principal of, or the rate of interest specified herein on any Loan, or any
fees or other amounts payable hereunder; (d) change the percentage of the
Commitments or of the aggregate unpaid principal amount of the Loans which is
required for the Banks or any of them to take any action hereunder; or (e) amend
this Section or any provision herein providing for consent or other action by
all Banks; provided, further, that no amendment, waiver or consent shall, unless
-------- -------
in writing and signed by the Administrative Agent in addition to the Majority
Banks or all the Banks, as the case may be, affect the rights or duties of the
Administrative Agent under this Agreement or rights or privileges thereunder.
11.2 Notices. All notices, payments, requests, reports, information,
-------
demands and other communications which any party hereto may desire, or may be
required, to give or make to any other party hereto, shall (unless otherwise
permitted as a telephonic notice or request hereunder) be given by mailing the
same, postage prepaid, or by telex, or rapifax transmission, or by hand delivery
or courier, to each party at its address set forth in Exhibit D attached hereto
and incorporated herein by reference, or to such other address as may, from time
to time, be specified in writing by Borrower or any Bank. Such communications
shall be deemed to have been duly given and received in the case of a telex,
when the telex is sent and the appropriate answer-back is received, in the case
of mail when sent by pre-paid certified or registered mail correctly addressed
to the addressee, in the case of rapifax transmission, when transmission has
been sent, in the case of hand delivery or courier, when received.
Administrative Agent may rely and act upon any Loan Request made by telex or
other telexed, telephonic or facsimile instructions to Administrative Agent by
any Person purporting to be an authorized Person of Borrower, and Borrower shall
be unconditionally and absolutely estopped from denying the authenticity and
validity of any transaction or act made by Administrative Agent or any Bank in
reliance thereon.
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<PAGE>
Each party hereto shall promptly confirm by telex or rapifax any telephone
communication made by it to another pursuant to this Agreement but the absence
of such confirmation shall not affect the validity of such communication, which
shall be effective upon receipt. If there is any conflict between any telephonic
communication and a written confirmation, the written communication shall
govern; provided, however, that the recipient of such communication shall be
-------- -------
held harmless by all parties hereto with respect to any action taken in reliance
on the telephonic communication prior to the time such recipient receives and
has had reasonable time to review the subsequent written confirmation and
initiate such corrective action as the recipient deems reasonable under the
circumstances.
11.3 Waiver. Neither the failure of, nor any delay on the part of, any
------
party hereto in exercising any right, power or privilege hereunder, or under any
agreement, contract, indenture, document or instrument mentioned herein, shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege hereunder, or under any agreement, contract,
indenture, document or instrument mentioned herein, preclude other or further
exercise thereof or the exercise of any other right, power or privilege; nor
shall any waiver of any right, power, privilege or default hereunder, or under
any agreement, contract, indenture, document or instrument mentioned herein,
constitute a waiver of any other right, power, privilege or default or
constitute a waiver of any other default of the same or of any other term or
provision. All rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies otherwise provided by law.
11.4 California Law. The interpretation, enforcement and effect of this
--------------
Agreement, the Loans and any agreements, contracts, indentures, documents or
instruments delivered in accordance herewith, shall be governed and controlled
in all respects by and construed according to the substantive laws of the State
of California, to the jurisdiction of whose courts the parties hereto hereby
agree to submit.
11.5 Headings. The headings set forth herein are solely for the purpose
--------
of identification and shall not be construed as a part of the sections or
subsections which they head.
11.6 Accounting Terms. All accounting terms not otherwise defined herein
----------------
have the meaning assigned to them in accordance with GAAP, provided, however,
any act or condition in accordance herewith and permitted hereunder when taken,
created or occurring, shall not become a violation of any section of this
Agreement as a result of a subsequent change in GAAP.
11.7 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the different parties hereto on separate counterparts, and
all of said counterparts taken together shall constitute one and the same
instrument.
11.8 Written Disclosure. Wherever written disclosure by Borrower to Banks
------------------
is required or permitted by this Agreement, written disclosure to
Administrative Agent by Borrower shall constitute such disclosure.
11.9 Singular; Plural. Whenever used herein, the singular number shall
----------------
include the plural, the plural the singular, and the use of any gender shall be
applicable to all genders.
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<PAGE>
11.10 Illegality. The illegality or unenforceability of any provision of
----------
this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
11.11 Assignments. This Agreement shall bind and inure to the benefit of
-----------
the parties hereto and their respective successors and assigns. No party hereto
may assign or transfer all or any part of its rights and obligations hereunder,
except that:
(a) Any Bank may, with the prior written consent of Borrower at all
times other than during the existence of an Event of Default, and the
Administrative Agent, which consents shall not be unreasonably withheld, at any
time assign and delegate to one or more Eligible Assignees (provided that no
written consent of Borrower or the Administrative Agent shall be required in
connection with any assignment and delegation by Bank to an Approved Bank
Affiliate of such Bank or another Bank) (each an "Assignee"), all, or any
ratable part of all, of the Loans, the Commitments and the other rights and
obligations of such Bank hereunder; provided, however, that any assignment to an
Eligible Assignee which is not a Bank or an Approved Bank Affiliate shall be of
all, but not less than all, of the Loans, the Commitment and the other rights
and obligations of such Bank hereunder; provided, further, that upon any such
assignment hereunder, such Bank shall concurrently assign to the same Assignee a
ratable portion of its loans, commitments and other rights and obligations under
the Revolving Credit Agreement (Multi-Year Facility) dated as of even date
herewith, among Borrower, the banks parties thereto, Bank of America National
Trust and Savings Association, as administrative agent, Morgan Guaranty Trust
Company of New York, as syndication agent and Citicorp USA, Inc. and The Chase
Manhattan Bank as documentation agents. Upon execution of a written agreement in
form satisfactory to Administrative Agent by such Eligible Assignee in which it
agrees to abide by all of the terms, conditions and obligations applicable to a
Bank herein and to have a Commitment as specified in such agreement, such
Eligible Assignee shall be deemed a Bank hereunder to the same extent as if it
were a signatory hereto and, thereafter, such Eligible Assignee shall for all
purposes be considered a "Bank" hereunder. Administrative Agent shall be
entitled to a $2,500 processing fee, payable by the assignor, with respect to
any such assignment by a Bank.
(b) Subject to Section 11.16, Borrower authorizes each Bank and the
Arranger to disclose to any prospective assignee and assignee any and all
information in such Bank's or the Arranger's possession concerning Borrower,
this Agreement and any collateral.
11.12 Obligations Several. The obligations of each Bank under this
-------------------
Agreement are several. Neither Administrative Agent nor any Bank shall be
liable for the failure of any other Bank to perform its obligations under this
Agreement.
11.13 Participations. Any Bank may at any time sell, or grant
--------------
participations in all or part of its Commitment or any Loan or Loans made to
Borrower under this Agreement to any other Person, other than an individual (a
"Participant"); provided, however, no Bank may be relieved of its obligations
under this Agreement except with the consent of Borrower and Administrative
Agent. Any such sale or grant of a participation is subject to the following
conditions:
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<PAGE>
(a) Administrative Agent and Borrower may, for all purposes of this
Agreement, deem and treat a Bank party to this Agreement as the owner of such
Bank's Loans hereunder for all purposes hereof until a written notice of the
sale or participation shall have been received by Administrative Agent, together
with Borrower's consent to treat such Participant as owner of such Loan.
(b) Subject to Section 11.16, Borrower authorizes each Bank and the
Administrative Agent to disclose to any prospective Participant and to any
Participant any and all information in such Bank's or the Administrative Agent's
possession concerning Borrower, this Agreement and any collateral.
(c) Any agreement pursuant to which a Bank grants a participation in its
rights with respect to any Loan or Loans shall provide that, with respect to any
such Loan or Loans, such Bank shall retain the sole right and responsibility to
exercise the rights of a Bank under this Agreement including, without
limitation, the right to approve any amendment, modification or waiver of any
provision of this Agreement and the right to take action to declare any amount
due and payable pursuant to Section 9; provided that such participation
agreement may provide that such Bank will not agree to any modification,
amendment or waiver of this Agreement without the consent of the Participant if
such modification, amendment or waiver would (i) increase the amount of the
Total Commitment or change the Commitment of such Bank, (ii) reduce interest,
principal or fees owing to such Bank hereunder, (iii) extend the fixed date on
which any sum is due hereunder, or (iv) release or subordinate any collateral.
(d) Except as provided in this Section 11.13, no recipient of a
participation in a Loan or Loans of any Bank shall have any rights under this
Agreement other than to receive payment of principal of, and interest on the
Loans and of such other amounts as Banks are entitled to receive pursuant to
Sections 3.1, 3.2, 3.3, and 3.4 of this Agreement; provided, however such
recipients shall be entitled to receive pursuant to Sections 3.1, 3.2 and 3.3
only the lesser of (i) the amount that the Bank from which the recipient
received its participation would have received had such Bank not transferred an
interest in its Loans to such recipient and (ii) the additional costs actually
incurred by such recipient; and any demand by a Participant for payment
hereunder shall certify that the amount demanded does not exceed the amount
Participant is entitled to receive under this subsection (d).
(e) Notwithstanding any other provision set forth in this Agreement, any
Bank may at any time create a security interest in all or any portion of its
rights under this Agreement (including, without limitation, the Loans owing to
it) in favor of any Federal Reserve Bank in accordance with Regulation A of the
Board of Governors of the Federal Reserve System.
11.14 Fees and Expenses. Borrower agrees to pay on demand (a) to
-----------------
Administrative Agent all reasonable costs, expenses and attorneys' fees
(including allocated costs for in-house legal services) incurred by
Administrative Agent in connection with the preparation and administration of
this Agreement and any documents including any amendments, waivers, or other
modifications and (b) all reasonable costs, expenses and attorneys' fees
(including allocated costs for in-house legal services) incurred by
Administrative Agent and Banks in connection with the enforcement of this
Agreement and any instrument or agreement required hereunder and in connection
with any refinancing or restructuring of the Loans in the nature of a "work-
out";
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<PAGE>
provided, however that, in addition to costs of Administrative Agent's in-house
counsel, Borrower shall be obligated to pay for the costs of no more than one
counsel for Administrative Agent and all Banks (without prejudice to any Bank's
right to engage additional counsel at its own cost and expense) unless any Bank
shall in good faith reasonably determine that there is a conflict of interest
that causes it to be reasonably necessary for such Bank to be represented by
separate counsel.
11.15 Indemnity. Borrower agrees to indemnify the Administrative Agent,
---------
the Arranger, the Syndication Agent, the Documentation Agents, each Bank and
their respective directors, officers, agents and employees (collectively, the
"Indemnitees") from and hold each of them harmless against any and all losses,
liabilities, claims, damages or expenses reasonably incurred by any of them
arising out of or by reason of any investigation by governmental or judicial
authorities or being made a party to any litigation or other similar proceeding
related to any use made or proposed to be made by Borrower of the proceeds of
any Loan for the acquisition of any other Person including, without limitation,
the reasonable fees and disbursements of counsel (including allocated costs for
in-house legal services) incurred in connection with any such investigation,
litigation or other proceeding; provided, however, that Borrower shall have no
-------- -------
obligation to indemnify or pay for the costs and expenses of more than one
counsel for the Indemnitees, unless any Indemnitee shall in good faith
reasonably determine that there is a conflict of interest that causes it to be
reasonably necessary for any Indemnitees to be represented by other counsel.
Counsel chosen to represent the any Indemnitee pursuant to the previous sentence
shall be reasonably satisfactory to Borrower. The obligations of Borrower under
this Section shall survive the termination of this Agreement.
11.16 Confidentiality. In consideration of Borrower furnishing
---------------
Confidential Information(as defined below) to the Banks, the Arranger, the
Administrative Agent, the Syndication Agent and the Documentation Agents,
(collectively, the "Recipients") and their respective directors, officers and
employees (collectively, the "Representatives"), each Recipient agrees for
itself that:
(a) Such Recipient shall keep the Confidential Information confidential
and shall not, without Borrower's prior written consent, disclose it in any
manner whatsoever, in whole or in part, and shall not use the Confidential
Information other than in connection with this Agreement. Each Recipient agrees
to reveal the Confidential Information only to its Representatives, bank
affiliates, auditors, counsel and other advisors, representatives or agents who
need to know the Confidential Information for the purpose of this Agreement, who
are informed by such Recipient of the confidential nature of the Confidential
Information and who shall agree to act in accordance with the terms and
conditions of this section. Each Recipient shall be responsible for any breach
of this Section by its Representatives.
(b) Without Borrower's prior written consent, no Recipient shall
disclose to any Person the fact that the Confidential Information has been made
available, that such Recipient is entering into this Agreement, or any other
facts with respect to this Agreement.
(c) All copies of the Confidential Information shall be returned to
Borrower immediately upon its request, except for that portion of the
information which consists of analyses, compilations, forecasts, studies or
other documents prepared by a Recipient or its
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<PAGE>
Representatives based on Confidential Information, which portion shall, upon
Borrower's election, be destroyed (as evidenced by a certificate of destruction
signed by a duly authorized offer of such Recipient) or held by such Recipient
and kept confidential and subject to the terms of this section. Any oral
Confidential Information shall continue to be subject to the terms of this
Section.
(d) Confidential Information shall not include such portions of the
information furnished to a Recipient which (i) are or become generally available
to the public other than as a result of a disclosure by such Recipient or its
Representatives in violation of this Agreement, (ii) become available to such
Recipient on a non-confidential basis from a source (other than Borrower or its
Representatives) which is not known by such Recipient to be prohibited from
disclosing such information to such Recipient, or (iii) were in such Recipient's
possession prior to being furnished to such Recipient or its Representatives
provided that the source of such information was not known by such Recipient to
be prohibited from disclosing the information to such Recipient.
(e) Except as otherwise expressly set forth in this Agreement, each
Recipient acknowledges that neither Borrower nor any of its Representatives
makes any express or implied representation or warranty as to the accuracy or
completeness of the information furnished to such Recipient, and that neither
Borrower nor any of its Representatives shall have any liability resulting from
the use of the information furnished to any Recipient, errors therein or
omissions therefrom.
(f) In the event any Recipient or any person to whom it transmits the
Confidential Information pursuant to this Agreement becomes legally compelled to
disclose any of the information, such Recipient shall, to the extent permitted
by law, provide Borrower with prompt written notice thereof so that the Borrower
may seek a protective order or other appropriate remedy and/or waiver such
Recipient's compliance with the provisions of this section. In the event that
such protective order or other remedy is not obtained, or that Borrower waives
any Recipient's compliance with the provisions of this section, such Recipient
may furnish only that portion of the Confidential Information which it is
advised by written opinion of counsel that the disclosure thereof is legally
required, and shall exercise its best efforts to obtain reliable assurance that
confidential treatment will be accorded the Confidential Information so
disclosed.
(g) Notwithstanding the foregoing, a Recipient may (i) disclose any
Confidential Information to bank examiners; (ii) use any Confidential
Information in connection with the management, supervision and enforcement of
this Agreement, including the enforcement of such Recipient's rights under any
agreement executed in connection therewith; (iii) disclose any Confidential
Information in connection with any litigation or dispute involving any such
Person or the Borrower and related to this Agreement or to any use of proceeds
of the Loans; (iv) disclose any Confidential Information to other Recipients;
and (v) disclose Confidential Information to prospective assignees and
Participants and assignees and Participants pursuant to Sections 3.8, 11.11(b)
and 11.13(b); provided, further, that in each of the foregoing cases, such
Person shall use its best efforts to ensure that any such disclosure will be
made under procedures reasonably calculated to maintain the confidentiality of
such Confidential Information.
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<PAGE>
For purposes of this Section, "Confidential Information" means information
relating to the business, operation or technology of Borrower or its affiliates
which Borrower has furnished to the Banks, the Arranger, the Administrative
Agent, the Syndication Agent, the Documentation Agents or their Representatives
which is either non-public, confidential or proprietary in nature, together with
copies and other reproductions thereof, and analyses, compilations, forecasts,
studies or other documents prepared by any Banks or its Representatives which
contain or otherwise reflect such information.
This section shall survive termination of the Agreement.
11.17 Termination of Existing Agreements. The parties hereto agree that,
----------------------------------
effective as of the Effective Date, the Existing Agreements, and the commitments
thereunder, are terminated and no party has any outstanding obligations
thereunder.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
in Los Angeles, California as of the date first hereinabove written.
HUGHES NETWORK SYSTEMS, INC.
(to be renamed HUGHES
ELECTRONICS CORPORATION)
By: ______________________________
Title: ___________________________
S-1
<PAGE>
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION,
as Administrative Agent
By: ______________________________
Janice Hammond
Vice President
S-2
<PAGE>
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as
Syndication Agent and a Bank
By: _____________________________
Name: ___________________________
Title: __________________________
S-3
<PAGE>
CITICORP USA, INC., as
Documentation Agent and a Bank
By: _____________________________
Name:____________________________
Title: __________________________
S-4
<PAGE>
THE CHASE MANHATTAN BANK, as
Documentation Agent and a Bank
By: _____________________________
Name:____________________________
Title: __________________________
S-5
<PAGE>
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION,
as a Bank
By: _____________________________
Dianne Allen
Vice President
S-6
<PAGE>
BANKERS TRUST COMPANY
By: _____________________________
Name:____________________________
Title: __________________________
S-7
<PAGE>
CREDIT SUISSE FIRST BOSTON
By: _____________________________
Name:____________________________
Title: __________________________
By: _____________________________
Name:____________________________
Title: __________________________
S-8
<PAGE>
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD., LOS ANGELES AGENCY
By: _____________________________
Name:____________________________
Title: __________________________
S-9
<PAGE>
THE MITSUBISHI TRUST & BANKING
CORPORATION, NEW YORK BRANCH
By: _____________________________
Name:____________________________
Title: __________________________
S-10
<PAGE>
NATIONSBANK OF TEXAS, N.A.
By: _____________________________
Name:____________________________
Title: __________________________
S-11
<PAGE>
TORONTO-DOMINION (TEXAS), INC.
By: _____________________________
Name:____________________________
Title: __________________________
S-12
<PAGE>
BANCA DI ROMA - SAN FRANCISCO BRANCH
By: __________________________________
Name:_________________________________
Title: _______________________________
By: __________________________________
Name:_________________________________
Title: _______________________________
S-13
<PAGE>
THE BANK OF NEW YORK
By: _____________________________
Name:____________________________
Title: __________________________
S-14
<PAGE>
CIBC INC.
By: _____________________________
Name:____________________________
Title: __________________________
S-15
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By: _____________________________
Name:____________________________
Title: __________________________
S-16
<PAGE>
DEUTSCHE BANK AG NEW YORK
AND/OR CAYMAN ISLANDS BRANCHES
By: _____________________________
Name:____________________________
Title: __________________________
By: _____________________________
Name:____________________________
Title: __________________________
S-17
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO
By: _________________________________
Name:________________________________
Title: ______________________________
S-18
<PAGE>
FIRST NATIONAL BANK OF MARYLAND
By: _____________________________
Name:____________________________
Title: __________________________
S-19
<PAGE>
THE FUJI BANK, LIMITED
LOS ANGELES AGENCY
By: _____________________________
Name:____________________________
Title: __________________________
S-20
<PAGE>
THE INDUSTRIAL BANK OF JAPAN,
LIMITED LOS ANGELES AGENCY
By: _____________________________
Name:____________________________
Title: __________________________
S-21
<PAGE>
ISTITUTO BANCARIO SAN PAOLO DI
TORINO SpA
By: _____________________________
Name:____________________________
Title: __________________________
By: _____________________________
Name:____________________________
Title: __________________________
S-22
<PAGE>
UNION BANK OF CALIFORNIA, N.A.
By: _____________________________
Name:____________________________
Title: __________________________
S-23
<PAGE>
SCHEDULE 1
BANKS AND COMMITMENTS
<TABLE>
<CAPTION>
Bank Commitment Normal Percentage
- ---- ---------- -----------------
<S> <C> <C>
Bank of America National 19,687,500 7.8750%
Trust and Savings Association
The Chase Manhattan Bank 19,687,500 7.8750%
Citicorp USA 19,687,500 7.8750%
Morgan Guaranty Trust Company 19,687,500 7.8750%
of New York
Bankers Trust Company 12,500,000 5.0000%
Credit Suisse First Boston 12,500,000 5.0000%
The Long-Term Credit Bank of 12,500,000 5.0000%
Japan, Ltd., Los Angeles Agency
The Mitsubishi Trust and Banking 12,500,000 5.0000%
Corporation, New York Branch
NationsBank of Texas, N.A. 12,500,000 5.0000%
The Toronto-Dominion Bank 12,500,000 5.0000%
Banca di Roma - San 8,750,000 3.5000%
Francisco Branch
The Bank of New York 8,750,000 3.5000%
CIBC Inc. 8,750,000 3.5000%
Creidt Lyonnais New York Branch 8,750,000 3.5000%
Deutsche Bank AG New York 8,750,000 3.5000%
and/or Cayman Island Branches
</TABLE>
-1-
<PAGE>
<TABLE>
<S> <C> <C>
The First National Bank of Chicago 8,750,000 3.5000%
First National Bank of Maryland 8,750,000 3.5000%
The Fuji Bank, Limited, Los 8,750,000 3.5000%
Angeles Agency
The Industrial Bank of Japan, 8,750,000 3.5000%
Limited, Los Angeles Agency
Istituto Bancario San Paolo 8,750,000 3.5000%
di Torino SpA
Union Bank of California 8,750,000 3.5000%
Total $250,000,000 100.0000%
</TABLE>
-2-
<PAGE>
EXHIBIT A-1
LOAN REQUEST
TO: Bank of America National Trust and
Savings Association, as Administrative
Agent for Banks
FROM: Hughes Electronics Corporation
DATE:
RE: Hughes Electronics Corporation -
Revolving Credit Agreement (364-day
Facility)
Gentlemen:
1. We refer to the Revolving Credit Agreement (364-day Facility) dated as
of December 5, 1997 and made among Hughes Electronics Corporation, the banks
parties thereto ("Banks"), Bank of America National Trust and Savings
Association, as administrative agent for the Banks (in such capacity
"Administrative Agent"), Morgan Guaranty Trust Company of New York, as
Syndication Agent and Citicorp USA, Inc. and The Chase Manhattan Bank as
Documentation Agents (the "Agreement"). Terms defined in the Agreement shall
have the same meaning herein.
2. We hereby request that a [Base Rate Loan] [Eurodollar Loan] is made to
us as follows:
(i) Principal Amount:
(ii) Borrowing Date:
(iii) Interest Period (if a Eurodollar Loan):
3. For the purposes of inducing the Banks to make the Loan requested
herein, we confirm that, pursuant to Section 5.2 of the Agreement, as of the
date hereof:
(i) to the best of the knowledge of the undersigned, the
representations and warranties set out in Section 6 of the
Agreement (with the exception of Section 6.6) are true and
correct in all material respects;
(ii) the most current financial statements delivered pursuant to
Section 7.5 of the Agreement present fairly the financial
position and results of operation
A-1-1
<PAGE>
and changes in financial position of Borrower and its
consolidated Subsidiaries as at the end of, and for the fiscal
period to which such statements relate as of the date thereof
(subject, in the case of unaudited financial statements, to year
end adjustments); and
(iii) to the best of the knowledge of the undersigned, no Event of
Default or Unmatured Event of Default has occurred and is
continuing.
HUGHES ELECTRONICS CORPORATION
By:___________________________
Title:________________________
A-1-2
<PAGE>
EXHIBIT A-2
LOAN REQUEST - BID RATE LOANS
TO: Bank of America National Trust and
Savings Association, as Administrative
Agent for Banks
FROM: Hughes Electronics Corporation
DATE:
RE: Hughes Electronics Corporation -
Revolving Credit Agreement (364-day
Facility)
Gentlemen:
1. We refer to the Revolving Credit Agreement (364-day Facility) dated as
of December 5, 1997 and made among Hughes Electronics Corporation, the banks
parties thereto ("Banks"), Bank of America National Trust and Savings
Association, as administrative agent for the Banks (in such capacity
"Administrative Agent"), Morgan Guaranty Trust Company of New York, as
Syndication Agent and Citicorp USA, Inc. and The Chase Manhattan Bank as
Documentation Agents (the "Agreement"). Terms defined in the Agreement shall
have the same meaning herein.
2. We hereby give you notice pursuant to Section 2.4 of the Revolving
Credit Agreement that we request offers for the following proposed Bid Rate
Loans:
(i) Borrowing Date:
(ii) Principal Amount:
(iii) Interest Period(s):
Each Bid Rate Loan offer should specify an amount, the Interest Period and
the Bid Rate upon which each Bank desires to advance a Bid Rate Loan.
3. For the purposes of inducing the Banks to make the Loan requested
herein, we confirm that, pursuant to Section 5.2 of the Agreement, as of the
date hereof:
(i) to the best of the knowledge of the undersigned, the
representations and warranties set out in Section 6 of the
Agreement (with the exception of Section 6.6) are true and
correct in all material respects;
A-2-1
<PAGE>
(ii) the most current financial statements delivered pursuant to
Section 7.5 of the Agreement present fairly the financial
position and results of operation and changes in financial
position of Borrower and its consolidated Subsidiaries as at the
end of, and for the fiscal period to which such statements
relate as of the date thereof (subject, in the case of unaudited
financial statements, to year end adjustments); and
(iii) to the best of the knowledge of the undersigned, no Event of
Default or Unmatured Event of Default has occurred and is
continuing.
HUGHES ELECTRONICS CORPORATION
By:_________________________
Title:______________________
A-2-2
<PAGE>
EXHIBIT B
MASTER BID RATE NOTE
Los Angeles, California December 5,1997
HUGHES ELECTRONICS CORPORATION, a Delaware corporation (formerly named
Hughes Network Systems, Inc.) (the "Borrower"), for value received, hereby
promises to pay to the order of __________________________________________
(the "Bank"), at Agency Administrative Services #5693 of Bank of America
National Trust and Savings Association, as Administrative Agent, for the account
of Bank, 1850 Gateway Blvd., Concord, California 94520, on the dates specified
in the Credit Agreement (as herein defined), in lawful money of the United
States, the total unpaid principal amount of all Bid Rate Loans made by Bank to
Borrower from the date of this Note through the Termination Date pursuant to the
Credit Agreement. This Note shall bear interest as set forth in the Credit
Agreement for Bid Rate Loans. Interest payable under this Note shall be payable
at the times specified in the Credit Agreement. No Loan shall be made under this
Note if, as a result of such Loan, the total aggregate principal amount of Loans
outstanding under the Credit Agreement exceeds the Total Commitment.
This Note is one of the Master Bid Rate Notes referred to in the Revolving
Credit Agreement (364-day Facility) dated as of December 5, 1997 (as in effect
from time to time, the "Credit Agreement"), among Borrower, the banks parties
thereto ("Banks"), Bank of America National Trust and Savings Association, as
administrative agent for the Banks (in such capacity "Administrative Agent"),
Morgan Guaranty Trust Company of New York, as Syndication Agent and Citicorp
USA, Inc. and The Chase Manhattan Bank as Documentation Agents, and is subject
to prepayment in whole or in part and its maturity is subject to acceleration
upon the terms provided in the Credit Agreement.
This Note shall be governed by, and construed and interpreted in accordance
with, the laws of the State of California.
B-1
<PAGE>
All Bid Rate Loans made by Bank to Borrower pursuant to the Credit
Agreement and all payments of principal thereof may be indicated by Bank upon
the grid attached hereto which is a part of this Note. Such notations shall be
presumptively correct as to the aggregate unpaid principal amount of all Bid
Rate Loans made by Bank pursuant to the Credit Agreement.
HUGHES ELECTRONICS CORPORATION
By:__________________________
Title:_______________________
B-2
<PAGE>
Bid Rate Loans and Payments of Principal
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Unpaid
Amount of Interest Interest Amount of Principal Name of Person
Date Loan Period Rate Principal Paid Balance Marking Notation
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
B-3
<PAGE>
EXHIBIT C
RELATIONS AMONG THE BANKS AND AGENTS
1. Administration of the Credit. Payment of interest and principal on the
----------------------------
Loans and the facility fee and all other amounts payable by Borrower hereunder
shall be made by Borrower in immediately available funds, directly to each Bank
in the case of amounts payable under Sections 3.1, 3.2 and 3.3 and, in all other
cases, to Administrative Agent, and Administrative Agent shall promptly
distribute to the other Banks in immediately available funds their shares of
principal, interest and fees and to each Bank as provided herein such other
amounts as paid by Borrower.
2. Pro Rata Distribution. All facility fees will be divided among the
---------------------
Banks in accordance with their Normal Percentage, and interest and principal
payments on each Loan will be divided pro rata among Banks in accordance with
their percentage interest in the Loan.
3. Right of Setoff. Any Bank which shall receive payment of or on account
---------------
of all or part of its share of the Loans through the exercise of any right of
setoff, counterclaim, or banker's lien, or otherwise in a greater proportion
than the proportionate amount of principal and interest due it under this
Agreement immediately prior to such payment shall purchase a ratable proportion
of the portions of the Loan held by the other Banks so that all recoveries of
principal and interest shall be shared by the Banks in accordance with their pro
rata interests in the Loans outstanding hereunder. If all or any portion of
such excess payment is thereafter recovered from such Bank, such purchase shall
be rescinded and the purchase price restored to the extent of such recovery, but
without interest. Any sum received by Bank through exercise of the right of
setoff, counterclaim, or banker's lien shall be deemed to be first applied to
such Bank's portion of the indebtedness under this Agreement, second as herein
above provided and any balance remaining thereafter shall be deemed applied to
any other indebtedness of Borrower to such Bank.
4. Notice of Event of Default. Upon receipt by Administrative Agent from
--------------------------
Borrower of any communication calling for an action on the part of Banks, or
upon notice to Administrative Agent of an Unmatured Event of Default or an Event
of Default, it will in turn promptly inform the other Banks in writing of the
nature of such communication or of the Unmatured Event of Default or Event of
Default, as the case may be.
5. Actions by Administrative Agent. Upon any occasion requiring or
-------------------------------
permitting an approval, consent, election or other action on the part of Banks,
action shall be taken by Administrative Agent for and on behalf or for the
benefit of all Banks upon the direction of the required number of Banks and the
Administrative Agent, if applicable, as set forth in Section 11.1 of the
Agreement.
6. Several Liability of Banks. The obligation of each Bank hereunder is
--------------------------
several, and the failure of one Bank to perform hereunder shall in no way
relieve the other Banks from performance.
7. Liability of Administrative Agent. Administrative Agent shall not be
---------------------------------
liable or answerable for anything whatsoever in connection with this Agreement
except for its willful
C-1
<PAGE>
misconduct or gross negligence, and Administrative Agent shall have no duties or
obligations other than as provided herein. Administrative Agent shall be
entitled to rely on any opinion of counsel (including counsel for Borrower) in
relation to this Agreement, and upon statements and communications received from
Borrower, or from any other person, believed by it to be authentic, and shall
not be liable for any action taken or omitted in good faith on such reliance.
8. Indemnification of Administrative Agent. Each Bank agrees to indemnify
---------------------------------------
Administrative Agent (to the extent not reimbursed by Borrower and without
limiting the obligation of Borrower to do so), ratably according to its Normal
Percentage, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever which may be imposed on, incurred by or
asserted against Administrative Agent in any way relating to or arising out of
this Agreement or any action taken or omitted by Administrative Agent under this
Agreement except for Administrative Agent's gross negligence or willful
misconduct. The obligations of the Banks under this Section 8 shall survive
termination of the Agreement.
9. Rights of Administrative Agent as Bank. With respect to its obligation
--------------------------------------
to lend under this Agreement and the Loans made by it, Bank of America shall
have the same rights and powers hereunder as any other Bank and may exercise the
same as though it were not Administrative Agent; and the term "Banks" shall
include Bank of America in its individual capacity. Bank of America may accept
deposits from, lend money to, and generally engage in any kind of banking, trust
or other business with Borrower as if it were not Administrative Agent.
10. Assignment by Bank of its Obligations. Administrative Agent may deem
--------------------------------------
and treat a Bank party to this Agreement as the owner of such Bank's portion of
the Loans for all purposes hereof unless and until a written notice of the
assignment or transfer of such Bank's obligations otherwise permitted under the
Agreement executed by such Bank shall have been received by Administrative
Agent, together with Borrower's consent to such assignment or transfer and such
other documentation from such Bank and its assignee or transferee as
Administrative Agent may reasonably request.
11. Representations by Banks. Neither Administrative Agent nor any Bank
------------------------
has made or makes to any other Bank any representation, and neither
Administrative Agent nor any Bank assumes any responsibility, in respect to the
execution, construction or enforcement of this Agreement or any other instrument
or agreement executed by Borrower or by any other person or entity.
12. Independent Investigation by Banks. Each Bank has made and shall
----------------------------------
continue to make its own independent investigation of the financial condition
and affairs of Borrower in connection with the making and the continuance of the
Loans and has made and covenants that it shall continue to make its own
appraisal of the creditworthiness of Borrower. Each Bank agrees Administrative
Agent has no duty or responsibility, either initially or on a continuing basis,
to provide any Bank with any credit or other information with respect to
Borrower, whether coming into its possession before the making of the Loans or
at any time or times thereafter except as expressly provided in this Agreement.
C-2
<PAGE>
13. Successor Administrative Agent. Administrative Agent shall have the
------------------------------
right, at any time, to resign as Administrative Agent for the Banks hereunder.
Such resignation shall not be effective until a successor Administrative Agent
chosen by Majority Banks, and accepted by Borrower, shall accept appointment as
Administrative Agent for the Banks hereunder. If no successor Administrative
Agent shall have been so appointed by the Majority Banks and shall have accepted
such appointment, within 30 days after the retiring Administrative Agent has
given notice of resignation, the retiring Administrative Agent may, on behalf of
the Banks, appoint a successor Administrative Agent reasonably acceptable to
Borrower, which successor Administrative Agent shall be a commercial bank
organized under the laws of the United States of America or a State thereof
having a combined capital and surplus of at least $100,000,000. Upon the
acceptance by the successor Administrative Agent of its appointment hereunder,
the successor Administrative Agent shall succeed to and become vested with all
the rights and obligations of the retiring Administrative Agent, and the
retiring Administrative Agent shall be discharged from its obligations under
this Agreement. The provisions of this Article shall inure to the benefit of
the retiring Administrative Agent as to any actions taken or omitted to be taken
by it while it was Administrative Agent under this Agreement. After any
retiring Administrative Agent's resignation hereunder as Administrative Agent,
the provisions of this Exhibit C and Section 11.14 shall inure to its benefit as
to any actions taken or omitted to be taken by it while it was Administrative
Agent under this Agreement.
14. Syndication Agent; Documentation Agents. None of the Banks identified
---------------------------------------
on the facing page or signature pages of this Agreement as Syndication Agent or
Documentation Agents shall have any right, power, obligation, liability,
responsibility or duty under this Agreement other than those applicable to all
Banks as such. Without limiting the foregoing, none of the Banks so identified
shall have or be deemed to have any fiduciary relationship with any Bank. Each
Bank acknowledges that it has not relied, and will not rely, on any of the Banks
so identified in deciding to enter into this Agreement or in taking or not
taking action hereunder.
C-3
<PAGE>
EXHIBIT D
LENDING OFFICES OF BANKS AND ADDRESSES FOR NOTICES
BORROWER
7200 Hughes Terrace, Mail Station A-135, Building C-1
P.O. Box 45066
Los Angeles, Ca. 90045-0066
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, AS ADMINISTRATIVE AGENT
Bank of America National Trust
and Savings Association
555 South Flower Street, 11th Floor
Los Angeles, California 90071
Attention: Gina Meador
Vice President
Agency Management-Los Angeles #20529
Telephone: (213) 228-5245
Facsimile: (213) 228-2299
Administrative Agent's Payment Office:
--------------------------------------
Bank of America National Trust
and Savings Association
1850 Gateway Boulevard, Fifth Floor
Concord, California 94520
Attention: Glenis Croucher
Sr. Agency Administrative Officer
Agency Administrative Services #5596
Telephone: (510) 675-8447
Facsimile: (510) 675-8500
D-1
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, AS A BANK
Domestic and Offshore Lending Office:
-------------------------------------
Bank of America National Trust
and Savings Association
GPO-Domestic Account Administration #5693
1850 Gateway Blvd., 3rd Floor
Concord, CA 954
Attention: Donna Cowan
Sr. Account Administrator
Telephone: (510) 675-7502
Facsimile: (510) 675-7531
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
------------------------
Bank of America National Trust
and Savings Association
555 South Flower Street, 11th Floor
Los Angeles, California 90071
Attention: Dianne Allen
Vice President
Credit Products #5618
Telephone: (213) 228-2435
Facsimile: (213) 623-1959
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
Domestic and Offshore Lending Office:
-------------------------------------
Morgan Guaranty Trust Company
of New York
c/o J.P. Morgan Services Inc.
500 Stanton Christiana Road
Newark, DE 19713
Attention: Jeannie Mattson
Associate
Telephone: (302) 634-1852
Facsimile: (302) 634-1938
D-2
<PAGE>
Notices for all Libor, CD, Base Rate Borrowings and or Repayments:
------------------------------------------------------------------
Morgan Guaranty Trust Company of New York
c/o J.P. Morgan Services Inc.
500 Stanton Christiana Road
Newark, DE 19713
Attention: Thomas Lazlo
Telephone: (302) 634-1852
Facsimile: (302) 634-1893
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
Morgan Guaranty Trust Company of New York
60 Wall Street, 22nd Floor
New York, NY 10260-0060
Attention: Robert Osieski
Vice President
Telephone: (212) 648-5018
Facsimile: (212) 648-7173
THE CHASE MANHATTAN BANK
Domestic and Offshore Lending Office:
-------------------------------------
The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017
Attention: Lenora Kiernan
Telephone: (212) 552-7309
Facsimile: (212) 552-5650
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017
Attention: Richard C. Smith
Vice President
Telephone: (212) 270-5435
Facsimile: (213) 270-5100
D-3
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LTD., LOS ANGELES AGENCY
Domestic and Offshore Lending Office:
-------------------------------------
The Long-Term Credit Bank of Japan, Ltd.,
Los Angeles Agency
350 South Grand Avenue, Suite 3000
Los Angeles, CA 90071
Attention: Mitchell Davis
Telephone: (213) 689-6238
Facsimile: (213) 626-1067
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
The Long-Term Credit Bank of Japan, Ltd.,
Los Angeles Agency
350 South Grand Avenue, Suite 3000
Los Angeles, California 90071
Attention: Tamotsju Ukai
Vice President
Telephone: (213) 381-6345
Facsimile: (213) 626-1067
THE MITSUBISHI TRUST AND BANKING
CORPORATION, NEW YORK BRANCH
Domestic and Offshore Lending Office:
-------------------------------------
The Mitsubishi Trust and Banking
Corporation, New York Branch
520 Madison Avenue
New York, New York 10022
Attention: Ming Hwa Chou
Telephone: (212) 891-8263
Facsimile: (212) 755-2349
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
The Mitsubishi Trust and Banking
Corporation, New York Branch
520 Madison Avenue
New York, New York 10022
Attention: Scott J. Paige
Special Finance
Telephone: (212) 891-8216
Facsimile: (212) 644-6825
D-4
<PAGE>
THE TORONTO-DOMINION BANK
Domestic and Eurodollar Lending Office:
---------------------------------------
The Toronto-Dominion Bank
909 Fanin, Suite 1700
Houston, Texas 77010
Attention: Jorge A. Garcia
Manager - Credit Administration
Telephone: (713) 653-8242
Facsimile: (713) 951-9921
Full Money Market Lending Office:
---------------------------------
The Toronto-Dominion Bank
31 West 52nd Street, 21st Floor
New York, New York 10019-6101
Attention: Senior Dealer
Telephone: (212) 468-0400
Facsimile: (212) 974-5283
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
The Toronto-Dominion Bank
31 West 52nd Street, 21st Floor
New York, New York 10019-6101
Attention: Michael Bandziere
Telephone: (212) 468-0713
Facsimile: (212) 262-1928
CREDIT LYONNAIS NEW YORK BRANCH
Domestic and Offshore Lending Office:
-------------------------------------
Credit Lyonnais New York Branch
1301 Avenue of the Americas
New York, New York 10019
Attention: Deborah Sachs
Telephone: (212) 261-7837
Facsimile: (212) 261-3318
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
Credit Lyonnais New York Branch
1301 Avenue of the Americas
New York, New York 10019
Attention: Mark Campellare
Telephone: (212) 261-7306
Facsimile: (212) 261-3288
D-5
<PAGE>
DEUTSCHE BANK AG
NEW YORK AND/OR CAYMAN ISLANDS BRANCH
Domestic and Offshore Lending Office:
-------------------------------------
Deutsche Bank AG
New York and/or Cayman Islands Branch
31 West 52nd Street
New York, New York 10019
Attention: Noble Samuel/Cheryl H. Manbelbaum
Telephone: (212) 469-4091
Facsimile: (212) 469-4139
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
Deutsche Bank AG
New York and/or Cayman Islands Branch
31 West 52nd Street
New York, New York 10019
Attention: Robert M. Wood, Jr.
Director
Telephone: (212) 469-7839
Facsimile: (212) 469-8212
THE FIRST NATIONAL BANK OF CHICAGO
Domestic and Offshore Lending Office:
-------------------------------------
The First National Bank of Chicago
One First National Plaza
Chicago, Illinois 60670
Attention: Sharon Bosch
Telephone: (312) 732-7112
Facsimile: (312) 732-4840
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
The First National Bank of Chicago
777 S. Figueroa Street, 4th Floor
Los Angeles, California 90017
Attention: Stewart Klein
Telephone: (213) 683-4950
Facsimile: (213) 683-4999
D-6
<PAGE>
with a copy to:
--------------
The First National Bank of Chicago
777 S. Figueroa Street, 4th Floor
Los Angeles, California 90017
Attention: Mark A. Isley
First Vice President
Telephone: (213) 683-4964
Facsimile: (213) 683-4999
FIRST NATIONAL BANK OF MARYLAND
Domestic and Offshore Lending Office:
-------------------------------------
First National Bank of Maryland
25 S. Charles Street, MC101-745
Baltimore, Maryland 21201
Attention: Peg Miedzianowski
Telephone: (410) 244-4839
Facsimile: (410) 244-4239
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
First National Bank of Maryland
25 S. Charles Street, MC101-745
Baltimore, Maryland 21201
Attention: Jennifer Putnam
Telephone: (410) 244-4721
Facsimile: (410) 244-4239
THE FUJI BANK LIMITED, LOS ANGELES AGENCY
Domestic and Offshore Lending Office:
-------------------------------------
The Fuji Bank Limited, Los Angeles Agency
333 South Hope Street, 39th Floor
Los Angeles, CA 90071
Attention: Wayne Wong
Telephone: (213) 253-4132
Facsimile: (213) 253-4178
D-7
<PAGE>
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
The Fuji Bank Limited, Los Angeles Agency
333 South Hope Street, 39th Floor
Los Angeles, California 90071
Attention: Yuka Giles
Assistant Vice President
Telephone: (213) 253-4162
Facsimile: (213) 253-4178
THE INDUSTRIAL BANK OF JAPAN, LIMITED
LOS ANGELES AGENCY
Domestic and Offshore Lending Office:
-------------------------------------
The Industrial Bank of Japan, Limited
Los Angeles Agency
350 S. Grand Avenue, Suite 1500
Los Angeles, CA 90071
Attention: Maria Lopez/Lynn Santos
Telephone: (213) 893-6355/(213) 893-6345
Facsimile: (213) 688-7486
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
The Industrial Bank of Japan, Limited
Los Angeles Agency
350 S. Grand Avenue, Suite 1500
Los Angeles, California 90071
Attention: J. Blake Seaton
Telephone: (213) 893-6448
Facsimile: (213) 488-9840
CITICORP USA
Domestic and Offshore Lending Office:
-------------------------------------
Citibank, N.A.
c/o 2 Pennsway, 2nd Floor
Newcastle, Delaware 19720
Attention: Suzanne Watson
Telephone: (302) 894-6060
Facsimile: (302) 894-6120
D-8
<PAGE>
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
Citibank, N.A.
725 S. Figueroa Street, 5th Floor
Los Angeles, California 90017
Attention: Walt Larsen
Managing Director
Telephone: (213) 239-1501
Facsimile: (213) 623-3592
BANCA DI ROMA - SAN FRANCISCO BRANCH
Domestic and Offshore Lending Office:
-------------------------------------
Banca Di Roma - San Francisco Branch
One Market Street, Steuart Tower, Suite 1000
San Francisco, California 94105
Attention: Francesco Barolo
Telephone: (415) 977-7303
Facsimile: (415) 357-9869
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
Banca Di Roma - San Francisco Branch
One Market Street, Steuart Tower, Suite 1000
San Francisco, California 94105
Attention: Augusto Bianchi
First Vice President
Telephone: (415) 977-7306
Facsimile: (415) 357-9869
THE BANK OF NEW YORK
Domestic and Offshore Lending Office:
-------------------------------------
The Bank of New York
One Wall Street, 22nd Floor
New York, New York 10286
Attention: Sandra Morgan/Dawn Hertling
Telephone: (212) 635-6743 or 6742
Facsimile: (212) 635-6877 or 6899
D-9
<PAGE>
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
The Bank of New York
10990 Wilshire Blvd, Suite 1125
Los Angeles, California 90024
Attention: Johathan Rollins
Assistant Vice President
Telephone: (310) 996-8658
Facsimile: (310) 996-8667
ISTITUTO BANCARIO SAN PAOLIO DI TORINO SpA
Domestic and Offshore Lending Office:
-------------------------------------
San Paolo Bank
245 Park Avenue
New York, New York 10167
Attention: Carmela Romanello-Schaden
Telephone: (212) 692-3126
Facsimile: (212) 599-5303
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
San Paolo Bank
444 South Flower Street
Los Angeles, California 90071
Attention: Donald Brown
Telephone: (213) 489-3105
Facsimile: (213) 622-2514
UNION BANK OF CALIFORNIA, N.A.
Domestic and Offshore Lending Office:
-------------------------------------
Union Bank of California, N.A.
445 S. Figueroa Street, 16th Floor
Los Angeles, California 90071
Attention: Jason Kim
Credit Associate
Telephone: (213) 236-7735
Facsimile: (213) 236-7636
D-10
<PAGE>
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
Union Bank of California, N.A.
445 S. Figueroa Street, 16th Floor
Los Angeles, California 90071
Attention: Steele Fairbanks
Vice President
Telephone: (213) 236-5791
Facsimile: (213) 236-7636
NATIONSBANK OF TEXAS, N.A.
Domestic and Offshore Lending Office:
-------------------------------------
NationsBank of Texas, N.A.
901 Main Street
Dallas, Texas 75202
Attention: Jean North
Telephone: (214) 508-2151
Facsimile: (214) 508-9390
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
NationsBank of Texas, N.A.
901 Main Street
Dallas, Texas 75202
Attention: Rosalyn Reid
Vice President
Telephone: (214) 508-0988
Facsimile: (214) 508-9390
CIBC, INC.
Domestic and Offshore Lending Office:
-------------------------------------
CIBC, Inc.
2727 Park Ferry Road, Suite 1200
Atlanta, Georgia 30339
Attention: Vickie Rollins
Telephone: (770) 319-4802
Facsimile: (770) 319-4950
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
------------------------
CIBC, Inc.
425 S. Lexington Avenue
New York, New York 10017
Attention: Laura Hom
Telephone: (212) 856-3985
Facsimile: (212) 856-3985
D-11
<PAGE>
BANKERS TRUST COMPANY
Domestic and Offshore Lending Office:
-------------------------------------
Bankers Trust Company
One Bankers Trust Plaza
New York, New York 10006
Attention: Hsing Huang
Telephone: (212) 250-2431
Facsimile: (212) 250-7351
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
Bankers Trust Company
One Bankers Trust Plaza
New York, New York 10006
Attention: Gina Thompson
Vice President
Telephone: (212) 250-7396
Facsimile: (212) 250-7351
CREDIT SUISSE FIRST BOSTON
Domestic and Offshore Lending Office:
-------------------------------------
Credit Suisse First Boston
11 Madison Avenue
New York, New York 10020
Attention: Matt Wilson
Telephone: (212) 325-0303
Facsimile: (212) 325-6509
Notices (other than Borrowing notices and Notices of
----------------------------------------------------
Conversion/Continuation):
-------------------------
Credit Suissed First Boston
11 Madison Avenue
New York, New York 10010
Attention: Mark Sampson
Vice President
Telephone: (212) 325-3641
Facsimile: (212) 325-6509
D-12
<PAGE>
EXHIBIT E
EXISTING LIENS
<TABLE>
<S> <C>
Hughes Software Systems Ltd.
Revolving Credit Facility $ 1,670,000.00
Term Loan 800,000.00
Letter of Credit Line 1,670,000.00
Galaxy Latin America
Capital Lease of AT&T Telephone Switch $ 300,000.00
--------------
Total $ 4,440,000.00
</TABLE>
E-1
EXISTING LIENS
<PAGE>
EXHIBIT F
OPINION OF COUNSEL
December 5, 1997
To: The Banks listed on Schedule A hereto; Bank
of America National Trust and Savings
Association, as Administrative Agent; Morgan
Guaranty Trust Company of New York, as
Syndication Agent; and Citicorp USA, Inc.
and The Chase Manhattan Bank as
Documentation Agents
Re: Hughes Electronics Corporation
Revolving Credit Agreement
--------------------------
Gentlemen:
I am the Assistant General Counsel of Hughes Electronics Corporation, a
Delaware corporation (the "Borrower"), in connection with the extension to
Borrower of a revolving line of credit extended under and subject to the terms
and provisions of a Revolving Credit Agreement (364-day Facility) dated as of
December 5, 1997 (the "Credit Agreement") by and among Borrower, the banks named
therein (the "Banks"), Bank of America National Trust and Savings Association,
as administrative agent for the Banks (in such capacity "Administrative Agent"),
Morgan Guaranty Trust Company of New York, as Syndication Agent and Citicorp
USA, Inc. and The Chase Manhattan Bank as Documentation Agents. Capitalized
terms not otherwise defined herein shall have the meanings set forth in the
Credit Agreement. This opinion is rendered to you pursuant to Section 5.1(a) of
the Credit Agreement.
As Assistant General Counsel to Borrower, I have caused to be made such
legal and factual examinations and inquiries, including an examination of
originals or copies, certified or otherwise identified to my satisfaction as
authentic, of such corporate records, agreements, instruments and other
documents as I have deemed necessary or appropriate for the purposes of this
opinion. I have caused to be obtained such certificates and other assurances
(copies of which have been delivered to you) from public officials and officers
and other employees of Borrower as I considered necessary or appropriate for the
purpose of rendering this opinion. I have assumed the genuineness of all
signatures (except that of Borrower), the authenticity of all documents
submitted to me as originals, and the conformity with the originals of all
documents submitted to me as copies.
F-1
OPINION OF COUNSEL
<PAGE>
Subject to the limitations herein set forth, I am opining herein as to the
effect on the subject transaction only of United States federal law, the laws of
the State of California and the General Corporation Law of the State of
Delaware. I am licensed to practice law in the State of California. I assume
no responsibility as to the applicability to the subject transaction or the
effect thereon of the laws of any other jurisdiction.
Based upon the foregoing and in reliance thereon, and subject to the
qualifications, limitations and assumptions set forth herein, I am of the
opinion that, as of the date hereof:
1. Borrower is a corporation duly incorporated and validity existing as a
corporation in good standing under the laws of the State of Delaware, with full
corporate power and authority to own and lease its properties and conduct its
business as presently owned and conducted.
2. Borrower is duly qualified to do business as a foreign corporation in
good standing in the State of California.
3. Borrower has full corporate power and authority to borrow the sums
provided for in the Credit Agreement, to execute and deliver the Credit
Agreement and to perform its obligations thereunder.
4. All corporate action required to be taken by Borrower for the
authorization, execution and delivery of the Credit Agreement by Borrower and
the performance by Borrower of its obligations thereunder has been duly taken.
5. The officer of Borrower executing the Credit Agreement is duly and
properly in office and duly authorized to execute the same.
6. The Credit Agreement is a valid and binding agreement of Borrower,
subject to the limitations, qualifications, exceptions and assumptions set forth
below.
7. To my knowledge, after causing to be conducted such legal and factual
examination and inquiries and causing to be conducted such discussions with and
obtaining such certificates or other confirmations from officers and other
employees of Borrower as I considered appropriate in the circumstances, no
consent, permission, authorization, order or license of any United States
federal or California governmental authority is necessary in connection with the
execution and delivery of the Credit Agreement by Borrower and Borrower's
performance of its obligations under the Credit Agreement.
8. There is no provision of the Certificate of Incorporation or the By-
laws of Borrower which would be contravened by the execution and delivery of the
Credit Agreement by Borrower or by the performance by Borrower of its
obligations under the Credit Agreement.
9. Borrower is not an "investment company" as defined in the Investment
Company Act of 1940, as amended.
10. To my knowledge, after causing to be conducted such legal and factual
examination and inquiries and causing to be conducted such discussions with and
obtaining such
F-2
<PAGE>
certificates or other confirmations from officers and other employees of
Borrower as I considered appropriate in the circumstances, no consent or
approval of any trustee or holder of any material indebtedness of Borrower is
necessary in connection with the execution and delivery of the Credit Agreement
by Borrower and Borrower's performance of its obligations under the Credit
Agreement.
11. There is no provision of any indenture or material agreement for
borrowed money to which Borrower is a party or under which Borrower is
obligated, and of which I am aware, after causing to be conducted such legal and
factual examinations and inquiries and causing to be conducted such discussion
with and obtaining such certificates or other confirmations from officers and
other employees of Borrower as I considered appropriate in the circumstances,
which would be contravened by the execution and delivery of the Credit Agreement
and the Notes by Borrower or by the performance by Borrower of its obligations
under the Credit Agreement.
12. To my knowledge, after causing to be conducted such legal and factual
examinations and inquiries and causing to be conducted such discussions with and
obtaining such certificates or other confirmations from officers and other
employees of Borrower as I considered appropriate in the circumstances, there is
no judgment, decree or order of any court or governmental agency binding on
Borrower which would be contravened by the execution and delivery of the Credit
Agreement by Borrower and Borrower's performance of its obligations under the
Credit Agreement and the Notes.
13. To my knowledge, after causing to be conducted such legal and factual
examinations and inquiries and obtaining certificates or other confirmations
from officers and employees of Borrower as I considered appropriate in the
circumstances, except as set forth in Attachment 1 hereto, there is no claim,
suit, action or proceeding pending or threatened against Borrower before any
court or governmental agency in which there is a specific claim, including
environmental matters, in excess of $75,000,000.
The opinion expressed in paragraph 6 is subject to the following
limitations, qualifications, exceptions and assumptions:
(a) the enforcement of the Credit Agreement and the Notes may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws or
by equitable principles relating to or limiting the rights of creditors
generally;
(b) the use of the term enforceable shall not imply any opinion as to the
availability of equitable remedies;
(c) I advise you that a California court may not strictly enforce certain
covenants contained in the Credit Agreement or allow acceleration of the
maturity of the indebtedness thereunder if it concludes that such enforcement or
acceleration would be unreasonable under the then existing circumstances. I do
believe, however, that subject to the limitations expressed elsewhere in this
opinion, enforcement or acceleration would be available if an Event of Default
occurs as a result of a material breach of a material covenant contained in the
Credit Agreement. Further, certain rights, remedies and waivers contained in
the Credit Agreement may be limited
F-3
<PAGE>
or rendered ineffective by applicable California laws or judicial decisions
governing such provisions, but such laws or judicial decisions do not render the
Credit Agreement invalid as a whole;
(d) The effect of California court decisions, invoking statutes or
principles of equity, which have held that certain covenants and provisions of
agreements are unenforceable where (i) the breach of such covenants or
provisions imposes restrictions or burdens upon the debtor, including the
acceleration of indebtedness due under debt instruments, and it cannot be
demonstrated that the enforcement of such restrictions or burdens is reasonably
necessary for the protection of the creditor, or (ii) the creditor's enforcement
of such covenants or provisions under the circumstances would violate the
creditor's implied covenant of good faith and fair dealing;
(e) The unenforceability under certain circumstances, under California or
federal law or court decisions, of provisions expressly or by implication
waiving broadly or vaguely stated rights, unknown future rights, defenses to
obligations or rights granted by law, where such waivers are against public
policy or prohibited by law;
(f) The unenforceability under certain circumstances of provisions to the
effect that rights or remedies are not exclusive, that every right or remedy is
cumulative and may be exercised in addition to or with any other right or
remedy, that election of a particular remedy or remedies does not preclude
recourse to one or more other remedies or that failure to exercise or delay in
exercising rights or remedies will not operate as a waiver of any such right or
remedy;
(g) The effect of Section 1717 of the California Civil Code, which
provides that, where a contract permits one party to the contract to recover
attorneys' fees, the prevailing party in any action to enforce any provision of
the contract shall be entitled to recover its reasonable attorneys' fees;
(h) The unenforceability under certain circumstances of provisions
indemnifying a party against liability for its own wrongful or negligent acts or
where such indemnification is contrary to public policy or prohibited by law;
and
(i) The enforceability under certain circumstances of provisions imposing
penalties, forfeitures, late payment charges or an increase in interest rate
upon delinquency in payment or the occurrence of a default.
To the extent that the obligations of Borrower may be dependent upon such
matters, I assume for purposes of this opinion that each of the Banks is duly
incorporated or organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation or organization; that each of the Banks is
duly qualified to engage in the transaction covered by this opinion; that the
Credit Agreement has been duly authorized, executed and delivered by each of the
Banks and that the Credit Agreement constitutes the valid and binding obligation
of each of the Banks, enforceable in accordance with its terms; and that each of
the Banks has the requisite corporate or organizational and legal power and
authority to own its properties, to carry on its business as now being conducted
and to perform its obligations under the Credit Agreement, including without
limitation, to make the loans under the Credit Agreement. I am not expressing
F-4
<PAGE>
any opinion as to the effect of or the compliance by any Bank with any state or
federal laws or regulations applicable to the transactions because of the nature
of its respective business.
This opinion is rendered to the Banks and Administrative Agent and is
solely for their benefit in connection with the above transaction. This opinion
may not be relied upon by the Banks or Administrative Agent for any other
purpose, or furnished to, quoted to or relied upon by any other person, firm or
corporation for any purpose without my prior written consent.
Very truly yours,
F-5
<PAGE>
SCHEDULE A TO OPINION OF COUNSEL
Bankers Trust Company
Credit Suisse First Boston
The Long-Term Credit Bank of Japan, Ltd., Los Angeles Agency
The Mitsubishi Trust & Banking Corporation, New York Branch
NationsBank of Texas, N.A.
The Toronto-Dominion Bank
Banca di Roma - San Francisco Branch
The Bank of New York
CIBC Inc.
Credit Lyonnais New York Branch
Deutsche Bank AG New York and/or Cayman Islands Branches
The First National Bank of Chicago
First National Bank of Maryland
The Fuji Bank, Limited, Los Angeles Agency
The Industrial Bank of Japan, Limited, Los Angeles Agency
Istituto Bancario San Paolo di Torino SpA
Union Bank of California
F-6
<PAGE>
ATTACHMENT A TO OPINION OF COUNSEL
LITIGATION
None.
F-7
<PAGE>
Exhibit 10.2
HUGHES ELECTRONICS CORPORATION
FIRST AMENDMENT
TO REVOLVING CREDIT AGREEMENT (364 DAY FACILITY)
This FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT (364-DAY FACILITY)
(this "Amendment") is dated as of December 3, 1998 and entered into by and among
HUGHES ELECTRONICS CORPORATION (formerly known as HUGHES NETWORK SYSTEMS, INC.),
a Delaware corporation (the "Borrower"), the financial institutions listed on
the signature pages hereof (the "Banks"), BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as the administrative agent for the Banks (in such capacity
the "Administrative Agent"), CITICORP USA, INC. as the co-administrative agent
(in such capacity the "Co-Administrative Agent") and MORGAN GUARANTY TRUST
COMPANY OF NEW YORK as syndication agent (the "Syndication Agent") and is made
with reference to that certain Credit Agreement dated as of December 5, 1997 (as
so amended, the "Credit Agreement"), by and among the Borrower, the lending
institutions identified therein, the Administrative Agent, the Co-Administrative
Agent and the Syndication Agent. Capitalized terms used herein without
definition shall have the same meanings herein as set forth in the Credit
Agreement.
RECITALS
WHEREAS, Borrower and Banks desire to amend the Credit Agreement to
(i) extend the Termination Date to December 1, 1999; (ii) to permit the Borrower
annually to request an extension of the Termination Date no earlier than 60 days
and no later than 45 days prior to the existing Termination Date; (iii) to
revise Schedule 1 to the Credit Agreement; (iv) to revise the definition of
Applicable Amount and (v) make certain other amendments as set forth below;
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
1. AMENDMENTS TO THE CREDIT AGREEMENT
1.1 Amendments to Cover Page and Introductory Paragraph
---------------------------------------------------
(A) The cover page of the Credit Agreement is hereby amended by
adding "Citicorp USA, Inc. as Co-Administrative Agent" immediately following
"Bank Of America National Trust and Savings Association as Administrative
Agent"; by deleting "Citicorp USA, Inc. and The Chase Manhattan Bank as
Documentation Agents" and by deleting "BancAmerica Robertson Stephens" and
replacing it with "Salomon Smith Barney Inc."
(B) The definition of "Banks" in the introductory paragraph of the
Credit Agreement is hereby modified to refer to the banks set forth on Schedule
1 attached hereto.
<PAGE>
(C) The introductory paragraph of the Credit Agreement is hereby
further amended by adding the following phrase immediately after "(in such
capacity "Administrative Agent")": "Citicorp USA, Inc., as co-administrative
agent (in such capacity "Co-Administrative Agent and")" and by deleting ", and
Citicorp USA, Inc. and The Chase Manhattan Bank as Documentation Agents (in such
capacity "Documentation Agents")".
1.2 Amendments to Section 1: Definitions
-------------------------------------
(A) Subsection 1.1 of the Credit Agreement is hereby amended by
adding thereto the following definitions, which shall be inserted in proper
alphabetical order:
"Co-Administrative Agent" means Citicorp USA, Inc.
"Commitment Increase Letter" means a letter notifying the
Administrative Agent of a Bank's desire to increase its Commitment pursuant to
Section 11.18 hereof, in substantially the form of Exhibit H hereto.
---------
"Extension Request" means a Request for Extension delivered by the
Borrower to the Banks to request an extension of the Termination Date in
accordance with the provisions of Section 2.13, in substantially the form of
Exhibit G hereto.
- ---------
"New Bank" or "New Banks" means additional lending institutions added
as Banks in accordance with Section 11.18 hereof.
"Utilization Fee" means 12.5 basis points per annum.
(B) Subsection 1.1 of the Credit Agreement is hereby further amended
by deleting the definition of "Applicable Level," in its entirety.
(C) Subsection 1.1 of the Credit Agreement is hereby further amended
by deleting the definitions of "Applicable Amount," "Arrangers," "Reference
Banks," and "Termination Date" therefrom in their entirety and substituting the
following therefor:
"Applicable Amount" means 25 basis points per annum.
"Arranger" means Salomon Smith Barney Inc.
"Reference Banks" means Bank of America, Citibank, N.A. and Morgan
Guaranty Trust Company of New York.
"Termination Date" means December 1, 1999; provided, however, that, if
any Bank has consented to an Extension Request in accordance with Section 2.13
with regard to the then existing Termination Date, then, subject to Section
2.13(b), the then existing Termination Date as to such Bank shall be
automatically extended for 364 days from the then existing Termination Date;
provided further, however, that, notwithstanding any other provisions of this
Agreement to the contrary, the Termination Date shall occur upon the earlier
termination in whole of the Commitments pursuant to Section 3.5 or 9.1.
2
<PAGE>
1.3 Amendments to Section 2: The Credit
-----------------------------------
(A) The following shall be added at the end of the first sentence
of Section 2.6(a): "plus the Utilization Fee (computed daily on the basis of a
three hundred sixty (360) day year and actual days elapsed) with respect to each
day on which the aggregate amount of outstanding Loans exceeds 50% of the Total
Commitment."
(B) The following shall be inserted in the second sentence of
Section 2.6(a) after "Borrower shall pay interest": "and the Utilization Fee".
(C) The term "Applicable Amount" shall be deleted from the first
sentence of Section 2.12, and replaced with "5 basis points per annum".
(D) A new Section 2.13 shall be added to the Credit Agreement, as
follows:
"2.13 Extension of Termination Date. (a) The Borrower may, no earlier
-----------------------------
than 60 days and not later than 45 days prior to the then effective Termination
Date (as it may be extended from time to time pursuant hereto), request in
writing that the Termination Date be extended for an additional 364 days by
sending to the Administrative Agent, which will promptly then provide a copy to
each Bank, an Extension Request. After Borrower's request, each Bank may, in
its sole discretion, consent or not consent to such extension by giving written
notice thereof to the Administrative Agent no earlier than 30 days prior to the
then existing Termination Date, but in any event no later than 20 days prior to
the then existing Termination Date. Each Bank's annual decision as to whether
to extend the Termination Date shall be based, in part, on a new credit analysis
utilizing then current information in respect of Borrower's business, financial
condition and operations and other information furnished by Borrower. Failure
of any Bank to respond within such 20 day period shall be deemed to be a refusal
of such request by such Bank. The Administrative Agent shall promptly notify
each Bank and Borrower of any Bank's decision to reject the proposed extension.
(b) If, in accordance with the provisions of this Section 2.13, a
Bank consents to the extension of the Termination Date, the Termination Date for
such Bank shall be extended for 364 days from the then current Termination Date,
without any further action by Borrower or such Bank; provided that no such
--------
extension shall be effective unless the Commitments of Banks agreeing to so
extend the Termination Date plus the Commitments of any New Banks which have
agreed to become party to this Agreement pursuant to Section 11.18 constitute at
least 50% of the Total Commitment existing on the date hereof.
(c) If any Bank does not consent to a request for an extension of
the Termination Date, or is deemed not to have consented to the requested
extension, and the Termination Date has been extended for the other Bank(s): (i)
the Borrower may, prior to the end of the non-extended Termination Date,
terminate such Bank's Commitment under this Agreement upon payment in full of
principal and interest on all Loans made by such Bank together with such other
sums, if any, that may be due by reason of such prepayment and any fees owing to
such Bank and, in connection with such termination, the Borrower may replace
3
<PAGE>
such non-consenting Bank with a New Bank or increase the Commitment of an
existing Bank, in each case pursuant to Section 11.18; and (ii) if the Borrower
has not previously terminated such non-consenting Bank's Commitment under this
Credit Agreement and paid principal and interest on the Loans held by such non-
consenting Bank and other amounts due to such non-consenting Bank as provided
above, then such principal and interest and other amounts due to such non-
consenting Bank shall be due and payable on the non-extended Termination Date
and the Termination Date shall not be extended insofar as such non-consenting
Bank is concerned."
1.4 Amendments to Section 11: Miscellaneous Provisions
---------------------------------------------------
(A) The following shall be deleted from the end of the first
sentence of Section 11.11(a):
"; provided, further, that upon any such assignment hereunder, such
Bank shall concurrently assign to the same Assignee a ratable portion of its
loans, commitments and other rights and obligations under the Revolving Credit
Agreement (Multi-Year Facility) dated as of even date herewith, among Borrower,
the banks parties thereto, Bank of America National Trust and Savings
Association, as administrative agent, Morgan Guaranty Trust Company of New York,
as syndication agent and Citicorp USA, Inc. and The Chase Manhattan Bank as
documentation agents."
(B) A new Section 11.18 shall be added to the Credit Agreement, as
follows:
"11.18 New Banks; Increases in Commitments of Banks. (a) In the
--------------------------------------------
event one or more Banks do not consent to an extension of the Termination Date
pursuant to Section 2.13, if no Event of Default or Unmatured Event of Default
has occurred and is continuing, Borrower may within five days of Borrower's
receipt of notice of such failure to so extend notify the Administrative Agent
and the Banks (a "Commitment Replacement Notice") that (i) it desires to add one
or more additional lenders to the Banks hereunder having aggregate Commitments
not exceeding the Commitment of the Bank(s) which have not consented to an
extension, and/or (ii) with the consent of the relevant Bank, increase the
Commitment of any one or more of the Banks in an aggregate amount not exceeding
the Commitment of the Bank which has not consented to an extension of the
Termination Date; provided that the existing Bank(s) shall have the right on a
--------
pro rata basis based upon the then existing Commitments to increase their
respective Commitments to replace the terminated Commitments before any New Bank
may be added as a Bank hereunder. The Banks desiring to increase their
Commitments based upon the immediately preceding proviso must give notice to the
Administrative Agent of their intention to accept a greater Commitment within
five days of Borrower's Commitment Replacement Notice. Each Commitment
Replacement Notice shall identify each new lender (each a "New Bank") proposed
by Borrower to be added as a Bank and/or each existing Bank which has proposed
to increase its Commitment, the amount of its proposed Commitment and the
proposed effective date of its becoming a Bank hereunder or increasing its
Commitment, as applicable (which shall be the last day of all then current
Interest Periods if there are Eurodollar Advances then outstanding from the
Banks). Any
4
<PAGE>
increase in the Commitment of a Bank shall be effective upon the receipt by the
Administrative Agent of a Commitment Increase Letter which shall identify the
proposed effective date (which shall be the last day of all then current
Interest Periods if there are Eurodollar Advances then outstanding from the
Banks). Each New Bank shall, with the consent of the Administrative Agent,
become a Bank hereunder for all purposes and to the same effect as if set forth
on the signature pages hereof, subject to its execution and delivery to the
Administrative Agent of at least one counterpart of this Agreement (which shall
be deemed to include all amendments thereto) and the execution and delivery by
the Administrative Agent and the Borrower of each such counterpart. Each Bank
expressly agrees that its obligations arising hereunder shall not be affected or
diminished by the addition or release of any other Bank hereunder, nor by any
election of the Administrative Agent not to authorize a lender to become a New
Bank.
(b) Following any Bank's or Banks' refusal to extend their
Commitments pursuant to Section 2.13 herein and/or any subsequent change in the
Commitments of the existing Banks or the addition of a New Bank, Schedule 1 of
this Agreement shall be deemed amended to reflect (i) the termination of the
non-extending Bank's Commitment; (ii) the addition of any New Bank; (iii) such
New Bank's Commitment; and (iv) any change to the Commitment of an existing
Bank.
(c) Following any Bank or Banks refusal to extend their Commitments
pursuant to Section 2.13 herein and any subsequent change in the Commitments of
the existing Banks or the addition of a New Bank, Borrower agrees to execute
such Notes as necessary to comply with the requirements of Sections 2.8 and 2.9
of this Agreement."
1.5 Modification of Schedules
-------------------------
(A) Schedule 1: Name of Banks and Commitments. Schedule 1 to the
----------------------------------------- ----------
Credit Agreement is hereby deleted in its entirety and replaced with Schedule 1
attached hereto.
1.6 Modification of Exhibits
------------------------
(A) Exhibit D; Addresses and Lending Offices of Banks. Exhibit D to
------------------------------------------------- ---------
the Credit Agreement is hereby amended by deleting said Exhibit D in its
---------
entirety and substituting in place thereof a new Exhibit D in the form attached
---------
to this Amendment.
1.7 Addition of Exhibits
--------------------
(A) Exhibit G; Form of Extension Request. The Credit Agreement is
------------------------------------
hereby amended by adding thereto a new Exhibit G in the form attached to this
---------
Amendment.
(B) Exhibit H; Form of Commitment Increase Letter. The Credit
---------------------------------------------
Agreement is hereby amended by adding thereto a new Exhibit H in the form
---------
attached to this Amendment.
5
<PAGE>
2. CONDITIONS TO EFFECTIVENESS
Section 1 of this Amendment shall become effective only upon the
satisfaction of all of the following conditions precedent (the date of
satisfaction of such conditions being referred to herein as the "First Amendment
Effective Date"):
(A) On or before the First Amendment Effective Date, Borrower shall
deliver to the Banks (or to the Administrative Agent for the Banks with
sufficient originally executed copies, where appropriate, for each Bank and its
counsel) the following, each, unless otherwise noted, dated the First Amendment
Effective Date:
(1) Favorable written opinions, dated the First Amendment Effective
Date, of the General Counsel or Assistant General Counsel of Borrower in the
form set out in Exhibit 1 hereto;
(2) Certificate of the Secretary or an Assistant Secretary of
Borrower dated the First Amendment Effective Date as to (i) the resolution of
the Board of Directors of Borrower or its Executive Committee in connection with
this Agreement, and (ii) the incumbency and signatures of the person authorized
to execute and deliver this Agreement and any other instrument, document or
other agreement required hereunder on the First Amendment Effective Date; and
(3) A certificate, signed by a vice president or assistant treasurer
of Borrower dated the First Amendment Effective Date certifying: (i) that since
December 31, 1997, there has been no change in the financial condition,
business, operations or properties of Borrower and its Subsidiaries taken as a
whole which constitutes a Material Change; and (ii) that no event has occurred
and is continuing or would result from the making of a Loan which constitutes or
would constitute an Event of Default or an Unmatured Event of Default.
(4) A Certificate of Good Standing in relation to Borrower issued by
the Secretary of the State of Delaware, dated not more than one month prior to
the First Amendment Effective Date.
(5) For each Bank that does not currently have in its possession a
Master Bid Note executed by Borrower for such Bank's benefit, a Master Bid Note,
referred to in Section 2.9 of the Credit Agreement, in an amount of each such
Bank's Commitment as set forth in Schedule 1 attached hereto duly executed by
Borrower.
(6) Executed copies of this Amendment.
(B) All fees and other amounts owed to the Administrative Agent, Co-
Administrative Agent, Syndication Agent, Documentation Agent, Arranger and any
Bank through the Effective Date (including Banks having no Commitment on and
after the Effective Date) by Borrower shall have been received by such person.
(C) On or before the First Amendment Effective Date, all corporate
and other proceedings taken or to be taken in connection with the transactions
contemplated hereby and all documents incidental thereto not previously found
acceptable by the
6
<PAGE>
Administrative Agent, acting on behalf of Banks, and its counsel shall be
satisfactory in form and substance to the Administrative Agent and such counsel,
and the Administrative Agent and such counsel shall have received all such
counterpart originals or certified copies of such documents as the
Administrative Agent may reasonably request.
3. BORROWER'S REPRESENTATIONS AND WARRANTIES
In order to induce Banks to enter into this Amendment and to amend the
Credit Agreement in the manner provided herein, Borrower represents and warrants
to each Bank that the following statements are true, correct and complete:
(A) Corporate Power and Authority. Borrower has all requisite
-----------------------------
corporate power and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, the Credit
Agreement as amended by this Amendment (the "Amended Agreement").
(B) Authorization of Agreements. The execution and delivery of this
---------------------------
Amendment and the performance of the Amended Agreement have been duly authorized
by all necessary corporate action on the part of Borrower.
(C) No Contravention. There is no charter, by-law, or capital stock
----------------
provision of Borrower and no provision of any indenture or material agreement,
written or oral, to which Borrower is a party or under which Borrower is
obligated, nor is there any statute, rule or regulation, or any judgment, decree
or order of any court or agency binding on Borrower which would be contravened
by the execution, delivery and performance of any provision, condition, covenant
or other term of this Amendment or the Amended Agreement.
(D) Binding Obligation. This Amendment and the Amended Agreement are
------------------
the legal, valid and binding obligation of Borrower, enforceable against it in
accordance with their terms, and any instrument or agreement required hereunder
or by the Amended Agreement, when executed and delivered, will be similarly
valid, binding and enforceable.
(E) Incorporation of Representations and Warranties From Credit
-----------------------------------------------------------
Agreement. The representations and warranties contained in Section 6 of the
- ---------
Credit Agreement are and will be true, correct and complete in all material
respects on and as of the First Amendment Effective Date to the same extent as
though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were
true, correct and complete in all material respects on and as of such earlier
date.
(F) Absence of Default. No event has occurred and is continuing or
------------------
will result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Unmatured Event of
Default.
4. MISCELLANEOUS
(A) Reference to and Effect on the Credit Agreement and the Other
Loan Documents.
7
<PAGE>
(i) On and after the First Amendment Effective Date, each reference
in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or
words of like import referring to the Credit Agreement, and each reference in
the other documents entered pursuant to the Credit Agreement to the "Credit
Agreement", "thereunder", "thereof" or words of like import referring to the
Credit Agreement shall mean and be a reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment, the Credit
Agreement and the other documents entered pursuant to the Credit Agreement shall
remain in full force and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of any provision
of, or operate as a waiver of any right, power or remedy of the Administrative
Agent or any Bank under, the Credit Agreement or any of the other Loan
Documents.
(B) Fees and Expenses. Borrower acknowledges that all costs, fees
-----------------
and expenses as described in subsection 11.14 of the Credit Agreement incurred
by the Arranger, the Administrative Agent and their counsel with respect to this
Amendment and the documents and transactions contemplated hereby shall be for
the account of Borrower.
(C) Headings. Section and subsection headings in this Amendment are
--------
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
(D) California Law. The interpretation, enforcement and effect of
--------------
this Agreement, the Loans and any agreements, contracts, indentures, documents
or instruments delivered in accordance herewith, shall be governed and
controlled in all respects by and construed according to the substantive laws of
the State of California, to the jurisdiction of whose courts the parties hereto
hereby agree to submit.
(E) Counterparts; Effectiveness. This Amendment may be executed in
---------------------------
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This Amendment (other than the
provisions of Section 1 hereof, the effectiveness of which is governed by
Section 2 hereof) shall become effective upon the execution of a counterpart
hereof by Borrower and Banks and receipt by Borrower and the Administrative
Agent of written or telephonic notification of such execution and authorization
of delivery thereof.
[Remainder of page intentionally left blank]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
HUGHES ELECTRONICS
CORPORATION
By:______________________________________
Name:
Title:
S-1
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as
Administrative Agent and as a Bank
By:______________________________________
Name:
Title:
S-2
<PAGE>
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as Syndication
Agent and a Bank
By:______________________________________
Name:
Title:
S-3
<PAGE>
[RESERVED]
S-4
<PAGE>
[RESERVED]
S-5
<PAGE>
THE MITSUBISHI TRUST & BANKING
CORPORATION, NEW YORK BRANCH,
as a Bank
By:______________________________________
Name:
Title:
S-6
<PAGE>
[RESERVED]
S-7
<PAGE>
CREDIT LYONNAIS NEW YORK
BRANCH, as a Bank
By:______________________________________
Name:
Title:
S-8
<PAGE>
DEUTSCHE BANK AG NEW YORK
AND/OR CAYMAN ISLANDS BRANCHES,
as a Bank
By:______________________________________
Name:
Title:
S-9
<PAGE>
THE FIRST NATIONAL BANK OF
CHICAGO, as a Bank
By:______________________________________
Name:
Title:
S-10
<PAGE>
FIRST NATIONAL BANK OF
MARYLAND, as a Bank
By:______________________________________
Name:
Title:
S-11
<PAGE>
THE FUJI BANK LIMITED LOS
ANGELES AGENCY, as a Bank
By:______________________________________
Name:
Title:
S-12
<PAGE>
CITICORP USA, INC., as Co-Administrative
Agent and as a Bank
By:______________________________________
Name:
Title:
S-13
<PAGE>
BANCA DI ROMA-SAN FRANCISCO
BRANCH, as a Bank
By:______________________________________
Name:
Title:
S-14
<PAGE>
THE BANK OF NEW YORK, as a Bank
By:______________________________________
Name:
Title:
S-15
<PAGE>
[RESERVED]
S-16
<PAGE>
[RESERVED]
S-17
<PAGE>
[RESERVED]
S-18
<PAGE>
CIBC, INC., as a Bank
By:______________________________________
Name:
Title:
S-19
<PAGE>
BANKERS TRUST COMPANY, as a Bank
By:______________________________________
Name:
Title:
S-20
<PAGE>
CREDIT SUISSE FIRST BOSTON, as a Bank
By:______________________________________
Name:
Title:
S-21
<PAGE>
THE INDUSTRIAL BANK OF JAPAN,
LIMITED LOS ANGELES AGENCY, as a
Bank
By:______________________________________
Name:
Title:
S-22
<PAGE>
SCHEDULE 1
----------
<TABLE>
<CAPTION>
________________________________________________________________________________
Lender Commitment
------ ----------
- --------------------------------------------------------------------------------
<S> <C>
Citicorp USA, Inc. $53,000,000
- --------------------------------------------------------------------------------
Bank of America National Trust and Savings Association $47,000,000
- --------------------------------------------------------------------------------
The First National Bank of Chicago $25,000,000
- --------------------------------------------------------------------------------
Morgan Guaranty Trust Company of New York $17,500,000
- --------------------------------------------------------------------------------
Bankers Trust Company $12,500,000
- --------------------------------------------------------------------------------
Credit Suisse First Boston $12,500,000
- --------------------------------------------------------------------------------
The Mitsubishi Trust & Banking Corporation, New York $12,500,000
Branch
- --------------------------------------------------------------------------------
Banca Di Roma-San Francisco Branch $ 8,750,000
- --------------------------------------------------------------------------------
The Bank of New York $ 8,750,000
- --------------------------------------------------------------------------------
CIBC, Inc. $ 8,750,000
- --------------------------------------------------------------------------------
Credit Lyonnais New York Branch $ 8,750,000
- --------------------------------------------------------------------------------
Deutsche Bank AG New York And/Or Cayman Islands Branches $ 8,750,000
- --------------------------------------------------------------------------------
First National Bank of Maryland $ 8,750,000
- --------------------------------------------------------------------------------
The Fuji Bank Limited Los Angeles Agency $ 8,750,000
- --------------------------------------------------------------------------------
The Industrial Bank Of Japan, Limited Los Angeles Agency $ 8,750,000
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT D
HUGHES ELECTRONICS CORPORATION
REVOLVING CREDIT AGREEMENT
(364-DAY FACILITY)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Bank Addresses
----
- --------------------------------------------------------------------------------
<S> <C>
Bank of America National Trust and 555 S. Flower Street
Savings Association, as 11th Floor
Administrative Agent Los Angeles, CA 90071
Attention: Gina Meador
Agency Management-Los Angeles #20529
Telephone: (213) 228-5245
Facsimile: (213) 228-2299
Payment Office
1850 Gateway Boulevard, Fifth Floor
Concord, CA 94520
Attention: Glenis Croucher
Senior Agency Administrative Officer
Agency Administrative Services #5596
Telephone: (925) 675-8447
Facsimile: (925) 675-8500
- --------------------------------------------------------------------------------
Bank of America National Trust and Domestic and Offshore Lending Office
Savings Association, as a Bank
1850 Gateway Boulevard, Third Floor
Concord, CA 94520
Attention: Donna Cowan
Senior Account Administrator
GPO-Domestic Account Administration #5693
Telephone: (925) 675-7502
Facsimile: (925) 675-7531
Notices (other than Borrowing Notices and
Conversion/Continuation)
555 S. Flower Street
11th Floor
Los Angeles, CA 90071
Attention: Dianne Allen
Vice President
Credit Products #5618
Telephone: (213) 228-2435
Facsimile: (213) 623-1959
- --------------------------------------------------------------------------------
</TABLE>
Exhibit D-1
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Morgan Guaranty Trust Company of Domestic and Offshore Lending Office:
New York
c/o J.P. Morgan Services Inc.
500 Stanton Christiana Road
Newark, DE 19713
Attention: Jeannie Mattson
Telephone: (302) 634-1852
Facsimile: (302) 634-1938
Notice for all Libor, DC, Base Rate
Borrowings and/or Repayments:
c/o J.P. Morgan Services Inc.
500 Stanton Christiana Road
Newark, DE 19713
Attention: Thomas Lazlo
Telephone: (302) 634-1852
Facsimile: (302) 634-1893
Notices (other than Borrowing Notices and
Conversion/Continuation)
60 Wall Street
3rd Floor
New York, NY 10260-0060
Attention: Robert Osieski
Vice President
Telephone: (212) 648-5018
Facsimile: (212) 648-7173
- --------------------------------------------------------------------------------
</TABLE>
Exhibit D-2
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
The Mitsubishi Trust & Banking Domestic and Offshore Lending Office:
Corporation, New York Branch
520 Madison Avenue
26th Floor
New York, NY 10022
Attention: Ming Hwa Chou
Telephone: (212) 891-8263
Facsimile: (212) 755-2349
Notices (other than Borrowing Notices and
Conversion/Continuation)
520 Madison Avenue
26th Floor
New York, NY 10022
Attention: Scott Paige
Special Finance
Telephone: (212) 891-8216
Facsimile: (212) 755-2349
Credit Lyonnais New York Branch Domestic and Offshore Lending Office:
1301 Avenue of the Americas
New York, NY 10019
Attention: Deborah Sachs
Telephone: (212) 261-7837
Facsimile: (212) 261-3318
Notices (other than Borrowing Notices and
Conversion/Continuation)
1301 Avenue of the Americas
New York, NY 10019
Attention: Mark Campellare
Telephone: (212) 261-7306
Facsimile: (212) 261-3288
- --------------------------------------------------------------------------------
</TABLE>
Exhibit D-3
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Deutsche Bank AG New York Domestic and Offshore Lending Office:
And/Or Cayman Islands Branches
31 W. 52nd Street
24th Floor
New York, NY 10019
Attention: Noble Samuel/Cheryl Manbelbaum
Telephone: (212) 469-4091
Facsimile: (212) 469-4139
Notices (other than Borrowing Notices and
Conversion/Continuation)
31 W. 52nd Street
24th Floor
New York, NY 10019
Attention: Joel Makowsky
Vice President
Telephone: (212) 469-7896
Facsimile: (212) 469-8212
- --------------------------------------------------------------------------------
</TABLE>
Exhibit D-4
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
The First National Bank of Chicago Domestic and Offshore Lending Office:
One First National Plaza
Chicago, Illinois 60670
Attention: Sharon Bosch
Telephone: (312) 732-7112
Facsimile: (312) 732-4840
Notices (other than Borrowing Notices and
Conversion/Continuation)
777 S. Figueroa Street
4th Floor
Los Angeles, CA 90017
Attention: Stewart Klein
Telephone: (213) 683-4950
Facsimile: (213) 683-4999
With a copy to:
777 S. Figueroa Street
4th Floor
Los Angeles, CA 90017
Attention: Mark Isley
Telephone: (213) 683-4964
Facsimile: (213) 683-4999
- --------------------------------------------------------------------------------
First National Bank of Maryland Domestic and Offshore Lending Office:
25 S. Charles Street, MC101-745
Baltimore, MD 21201
Attention: Peg Miedzianowski
Telephone: (410) 244-4839
Facsimile: (410) 244-4239
Notices (other than Borrowing Notices and
Conversion/Continuation)
25 S. Charles Street, MC101-745
Baltimore, MD 21201
Attention: Jennifer Putnam
Telephone: (410) 244-4721
Facsimile: (410) 244-4239
- --------------------------------------------------------------------------------
</TABLE>
Exhibit D-5
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
The Fuji Bank Limited Los Angeles Domestic and Offshore Lending Office:
Agency
333 South Hope Street
39th Floor
Los Angeles, CA 90071
Attention: Wayne Wong
Telephone: (213) 253-4132
Facsimile: (213) 253-4178
Notices (other than Borrowing Notices and
Conversion/Continuation)
333 South Hope Street
39th Floor
Los Angeles, CA 90071
Attention: Jonathan Bigelow
Vice President
Telephone: (213) 253-4144
Facsimile: (213) 253-4178
- --------------------------------------------------------------------------------
Citicorp USA, Inc. Domestic and Offshore Lending Office:
Citibank, N.A.
c/o Pennsway, 2nd Floor
Newcastle, Delaware 19720
Attention: Suzanne Watson
Telephone: (302) 894-6060
Facsimile: (302) 894-6120
Notices (other than Borrowing Notices and
Conversion/Continuation)
Citibank, N.A.
777 S. Figueroa Street
5th Floor
Los Angeles, CA 90017
Attention: Walt Larson
Managing Director
Telephone: (213) 239-1501
Facsimile: (213) 623-3592
- --------------------------------------------------------------------------------
</TABLE>
Exhibit D-6
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Banca Di Roma-San Francisco Branch Domestic and Offshore Lending Office:
One Market Street
Steuart Tower
Suite 1000
San Francisco, CA 94105
Attention: Francesco Barolo
Telephone: (415) 977-7303
Facsimile: (415) 357-9869
Notices (other than Borrowing Notices and
Conversion/Continuation)
One Market Street
Steuart Tower
Suite 1000
San Francisco, CA 94105
Attention: Augusto Bianchi
First Vice President
Telephone: (415) 977-7306
Facsimile: (415) 357-9869
- --------------------------------------------------------------------------------
The Bank of New York Domestic and Offshore Lending Office:
One Wall Street, 22nd Floor
New York, NY 10286
Attention: Sandra Morgan/Dawn Hertling
Telephone: (212) 635-6743 or 6742
Facsimile: (212) 635-6877 or 6899
Notices (other than Borrowing Notices and
Conversion/Continuation)
10990 Wilshire Boulevard
Los Angeles, CA 90024
Attention: Jonathan Rollins
Assistant Vice President
Telephone: (310) 996-8658
Facsimile: (310) 996-8667
- --------------------------------------------------------------------------------
</TABLE>
Exhibit D-7
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
CIBC, Inc. Domestic and Offshore Lending Office:
2727 Park Ferry Road, Suite 1200
Atlanta, Georgia 30339
Attention: Vickie Rollins
Telephone: (770) 319-4802
Facsimile: (770) 319-4950
Notices (other than Borrowing Notices and
Conversion/Continuation)
425 Lexington Avenue
8th Floor
New York, NY 10017
Attention: Christine Harrigan
Telephone: (212) 856-3764
Facsimile: (212) 856-3558
- --------------------------------------------------------------------------------
Bankers Trust Company Domestic and Offshore Lending Office:
One Bankers Trust Plaza
8th Floor
New York, NY 10006
Attention: Hsing Huang
Telephone: (212) 250-2431
Facsimile: (212) 250-7351
Notices (other than Borrowing Notices and
Conversion/Continuation)
One Bankers Trust Plaza
8th Floor
New York, NY 10006
Attention: Gina Thomson
Vice President
Telephone: (212) 250-7396
Facsimile: (212) 250-7351
- --------------------------------------------------------------------------------
</TABLE>
Exhibit D-8
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Credit Suisse First Boston Domestic and Offshore Lending Office:
5 World Trade Center
8th Floor
New York, NY 10048
Attention: Ronald Davis
Telephone: (212) 322-1865
Facsimile: (212) 335-0593
Notices (other than Borrowing Notices and
Conversion/Continuation)
11 Madison Avenue
20th Floor
New York, NY 10010
Attention: David Kratovil
Vice President
Telephone: (212) 325-9155
Facsimile: (212) 325-8309
- --------------------------------------------------------------------------------
The Industrial Bank Of Japan, Domestic and Offshore Lending Office:
Limited Los Angeles Agency
350 South Grand Avenue
Suite 1500
Los Angeles, CA 90071
Attention: Maria Lopez/Lynn Santos
Telephone: (213) 893-6355 or 6345
Facsimile: (213) 688-7486
Notices (other than Borrowing Notices and
Conversion/Continuation)
350 South Grand Avenue
Suite 1500
Los Angeles, CA 90071
Attention: Blake Seaton
Telephone: (213) 628-7241
Facsimile: (213) 488-9840
- --------------------------------------------------------------------------------
</TABLE>
Exhibit D-9
<PAGE>
EXHIBIT G
[FORM OF REQUEST FOR EXTENSION OF TERMINATION DATE]
[LETTERHEAD OF HUGHES ELECTRONICS CORPORATION]
_____________________, 19___
BANKS PARTY TO THE CREDIT AGREEMENT
REFERRED TO BELOW
Ladies and Gentlemen
In accordance with Section 2.13 of the Revolving Credit Agreement
dated as of December 5, 1997 (as amended, the "Credit Agreement"; terms
defined therein being used herein as therein defined), among the
undersigned, the Banks parties thereto, Bank of America National Trust and
Savings Association as Administrative Agent, Citicorp USA, Inc. as Co-
Administrative Agent and Morgan Guaranty Trust Company of New York as
Syndication Agent, the undersigned hereby requests that you consent to
extension of the Termination Date to [INSERT DATE 364 DAYS AFTER CURRENT
TERMINATION DATE], or, if such date is not a Business Day, the next
preceding Business Day.
Please indicate your consent to such extension of the Termination
Date by signing the attached copy of this letter in the space provided
below and returning same to the Administrative Agent, if possible by
_____________, 19__ but, in any event, not later than ____________, 19___.
Very truly yours,
HUGHES ELECTRONICS
CORPORATION
By _________________________
Name:
Title:
The undersigned Lender, party to the Credit Agreement, consents
to the extension of the Termination Date as requested above.
[NAME OF BANK]
By _________________________
Name:
Title:
Exhibit G-1
<PAGE>
EXHIBIT H
[FORM OF COMMITMENT INCREASE LETTER]
[LETTERHEAD OF HUGHES ELECTRONICS CORPORATION]
__________, 199_
To Bank of America National Trust and Savings Association:
as Administrative Agent for the Banks party to the Credit Agreement
referred to below
_______________________
_______________________
Attention:_____________
Ladies and Gentlemen:
In accordance with Section 11.18(a) of the Credit Agreement, dated as
of December 5, 1997, (as amended, the "Credit Agreement"; terms defined therein
being used herein as therein defined), among the undersigned, the Banks parties
thereto, Bank of America National Trust and Savings Association as
Administrative Agent, Citicorp USA, Inc. as Co-Administrative Agent and Morgan
Guaranty Trust Company of New York as Syndication Agent, the undersigned hereby
requests that you, the Administrative Agent and [NAME OF INCREASING BANK]
consent to the increase of [$____________] to [NAME OF INCREASING BANK]'S
Commitment which shall result in [NAME OF INCREASING BANK]'s net Commitment
equaling [$___________].
The undersigned hereby certifies, on behalf of Borrower that (i)
representations and warranties contained in Section 6 of the Credit Agreement
are true and accurate as though made on and as of the date hereof (except to the
extent any representation and warranty is expressly made as of a specific date,
in which case such representation and warranty shall be true and correct in all
material respects as of such specific date), and (ii) no event has occurred and
is continuing or would result from such increase in [INCREASING BANK]'s
Commitment which constitutes an Event of Default or an Unmatured Event of
Default under the Credit Agreement.
Exhibit H-1
<PAGE>
Please indicate your consent to such increase of the commitment of
[NAME OF INCREASING BANK] by signing the attached copy of this letter in the
space provided below by __________, 199_ but, in any event, not later than
_______, 199_.
Very truly yours,
HUGHES ELECTRONICS CORPORATION
By________________________
Name:
Title:
The undersigned parties consent to the increase of [NAME OF INCREASING
BANK]'s Commitment as requested above.
Accepted this __ day [NAME OF INCREASING BANK]
of _________, 199_
By________________________
Name:
Title:
Acknowledged and Agreed:
Bank of America National Trust
and Savings Association
as Administrative Agent
By_______________________
Name:
Title:
Exhibit H-2
<PAGE>
EXHIBIT 1
[HUGHES ELECTRONICS CORPORATION LETTERHEAD]
December 3, 1998
To: The Banks listed on Schedule A hereto;
Bank of America National Trust and
Savings Association, as Administrative
Agent, Morgan Guaranty Trust Company of
New York, as Syndication Agent; and
Citicorp USA, Inc. as Co-Administrative
Agent
Re: Hughes Electronics Corporation's First Amendment to
Revolving Credit Agreement (364-Day Facility)
---------------------------------------------
Ladies and Gentlemen:
I am the Assistant General Counsel of Hughes Electronics Corporation, a
Delaware corporation ("Borrower"), in connection with the First Amendment dated
as of December 3, 1998 (the "First Amendment") to the Revolving Credit Agreement
(364-Day Facility) dated as of December 5, 1997 (as so amended, "Credit
Agreement") by and among Borrower, the banks named therein (the "Banks"), Bank
of America National Trust and Savings Association, as administrative agent for
the Banks (in such capacity "Administrative Agent"), Morgan Guaranty Trust
Company of New York, as Syndication Agent, and Citicorp USA, Inc. as Co-
Administrative Agent. Capitalized terms not otherwise defined herein shall have
the meanings set forth in the Credit Agreement. This opinion is rendered to you
pursuant to Section 2(A)(1) of the First Amendment.
As Assistant General Counsel to Borrower, I have caused to be made such
legal and factual examinations and inquiries, including an examination of
originals or copies, certified or otherwise identified to my satisfaction as
authentic, of such corporate records, agreements, instruments and other
documents as I have deemed necessary or appropriate for the purposes of this
opinion. I have caused to be obtained such certificates and other assurances
(copies of which have been delivered to you) from public officials and officers
and other employees of Borrower as I considered necessary or appropriate for the
purpose of rendering this opinion. I have assumed the genuineness of all
signatures (except that of Borrower), the authenticity of all documents
submitted to us as originals, and the conformity with the originals of all
documents submitted to me as copies.
Subject to the limitations herein set forth, I am opining herein as to the
effect on the subject transaction only of United States federal law, the laws of
the State of California and the General Corporation Law of the State of
Delaware. I am licensed to practice law in the State of California. I assume no
responsibility as to the applicability to the subject transaction or the effect
thereon of the laws of any other jurisdiction.
Exhibit 1 - 1
<PAGE>
Based upon the foregoing and in reliance thereon, and subject to the
qualifications, limitations, and assumptions set forth herein, I am of the
opinion that, as of the date hereof:
1. Borrower is a corporation duly incorporated and validly existing as a
corporation in good standing under the laws of the State of Delaware, with full
corporate power and authority to own and lease its properties and conduct its
business as presently owned and conducted.
2. Borrower is duly qualified to do business as a foreign corporation in
good standing in the State of California.
3. Borrower has full corporate power and authority to borrow the sums
provided for in the Credit Agreement, to execute and deliver the First Amendment
and to perform its obligations under the Credit Agreement and the First
Amendment.
4. All corporate action required to be taken by Borrower for the
authorization, execution and delivery of the First Amendment by Borrower and the
performance by Borrower of its obligations thereunder and under the Credit
Agreement has been duly taken.
5. The officer of Borrower executing the First Amendment is duly and
properly in office and duly authorized to execute the same.
6. The First Amendment and Credit Agreement are valid and binding
agreements of Borrower, enforceable in accordance with their terms, subject to
the limitations, qualifications, exceptions and assumptions set forth below.
7. To my knowledge, after causing to be conducted such legal examination
and inquiries and causing to be conducted such discussions with and obtaining
such certificates or other confirmations from officers and other employees of
Borrower as I considered appropriate in the circumstances, no consent,
permission, authorization order or license of any United States federal or
California governmental authority is necessary in connection with the execution
and delivery of the First Amendment by Borrower and Borrower's performance of
its obligations under the First Amendment and the Credit Agreement.
8. There is no provision of the Certificate of Incorporation or the By-
laws of Borrower which would be contravened by the execution and delivery of the
First Amendment by Borrower or by the performance by Borrower of its obligations
under the First Amendment and the Credit Agreement.
9. Borrower is not an "investment company" as defined in the Investment
Company Act of 1940, as amended.
10. To my knowledge, after causing to be conducted such legal and factual
examination and inquiries and causing to be conducted such discussions with and
obtaining such certificates or other confirmations from officers and other
employees of Borrower as I considered appropriate in the circumstances, no
consent or approval of any trustee or holder of any material indebtedness of
Borrower is necessary in connection with the execution and delivery of the First
Amendment by Borrower and Borrower's performance of its obligations under the
First Amendment and the Credit Agreement.
Exhibit 1 - 2
<PAGE>
11. There is no provision of any indenture or material agreement for
borrowed money to which Borrower is a party or under which Borrower is
obligated, and of which I am aware, after causing to be conducted such legal and
factual examinations and inquiries and causing to be conducted such discussion
with and obtaining such certificates or other confirmations from officers and
other employees of Borrower as I considered appropriate in the circumstances
which would be contravened by the execution and delivery of the First Amendment
by Borrower or by the performance by Borrower of its obligations under the First
Amendment and the Credit Agreement.
12. To my knowledge, after causing to be conducted such legal and factual
examination and inquiries and causing to be conducted such discussions with and
obtaining such certificates or other confirmations from officers and other
employees of Borrower as I considered appropriate in the circumstances, there is
no judgment, decree or order of any court or governmental agency binding on
Borrower which would be contravened by the execution and delivery of the First
Amendment and the Notes by Borrower and Borrower's performance of its
obligations under the First Amendment, the Credit Agreement and the Notes.
13. To my knowledge, after causing to be conducted such legal and factual
examinations and inquiries and obtaining certificates or other confirmations
from officers and employees of Borrower as I considered appropriate in the
circumstances, except as set forth in Attachment 1 hereto, there is no claim,
suit, action or proceeding pending or threatened against Borrower before any
court or governmental agency in which there is a specific claim, including
environmental matters, in excess of $75,000,000.
The opinion expressed in paragraph 6 is subject to the following
limitations, qualifications, exceptions and assumptions:
(a) the enforcement of the First Amendment, the Credit Agreement and
the Notes may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws or by equitable principles relating to or
limiting the rights or creditors generally;
(b) the use of the term enforceable shall not imply any opinion as to
the availability of equitable remedies;
(c) I advise you that a California court may not strictly enforce
certain covenants contained in the First Amendment and the Credit Agreement
or allow acceleration of the maturity of the indebtedness thereunder if it
concludes that such enforcement or acceleration would be unreasonable under
the then existing circumstances. I do believe, however, that subject to the
limitations expressed elsewhere in this opinion, enforcement or
acceleration would be available if an Event of Default occurs as a result
of a material breach of a material covenant contained in the First
Amendment or the Credit Agreement. Further, certain rights, remedies and
waivers contained in the Credit Agreement may be limited or rendered
ineffective by applicable California laws or judicial decisions governing
such provisions, but such laws or judicial decisions do not render the
Credit Agreement invalid as a whole;
Exhibit 1 - 3
<PAGE>
(d) The effect of California court decisions, invoking statutes or
principles of equity, which have held that certain covenants and provisions
of agreements are unenforceable where (i) the breach of such covenants or
provisions imposes restrictions or burdens upon the debtor, including the
acceleration of indebtedness due under debt instruments, and it cannot be
demonstrated that the enforcement of such restrictions or burdens is
reasonably necessary for the protection of the creditor, or (ii) the
creditors enforcement of such covenants or provisions under the
circumstances would violate the creditors implied covenant of good faith
and fair dealing;
(e) The unenforceability under certain circumstances under California
or federal law or court decisions, of provisions expressly or by
implication waiving broadly or vaguely stated rights, unknown future
rights, defenses to obligations or rights granted by law, where such
waivers are against public policy or prohibited by laws;
(f) The unenforceability under certain circumstances of provisions to
the effect that rights or remedies are not exclusive, that every right or
remedy is cumulative and may be exercised in addition to or with any other
right or remedy, that election of a particular remedy or remedies does not
preclude recourse to one or more other remedies or that failure to exercise
or delay in exercising rights or remedies will not operate as a waiver of
any such right or remedy;
(g) The effect of Section 1717 of the California Civil Code, which
provides that, where a contract permits one party to the contract to
recover attorneys' fees, the prevailing party in any action to enforce any
provision of the contract shall be entitled to recover its reasonable
attorneys' fees;
(h) The unenforceability under certain circumstances of provisions
indemnifying a party against liability for its own wrongful or negligent
acts or where such indemnification is contrary to the public policy or
prohibited by laws; and
(i) The enforceability under certain circumstances of provisions
imposing penalties, forfeitures, late payment charges or any increase in
interest rate upon delinquency in payment or the occurrence of a default.
To the extent that the obligations of Borrower may be dependent on such
matters, I assume for purposes of this opinion that each of the Banks is duly
incorporated or organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation or organization; that each of the Banks is
duly qualified to engage in the transactions covered by this opinion; that the
First Amendment and the Credit Agreement have been duly authorized, executed and
delivered by each of the Banks and that the First Amendment and the Credit
Agreement Constitute the valid and binding obligation of each of the Banks,
enforceable in accordance with their terms; and that each of the Banks has the
requisite corporate or organizational and legal power and authority to own its
properties, to carry on its business as now being conducted and to perform its
obligations under the First Amendment and the Credit Agreement, including,
without limitation, to make the loans under the Credit Agreement. I am not
expressing any opinion as to the effect of or the compliance by any Bank with
any state or
Exhibit 1 - 4
<PAGE>
federal laws or regulations applicable to the transactions because of the nature
of its respective business.
This opinion is rendered to the Banks and the Administrative Agent and is
solely for their benefit in connection with the above transaction. This opinion
may not be relied upon by the Banks or Administrative Agent for any other
purpose, or furnished to, quoted to or relied upon by any other person, firm or
corporation for any purpose without prior written consent.
Very truly yours,
[Assistant General Counsel]
Exhibit 1 - 5
<PAGE>
EXHIBIT 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 herein
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
Arranged by
BancAmerica Robertson Stephens
[LOGO APPEARS HERE]-------------------------------------------------------------
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1 DEFINITIONS......................................................................................... 1
1.1 DEFINITIONS........................................................................................... 1
SECTION 2 THE CREDIT.......................................................................................... 8
2.1 THE COMMITMENTS....................................................................................... 8
2.2 THE LOANS............................................................................................. 9
2.3 REQUESTS FOR BASE RATE AND EURODOLLAR LOANS........................................................... 9
2.4 REQUESTS FOR BID RATE LOANS........................................................................... 9
2.5 INTEREST AND PRINCIPAL ON BASE RATE LOANS............................................................. 10
2.6 INTEREST AND PRINCIPAL ON EURODOLLAR LOANS............................................................ 11
2.7 INTEREST AND PRINCIPAL ON BID RATE LOANS.............................................................. 11
2.8 LOAN ACCOUNTS......................................................................................... 11
2.9 MASTER BID RATE NOTES................................................................................. 11
2.10 CONVERSION OF LOANS BETWEEN EURODOLLAR LOANS AND BASE RATE LOANS AND CONVERSION OF
INTEREST PERIODS OF EURODOLLAR LOANS.................................................................. 12
2.11 DISBURSEMENTS AND PAYMENTS............................................................................ 12
2.12 FACILITY FEE.......................................................................................... 13
SECTION 3 PAYMENT OF COSTS AND REDUCTION OF THE COMMITMENT.................................................... 14
3.1 INDEMNIFICATION UPON FAILURE TO PAY EURODOLLAR LOAN OR BID RATE LOAN.................................. 14
3.2 INCREASED COSTS....................................................................................... 14
3.3 TAXES................................................................................................. 15
3.4 PREPAYMENT............................................................................................ 16
3.5 PRO RATA REDUCTION OF COMMITMENTS BY BORROWER......................................................... 16
3.6 REDUCTION OF ONE BANK'S COMMITMENT BY BORROWER........................................................ 16
3.7 NOTICE OF REDUCTIONS.................................................................................. 17
3.8 DESIGNATION OF REPLACEMENT BANK....................................................................... 17
3.9 EFFECT OF REDUCTION OF COMMITMENT..................................................................... 17
3.10 ACCRUED FEES.......................................................................................... 17
3.12 SURVIVAL.............................................................................................. 17
SECTION 4 CHANGE IN CIRCUMSTANCES AFFECTING LOANS............................................................. 17
4.1 INABILITY TO DETERMINE EURODOLLAR RATE................................................................ 18
4.2 ILLEGALITY............................................................................................ 18
SECTION 5 CONDITIONS PRECEDENT................................................................................ 19
5.1 INITIAL CONDITIONS PRECEDENT.......................................................................... 19
5.2 CONDITIONS PRECEDENT TO LOANS......................................................................... 19
5.2 CONDITIONS PRECEDENT TO LOANS......................................................................... 20
SECTION 6 REPRESENTATIONS AND WARRANTIES...................................................................... 20
6.1 AUTHORITY OF BORROWER................................................................................. 20
6.2 BINDING OBLIGATIONS................................................................................... 20
6.3 INCORPORATION OF RESTRICTED SUBSIDIARIES.............................................................. 21
6.4 NO CONTRAVENTION...................................................................................... 21
6.5 NOTICES............................................................................................... 21
6.6 FINANCIAL STATEMENTS.................................................................................. 21
6.7 ERISA................................................................................................. 21
6.8 REGULATION U.......................................................................................... 21
6.9 TAXES................................................................................................. 22
6.10 INSURANCE............................................................................................. 22
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
6.11 LIENS................................................................................................. 22
SECTION 7 AFFIRMATIVE COVENANTS OF BORROWER................................................................... 22
7.1 USE OF PROCEEDS OF LOANS.............................................................................. 22
7.2 MANAGEMENT OF BUSINESS................................................................................ 22
7.3 NOTICE OF CERTAIN EVENTS.............................................................................. 22
7.4 RECORDS............................................................................................... 23
7.5 INFORMATION FURNISHED................................................................................. 23
7.6 EXECUTION OF OTHER DOCUMENTS.......................................................................... 24
7.7 ERISA................................................................................................. 24
7.8 ADMINISTRATIVE AGENT'S FEES........................................................................... 24
7.9 COMPLIANCE WITH LAW................................................................................... 24
SECTION 8 NEGATIVE COVENANTS OF BORROWER...................................................................... 24
8.1 LIENS................................................................................................. 24
8.2 MERGERS, LIQUIDATIONS AND SALES OF ASSETS............................................................. 26
8.3 DEFAULTS.............................................................................................. 26
8.4 COMPLIANCE WITH REGULATIONS........................................................................... 27
SECTION 9 EVENTS OF DEFAULT................................................................................... 27
9.1 EVENTS OF DEFAULT..................................................................................... 27
9.3 RECOVERY OF AMOUNTS DUE............................................................................... 30
9.4 RIGHTS CUMULATIVE..................................................................................... 30
SECTION 10 THE BANKS.......................................................................................... 30
10.1 ADMINISTRATION OF LOAN................................................................................ 30
10.2 REPRESENTATIONS BY BANKS.............................................................................. 31
SECTION 11 MISCELLANEOUS PROVISIONS........................................................................... 31
11.1 AMENDMENTS AND WAIVERS................................................................................ 31
11.2 NOTICES............................................................................................... 31
11.3 WAIVER................................................................................................ 32
11.4 CALIFORNIA LAW........................................................................................ 32
11.5 HEADINGS.............................................................................................. 32
11.6 ACCOUNTING TERMS...................................................................................... 32
11.7 COUNTERPARTS.......................................................................................... 32
11.8 WRITTEN DISCLOSURE.................................................................................... 32
11.9 SINGULAR; PLURAL...................................................................................... 32
11.10 ILLEGALITY............................................................................................ 33
11.11 ASSIGNMENTS........................................................................................... 33
11.12 OBLIGATIONS SEVERAL................................................................................... 33
11.13 PARTICIPATIONS........................................................................................ 33
11.14 FEES AND EXPENSES..................................................................................... 34
11.15 INDEMNITY............................................................................................. 35
11.16 CONFIDENTIALITY....................................................................................... 35
</TABLE>
EXHIBITS
A-1 Form of Loan Request
A-2 Form of Loan Request - Bid Rate Loans
B Master Bid Rate Loan Note
-ii-
<PAGE>
C Relations Among the Banks and Agents
D Addresses and Lending Offices of Banks
E Existing Liens
F Form of Opinion of General Counsel
SCHEDULE
1 Name of Banks and Commitments
-iii-
<PAGE>
REVOLVING CREDIT AGREEMENT
(MULTI-YEAR FACILITY)
THIS REVOLVING CREDIT AGREEMENT (MULTI-YEAR FACILITY) ("Agreement") is
entered into as of December 5, 1997 (the "Signing Date") among HUGHES NETWORK
SYSTEMS, INC. (to be renamed HUGHES ELECTRONICS CORPORATION upon completion of
the Reorganization), a corporation organized and existing under the laws of
Delaware ("Borrower"), the banks named herein (collectively, together with any
other lenders that become parties hereto pursuant to Section 3.8 or 11.11, the
"Banks" and individually a "Bank"), Bank of America National Trust and Savings
Association, as administrative agent for the Banks (in such capacity
"Administrative Agent"), Morgan Guaranty Trust Company of New York, as
Syndication Agent (in such capacity "Syndication Agent"), and Citicorp USA, Inc.
and The Chase Manhattan Bank as Documentation Agents (in such capacity
"Documentation Agents").
SECTION 1
DEFINITIONS
1.1 Definitions.
-----------
"Applicable Amount" means, for the facility fee and Eurodollar Loans, the
amount (expressed in basis points per annum) set forth in the chart below
opposite the Applicable Level then in effect:
<TABLE>
<CAPTION>
===================================================================================================
Applicable Amount
(in basis points per annum)
-------------------------------------------------
Applicable Debt Ratings
Level Eurodollar Rate Facility Fee
+
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 more than or 12.5 6.0
equal to A+/A1
2 A/A2 13.5 6.5
3 A-/A3 15.5 7.0
4 BBB+/Baa1 19.0 8.5
5 BBB/Baa2 21.5 11.0
6 BBB-/Baa3 30.0 15.0
===================================================================================================
</TABLE>
-1-
<PAGE>
"Applicable Level" means the level set forth opposite the Debt Ratings then
in effect. Any change in the Applicable Level shall become effective upon any
public announcement of any change in any Debt Rating that requires a change in
the Level in accordance with the above chart.
"Approved Bank Affiliate" means a Person that is a subsidiary of a Bank or
of a Person of which a Bank is a subsidiary, and which is either engaged
primarily in the business of commercial banking or, if not so engaged, which has
been approved by the Borrower and Administrative Agent (provided that Borrower's
--------
consent shall not be unreasonably withheld).
"Arranger" means BancAmerica Robertson Stephens.
"Authorized Designee" means the chief executive officer, the vice chairman,
the chief financial officer, treasurer or the assistant treasurer of Borrower,
or any other officer of Borrower specified as being an Authorized Designee in
the certificate delivered pursuant to Section 5.2(c).
"Availability Period" means the period commencing on the Effective Date and
ending on the Termination Date.
"Bank of America" means Bank of America National Trust and Savings
Association in its capacity as a Bank.
"Base Rate" means the higher of: (a) the rate of interest publicly
announced from time to time by Bank of America in San Francisco, California, as
its "reference rate," which is a rate set by Bank of America based upon various
factors including Bank of America's costs and desired return, general economic
conditions and other factors, and is used as a reference point for pricing some
loans, which may be priced at, above, or below such announced rate; and (b) one-
half percent per annum above the Federal Funds Rate. Any change in the
reference rate announced by Bank of America shall take effect at the opening of
business on the day specified in the public announcement of such change.
"Base Rate Loan" means a Loan bearing interest based on the Base Rate
calculated pursuant to Section 2.5.
"Bid Rate" means an interest rate offered by a Bank in its sole discretion
and in response to the Borrower's Loan Request for a Bid Rate Loan pursuant to
Section 2.4, which interest rate shall include all applicable reserve and other
adjustments when being advised by such Bank to Administrative Agent.
"Bid Rate Loan" means a Loan bearing interest at a Bid Rate.
"Borrowing Date" means a date on which funds are advanced to Borrower by
one or more Banks pursuant to a Loan Request.
"Business Day" means a day other than a Saturday or Sunday on which banks
are open for business in both San Francisco, California and New York, New York.
-2-
<PAGE>
"Commercial Paper" means short term commercial paper (with a maturity date
not in excess of 270 days from the date of its issuance) issued by Borrower (a)
pursuant to the exemption from registration contained in Section 4(2) of the
Securities Act of 1933, as amended or modified from time to time, or (b)
pursuant to the exemption from registration contained in Section 3(a)(3) of the
Securities Act of 1933, as amended or modified from time to time, with respect
to which a recognized rating agency has taken this Agreement into account in the
rating of such short term commercial paper.
"Commitment" of each Bank means the dollar amount set forth opposite such
Bank's name on Schedule 1 hereto, as such amount may be reduced or changed
pursuant to Sections 3.5 and 3.6. "Total Commitment" means the aggregate amount
of the Commitments.
"Consolidated Adjusted Net Worth" means, as of the date of determination
thereof, the consolidated stockholders equity of Borrower and its Subsidiaries
in accordance with GAAP adjusted by adding back the amount by which such
consolidated stockholders equity has been reduced (or by subtracting the amount
by which stockholders equity has been increased) on account of (a) changes
subsequent to December 31, 1992 in the long term liability of Borrower and its
Subsidiaries for post-retirement benefits other than pensions and (b) specified
material non-cash adjustments resulting from the adoptions of future
pronouncements of the Financial Accounting Standards Board.
"Consolidated Tangible Net Worth" means, at any date of determination,
Consolidated Adjusted Net Worth less the consolidated intangible assets of
----
Borrower and its Subsidiaries, determined in accordance with GAAP.
"Debt Rating" means, as of any date of determination, the rating as
determined by either Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. (collectively, the "Debt Ratings"); of (a) the Borrower's senior
unsecured long-term debt or (b) if the foregoing debt is not outstanding, then
the rating of this bank credit facility or the implied rating of senior
unsecured debt securities, provided that if both ratings in this clause (b) have
-------------
been issued then both shall apply; or (c) if neither (a) nor (b) apply, then the
rating of long-term debt issued by equipment trust guaranteed by Borrower;
provided that if a Debt Rating is issued by both of such rating agencies, then
- -------------
the more credit worthy of such credit ratings shall apply unless the split in
credit ratings is more than one level, in which case the level one level higher
than the lower rating shall apply. Initially, the Debt Ratings shall be
determined from the certificate delivered pursuant to Section 5.2(d).
Thereafter the credit ratings shall be determined from the most recent public
announcement of any changes in such credit ratings.
"Effective Date" means the date the conditions set forth in Section 5.2 are
satisfied or waived by the Banks.
"Eligible Assignee" means a Person which can lawfully fulfill all of the
obligations of a Bank hereunder and is (a) a commercial bank organized under the
laws of the United States, or any state thereof, and having a combined capital
and surplus of at least $100,000,000; (b) a commercial bank organized under the
laws of any other country which is a member of the Organization for Economic
Cooperation and Development (the "OECD"), or a political subdivision of any such
country, and having a combined capital and surplus of at least
-3-
<PAGE>
$100,000,000, provided that such bank is acting through a branch or agency
located in the country in which it is organized or another country which is also
a member of the OECD; or (c) any Person engaged primarily in the business of
commercial banking and that is a subsidiary of a Bank or of a Person of which a
Bank is a subsidiary.
"ERISA" means the Employee Retirement Income Security Act of 1974, as in
effect from time to time.
"ERISA Affiliate" means any trade or business (whether or not incorporated)
under common control with Borrower or any Subsidiary of Borrower within the
meaning of Section 414(b), 414(c) or 414(m) of Internal Revenue Code of 1986, as
amended.
"Eurodollar Banking Day" means a day on which banks are open for business
in San Francisco, California, New York, New York and the applicable offshore
dollar interbank market and dealing in U. S. Dollar deposits.
"Eurodollar Loan" means a Loan at the rate of interest calculated pursuant
to Section 2.6.
"Eurodollar Rate" means for each Interest Period of a Eurodollar Loan the
arithmetic mean of the rates of interest rounded to the nearest 1/100 of one
percent as notified to the Administrative Agent by the Reference Banks at which
U.S. Dollar deposits for such Interest Period and in an amount comparable to the
Principal Amount of such Eurodollar Loan would be offered by such Reference
Banks to major banks in the London offshore dollar interbank market upon request
of such banks at approximately 11:00 a.m. London time two Eurodollar Banking
Days prior to the first day of such Interest Period.
"Event of Default" means any event specified in Section 9.1.
"Existing Agreements" means (a) the Revolving Credit Agreement dated as of
January 4, 1995, as amended, among Borrower, the banks party thereto and Bank of
America National Trust and Savings Association, as agent for such banks; (b) the
Revolving Promissory Note dated June 16, 1997 in favor of Bank of America
National Trust and Savings Association; (c) the Note dated June 30, 1997 in
favor of Morgan Guaranty Trust Company of New York, and (d) the Promissory Note
dated July 1, 1997 in favor of Citicorp USA, Inc..
"Federal Funds Rate" means, for any day, the rate set forth in the weekly
statistical release designated as H.15(519), or any successor publication,
published by the Federal Reserve Board (including any such successor,
"H.15(519)") for such day opposite the caption "Federal Funds (Effective)". If
on any relevant day such rate is not yet published in H.15(519), the rate for
such day will be the rate set forth in the daily statistical release designated
as the Composite 3:30 p.m. Quotations for U.S. Government Securities, or any
successor publication, published by the Federal Reserve Bank of New York
(including any such successor, the "Composite 3:30 p.m. Quotation") for such day
under the caption "Federal Funds Effective Rate". If on any relevant day the
appropriate rate for such day is not yet published in either H.15(519) or the
Composite 3:30 p.m. Quotations, the rate for such day will be the arithmetic
mean of the rates for the last transaction in overnight Federal funds arranged
prior to 9:00 a.m. (New York time) on that day by each of three leading brokers
of Federal funds transactions in New York City selected by Administrative Agent.
-4-
<PAGE>
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System, or any successor thereto.
"GAAP" means generally accepted accounting principles set forth from time
to time in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the accounting
profession), or in such other statements by such other entity as may be in
general use by significant segments of the U.S. accounting profession, which are
applicable to the circumstances as of the date of determination.
"Interest Payment Date" means, with respect to each Bid Rate Loan and each
Eurodollar Loan, the last day of each Interest Period; provided, however, that
-------- -------
if any Interest Period (a) in the case of a Bid Rate Loan exceeds 90 days and
(b) in the case of a Eurodollar Loan exceeds three months, "Interest Payment
Date" shall mean the 90th day and the last day of the third month of such
Interest Period, respectively, as well as the last day of the relevant Interest
Period; and, with respect to each Base Rate Loan, means the 10th day of each
January, April, July, and October and the Termination Date. If any day
specified herein is not a Business Day or, in the case of a Eurodollar Loan, a
Eurodollar Banking Day, then the relevant Interest Payment Date shall be the
next succeeding Business Day or Eurodollar Banking Day, as applicable, except as
otherwise provided in the definition of Interest Period.
"Interest Period" means: (a) with respect to each Bid Rate Loan, a period
of 7 to 180 days as selected by Borrower by a Loan Request delivered to
Administrative Agent in accordance with Section 2.4, and (b) with respect to
each Eurodollar Loan, a period of one, two, three or six months as selected by
Borrower by a Loan Request delivered to Administrative Agent in accordance with
Section 2.3, subject to the following:
(i) If the term of an Interest Period is not designated, a period of
30 days shall be deemed selected for the relevant Bid Rate Loan and a
period of one month shall be deemed selected for the relevant Eurodollar
Loan;
(ii) The first Interest Period for each Loan shall commence on the
date such Loan is disbursed and each succeeding Interest Period for such
Loan shall commence on the last day of the preceding Interest Period for
such Loan;
(iii) In the case of a Bid Rate Loan, if the last day of an Interest
Period falls on a day that is not a Business Day, the Interest Period
involved shall be extended to the next succeeding Business Day, and the
next succeeding Interest Period shall be measured from the last day of the
Interest Period as so adjusted;
(iv) In the case of a Eurodollar Loan, if the last day of an Interest
Period falls on a day that is not a Eurodollar Banking Day, the Interest
Period involved shall be extended to the next following Eurodollar Banking
Day unless as a result thereof it would fall into the next calendar month,
in which case the end of the Eurodollar Interest Period shall be the
preceding Eurodollar Banking Day, and in either case the next succeeding
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Eurodollar Interest Period shall be measured from the last day of the
Interest Period as so adjusted;
(v) If an Interest Period for a Eurodollar Loan commences on the last
Eurodollar Banking Day of a calendar month, it shall end on the last
Eurodollar Banking Day of a calendar month; and
(vi) No Interest Period shall end on a day later than the Termination
Date.
"Investment Grade" means a Debt Rating by S&P of BBB- or better and Debt
Rating of Moody's of Baa3 or better.
"Lending Office" means with respect to any Bank as the context shall
require, the branch office of such Bank designated as the Lending Office of such
Bank in Exhibit D attached hereto and incorporated herein by reference; or any
other branch office or affiliate of such Bank hereafter selected and notified to
Borrower and Administrative Agent from time to time by such Bank; provided that
any Bank may from time to time by notice to Borrower and Administrative Agent
designate separate Lending Offices for its Bid Rate Loans, its Eurodollar Loans
and/or its Base Rate Loans, in which case any reference to the Lending Office of
such Bank shall be deemed to refer to any or all of such offices, branches or
affiliates as the context may require.
"Letter Agreement" means that letter agreement among Arranger,
Administrative Agent and Borrower dated October 23, 1997 specifying Arranger's
and Administrative Agent's compensation for services hereunder as such letter
agreement may from time to time be amended, restated, reissued or otherwise
modified.
"Lien" means any trust deed, mortgage, pledge, hypothecation, assignment,
security interest, lien, charge or encumbrance, or preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, the lien of an attachment, judgment or
execution, or any conditional sale or other title retention agreement, any
capitalized lease, and the filing of, or agreement to give, any financing
statement under the Uniform Commercial Code or comparable law of any
jurisdiction, but excluding financing statements filed to give notice of leases
in the ordinary course of business).
"Loan" or "Loans" means the loans described in Section 2, any of which may
be at any time Base Rate Loans, Eurodollar Loans or Bid Rate Loans.
"Loan Request" means a notice given by Borrower pursuant to Section 2.3 or
2.4.
"Majority Banks" means those Banks whose Commitments constitute at least
60% of the Total Commitment as such Total Commitment may be adjusted from time
to time pursuant to the terms of this Agreement.
"Master Bid Rate Note" means a promissory note of Borrower payable to order
of a Bank in substantially the form of Exhibit B hereto in favor of such Bank
evidencing the indebtedness of the Borrower to such Bank resulting from a Bid
Rate Loan made by such Bank.
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"Material Change" means any adverse change which could reasonably be
expected to materially impair Borrower's ability to timely and fully perform its
obligations under this Agreement, provided that the Reorganization shall not be
deemed a Material Change..
"Moody's" means Moody's Investors Service, Inc.
"Normal Percentage" means, with respect to each Bank, the percentage under
the heading "Normal Percentage" set forth opposite such Bank's name on Schedule
1 hereto, as such amount may be reduced or changed pursuant to Section 3.6 or
Section 11.11.
"Note" means any promissory note delivered pursuant to Section 2.8 or any
Master Bid Rate Note (collectively, the "Notes").
"Person" means any individual, firm, company, corporation, joint venture,
joint-stock company, trust, unincorporated organization, governmental or state
entity, or any association or partnership (whether or not having separate legal
personality) of two or more of the foregoing.
"Plan" means any employee benefit pension plan which is subject to the
provisions of Title IV of ERISA and which is maintained for employees of
Borrower or any Subsidiary.
"Principal Amount" means, when used with reference to any Loan, the amount
requested in the Loan Request relating thereto and made available to Borrower by
the Banks hereunder.
"Principal Repayment Date" means, with respect to each Base Rate Loan, the
Termination Date, and with respect to each Bid Rate Loan and each Eurodollar
Loan, the last day of the Interest Period for such Loan.
"Reference Banks" means Bank of America, Morgan Guaranty Trust Company of
New York and The Chase Manhattan Bank
"Reorganization" means the transactions contemplated by that certain
Agreement and Plan of Merger dated as of January 16, 1997 by and between HE
Holdings and Raytheon Company including, without limitation the "GM
Transactions" defined therein.
"Reportable Event" means any of the events set forth in Section 4043(b) of
ERISA or the regulations thereunder excluding those events for which the 30-day
notice requirement is waived, a withdrawal from a Plan described in Section 4063
of ERISA, or a cessation of operations described in Section 4062(e) of ERISA.
"Restricted Subsidiaries" means each Subsidiary (i) having assets exceeding
10% of the Consolidated Tangible Net Worth of Borrower and its Subsidiaries on a
consolidated basis or (ii) having operating revenues exceeding 10% of the
operating revenues of Borrower and its Subsidiaries on a consolidated basis, in
each case as shown on the pro forma financial statements dated as of June 30,
1997 and, thereafter, as shown on the audited consolidated financial statements
of Borrower and its Subsidiaries as of the end of the fiscal year immediately
preceding the date of determination; provided, however, that "Restricted
-------- -------
Subsidiary" shall not include any Subsidiary which is a corporation created
solely to purchase receivables from Borrower or any of its Subsidiaries, and
which would not, in accordance with GAAP, be included in the consolidated
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financial statements of Borrower.
"S&P" means Standard & Poor's Ratings Group.
"Signing Date" means the date of this Agreement.
"Subsidiaries" (individually a "Subsidiary") means those corporations or
entities of which Borrower owns more than 50% of the voting securities. If
Borrower, subject to the terms hereof, permits its ownership to fall to 50% or
below of outstanding voting shares of any Subsidiary, such Subsidiary shall
thereupon cease to be a Subsidiary for all purposes hereof.
"Tax" and "Taxes" mean all taxes, levies, imposts, duties, fees or other
charges of whatsoever nature however imposed by any country or any subdivision
or authority of or in that country in any way connected with this Agreement or
any instrument or agreement required hereunder, and all interest, penalties or
similar liabilities with respect thereto, except such taxes as are imposed on or
measured by any Bank's net income or capital and franchise taxes, by the country
or any subdivision or authority of or in that country in which such Bank's
principal office or actual Lending Office is located.
"Termination Date" means December 5, 2002 or if such day is not a Business
Day, the next preceding Business Day.
"Unmatured Event of Default" means an event which with the passage of time
or the giving of notice, or both, would become an Event of Default.
"Voting Stock" means capital stock of Borrower having voting power under
ordinary circumstances to elect directors of Borrower.
"Withdrawal Liability" means, as of any determination date, the aggregate
amount of the liabilities, if any, pursuant to Section 4201 of ERISA if the
Borrower or any ERISA Affiliate made a complete withdrawal from all Plans and
any increase in contributions pursuant to Section 4243 or ERISA.
SECTION 2
THE CREDIT
2.1 The Commitments. (a) From time to time, during the Availability
---------------
Period, each Bank severally agrees to lend to Borrower in U. S. Dollars the
amount set forth opposite such Bank's name on Schedule 1 hereto, subject to
reduction of such amount at Borrower's option, pursuant to Sections 3.5 and 3.6
or otherwise pursuant to Section 2.1(c).
(b) Except as provided in subsection 2.1(d), each Bank shall make
available to Borrower Base Rate Loans and Eurodollar Loans up to the amount of
such Bank's Commitment. In addition, each Bank may, but shall not be required
under any circumstances whatsoever to, make available to Borrower Bid Rate
Loans. Except as provided in subsection 2.1(c), the
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Commitment of any Bank making a Bid Rate Loan shall not be reduced by the amount
of any such Loan or Loans made by such Bank or by any other Bank.
(c) The Principal Amount of Bid Rate Loans made by any Bank may exceed
such Bank's Commitment; provided, however, that the aggregate Principal Amount
-------- -------
of all Bid Rate Loans outstanding under this Agreement shall not exceed the
Total Commitment. The Total Commitment shall be reduced by the Principal Amount
of Bid Rate Loans outstanding so long as such Bid Rate Loans remain outstanding;
and the Commitment of each Bank shall be reduced pro rata.
(d) During any period of time when Bid Rate Loans are outstanding,
additional Eurodollar Loans and Base Rate Loans requested by Borrower shall be
allocated among the Banks in accordance with their Normal Percentage as set
forth in Schedule 1 and without regard to any Bid Rate Loans such Bank may have
outstanding to Borrower. In no event shall Eurodollar Loans, Base Rate Loans
and Bid Rate Loans outstanding hereunder exceed the Total Commitment as adjusted
from time to time pursuant to this Section 2.1.
2.2 The Loans. Each Loan shall be a Base Rate Loan, a Eurodollar Loan or
---------
a Bid Rate Loan and shall be in U. S. Dollars. Each Loan shall be in the
minimum amount of $5,000,000 with any additional amounts in integral multiples
of $1,000,000. This is a revolving credit, and Borrower may, during the
Availability Period, reborrow amounts repaid or prepaid. No Loan nor any part
of any Loan shall be repaid except at the times and in the manner expressly
provided herein.
2.3 Requests for Base Rate and Eurodollar Loans. Each Base Rate Loan and
-------------------------------------------
Eurodollar Loan shall be made upon irrevocable written or telephonic notice,
confirmed promptly in writing, substantially in the form of Exhibit A-1 hereto,
by Borrower to Administrative Agent received by Administrative Agent not later
than 9:00 a.m. California time not less than three (3) Eurodollar Banking Days
prior to the Borrowing Date (which must be a Eurodollar Banking Day) of a
Eurodollar Loan and not later than 9:00 a.m. California time on the proposed
Borrowing Date (which must be a Business Day) of a Base Rate Loan. Upon receipt
of a request for a Base Rate Loan and Eurodollar Loan, Administrative Agent
shall promptly notify the Banks of the amount, the Interest Period(s), if
applicable, and the Borrowing Date requested by Borrower. After giving effect to
any borrowing of Eurodollar Loans or any conversion or continuation of
Eurodollar Loans, there shall not be more than 10 different Interest Periods for
Eurodollar Loans and Bid Rate Loans in the aggregate at any time.
2.4 Requests for Bid Rate Loans. (a) Each Bid Rate Loan shall be made
---------------------------
upon irrevocable written or telephonic notice, confirmed promptly in writing,
substantially in the form of Exhibit A-2 hereto, by Borrower and must be
received by Administrative Agent not later than 9:00 a.m. California time one
Business Day prior to the Borrowing Date for such Loan, specifying the Borrowing
Date (which must be a Business Day), the amount, and the Interest Period. In
requesting a Bid Rate Loan, Borrower may specify up to a maximum of three
alternative Interest Periods for the Bid Rate Loan. After giving effect to any
borrowing of Bid Rate Loans, there shall not be more than 10 different Interest
Periods for Bid Rate Loans and Eurodollar Loans in the aggregate at any one
time.
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(b) Upon receipt of a request for a Bid Rate Loan pursuant to paragraph
(a) above, Administrative Agent shall promptly notify the Banks of the amount,
the Interest Period(s) and the Borrowing Date requested by Borrower. If Bank of
America elects to advance a Bid Rate Loan it shall notify Borrower and
Administrative Agent of the amount, the Interest Period(s) and the Bid Rate
(with any fraction of a percentage expressed as a decimal to the nearest
1/10,000 of one percent) upon which Bank of America desires to advance such a
Bid Rate Loan by 7:00 a.m. California time on such Borrowing Date. By 7:15 a.m.
California time on the Borrowing Date, each other Bank shall notify
Administrative Agent whether or not it will submit an offer in response to
Borrower's request for a Bid Rate Loan and each Bank submitting an offer shall
notify Administrative Agent of the amount, the Interest Period(s) and the Bid
Rate (with any fraction of a percentage expressed as a decimal to the nearest
1/10,000 of one percent) upon which such Bank desires to advance a Bid Rate
Loan. By 7:30 a.m. California time on the Borrowing Date Administrative Agent
shall give notice to Borrower, of the amount, the Interest Period and the Bid
Rate upon which each Bank desires to advance a Bid Rate Loan. Borrower shall,
before 7:45 a.m. California time on such Borrowing Date, elect which of the
offered Bid Rate Loans it desires to accept and notify Administrative Agent of
each offer that is being accepted by Borrower. Such acceptance by Borrower shall
be irrevocable. If Borrower accepts any of the offers for Bid Rate Loans,
Borrower must accept offers strictly based upon pricing and no other criteria.
If two or more Banks submit offers at identical pricing and Borrower accepts any
of such offers but does not wish to borrow the total amount offered by such
Banks, Borrower shall accept offers from all of such Banks on amounts allocated
among them pro rata (in multiples of $1,000,000) according to the amounts
offered by such Banks.
(c) If Borrower accepts one or more of the offers made by any Bank or
Banks pursuant to subsection (b) above, Administrative Agent shall, by 8:15 a.m.
California time on such Borrowing Date, notify each Bank as to the identity of
each Bank which is to make a Bid Rate Loan, the amount of the Loan to be made by
each Bank, the Interest Period, and the Bid Rate applicable to each such Loan.
Administrative Agent shall also notify each Bank by 8:15 a.m. California time on
such Borrowing Date if Administrative Agent has either received no offers in
response to Borrower's Loan Request for a Bid Rate Loan or if Borrower has
elected not to accept any of the offers received.
(d) Each Bank whose offer for a Bid Rate Loan has been accepted pursuant
to Section 2.4(b) shall determine for itself whether the conditions precedent in
Section 5.2 have been or will be satisfied on the Borrowing Date. On or before
11:00 a.m. California time on the Borrowing Date, each such Bank's Lending
Office will make available to Administrative Agent the principal amount of the
Bid Rate Loan in immediately available funds and Administrative Agent shall
promptly credit Borrower's account at Administrative Agent in immediately
available funds.
2.5 Interest and Principal on Base Rate Loans. The outstanding Principal
-----------------------------------------
Amount of each Base Rate Loan shall bear interest until payment is due in full
(computed daily on the basis of a 365 or 366, as the case may be, day year and
actual days elapsed) at the rate per annum equal to the Base Rate. Borrower
shall pay interest on each Base Rate Loan on each Interest Payment Date for the
interest accruing since the previous Interest Payment Date on such Base Rate
Loan. Borrower shall repay in full the Principal Amount of each Base Rate Loan
on the Termination Date or as provided in Section 2.10(c).
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2.6 Interest and Principal on Eurodollar Loans. (a) The outstanding
------------------------------------------
Principal Amount of each Eurodollar Loan shall bear interest until payment is
due in full (computed daily on the basis of a three hundred sixty (360) day year
and actual days elapsed) at a rate per annum equal to the Eurodollar Rate plus
the Applicable Amount therefor. Borrower shall pay interest on each Eurodollar
Loan on each Interest Payment Date for such Eurodollar Loan. Borrower shall
repay in full the Principal Amount of each Eurodollar Loan on the last day of
the Interest Period for such Eurodollar Loan or as provided in Section 2.10(c).
(b) If any Reference Bank's Commitment shall terminate (otherwise than on
termination of all the Commitments), or for any reason whatsoever the Reference
Bank shall cease to be a Bank hereunder, that Reference Bank shall thereupon
cease to be a Reference Bank, and the Eurodollar Rate shall be determined on the
basis of the rates as notified by the remaining Reference Banks. Each Reference
Bank shall use its best efforts to furnish quotations of rates to the
Administrative Agent as contemplated hereby. If any of the Reference Banks
shall be unable or otherwise fails to supply such rates to the Administrative
Agent upon its request, the rate of interest shall be determined on the basis of
the quotations of the remaining Reference Banks or Reference Bank.
2.7 Interest and Principal on Bid Rate Loans. The outstanding principal
----------------------------------------
amount of each Bid Rate Loan shall bear interest until payment is due in full
(computed daily on the basis of a 360-day year and actual days elapsed) at a
rate per annum equal to the Bid Rate. Borrower shall pay interest on each Bid
Rate Loan on each Interest Payment Date for such Bid Rate Loan. Borrower shall
repay in full the Principal Amount of each Bid Rate Loan on the last day of the
Interest Period of such Bid Rate Loan.
2.8 Loan Accounts. Each Bank shall open and maintain on its books and one
-------------
or more loan accounts in Borrower's name. Each loan account shall show (without
duplication) as debits thereto each Bank's portion of each Base Rate Loan and/or
Eurodollar Loan and as credits thereto all Base Rate Loan and/or Eurodollar Loan
payments received by such Bank for the account of such Bank and applied to
principal so that the balance of the loan account(s) at all times reflect the
principal amount due each Bank from Borrower as Base Rate Loans and Eurodollar
Loans. All entries in said books shall be presumptive evidence of the making of
each Base Rate Loan and Eurodollar Loan, the obligation of Borrower to repay
each Base Rate Loan and Eurodollar Loan, and all payments received and disbursed
by such Bank. Borrower agrees that if, in the opinion of any Bank, a promissory
note or other evidence of debt is required or appropriate to reflect or enforce
any Loans outstanding to or to be made by such Bank, then Borrower shall
promptly execute and deliver to such Bank one or more promissory notes payable
to such Bank to evidence the Loans outstanding to such Bank under this Agreement
from time to time, together with such documents as such Bank may reasonably
request to evidence the due authorization, execution, delivery and
enforceability of such notes. If any notes are issued hereunder, Administrative
Agent and Borrower may treat the payee of that note as the owner of such note
for all purposes.
2.9 Master Bid Rate Notes. Borrower shall execute a Master Bid Rate Note
---------------------
in the form of Exhibit B hereto in favor of each Bank. The Master Bid Rate Note
of each Bank shall evidence the outstanding principal amount of Bid Rate Loans
made by such Bank, and shall be dated the first day of the Availability Period.
Each Bank is authorized to indicate upon the grid
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attached to its Master Bid Rate Note the principal amount, interest rate and
Interest Period of each Bid Rate Loan and all payments of principal and interest
thereon. Such notations shall be presumptively correct as to the aggregate
unpaid principal amount of the Bid Rate Loan made by such Bank, and interest due
thereon, but the failure by such Bank to make such notations shall not affect
the obligations of Borrower hereunder or under the Master Bid Rate Notes.
2.10 Conversion of Loans Between Eurodollar Loans and Base Rate Loans and
--------------------------------------------------------------------
Conversion of Interest Periods of Eurodollar Loans. (a) On any Eurodollar
- --------------------------------------------------
Banking Day Borrower may convert on a pro rata basis among the Banks any
outstanding Base Rate Loans or Eurodollar Loans (but not Bid Rate Loans) into
any other type of Loan available to Borrower hereunder (but not to a Bid Rate
Loan), or Borrower may change the Interest Period of any Eurodollar Loan to
another Interest Period available under this Agreement, subject to the following
limitations:
(i) No conversion of any Eurodollar Loan into any other Loan and no
conversion of the Interest Period of any Eurodollar Loan may be made except
on the last day of an Interest Period with respect thereto; and
(ii) Any conversion shall be preceded by an irrevocable written or
telephonic notice from Borrower that it elects such conversion, which
notice shall be received by Administrative Agent at least three (3)
Eurodollar Banking Days prior to the date requested for such conversion
from or into a Eurodollar Loan or conversion of the Interest Period of a
Eurodollar Loan.
(b) Banks shall not be obligated to make or continue any Eurodollar Loan
when any Event of Default has occurred and is continuing, but any outstanding
Eurodollar Loan shall be automatically converted to a Base Rate Loan on the last
day of the Interest Period for which a Eurodollar Rate was determined by
Administrative Agent following occurrence of such Event of Default, and, unless
Section 2.11(f) is applicable, Borrower shall be obligated to pay interest at
the Base Rate from the date any Loan is so converted until such Loan is repaid
in full regardless of the date when Administrative Agent obtains knowledge of
such Event of Default.
(c) Each conversion of a Loan into a Base Rate Loan or a Eurodollar Loan,
as the case may be, shall be effected by each Bank, on behalf of Borrower, as
applicable, by making a simultaneous payment of the relevant Eurodollar Loan, or
Base Rate Loan, as the case may be, from the proceeds of the new Loans,
procedures with respect thereto to be governed by the provisions of Section 2.3,
except that disbursement shall be made by means of such payment rather than
directly to Borrower to the extent applicable with respect to each Bank.
(d) If upon the expiration of any Interest Period applicable to
Eurodollar Loans, Borrower has failed to select a new Interest Period to be
applicable thereto, or if any Event of Default or Unmatured Event of Default
shall then exist, Borrower shall be deemed to have elected to convert such
Eurodollar Loans into Base Rate Loans effective as of the expiration date of
such current Interest Period.
2.11 Disbursements and Payments. (a) Each Base Rate Loan and Eurodollar
--------------------------
Loan shall be made on a pro rata basis by Banks, and each Bank's portion of each
Loan shall be determined
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by application of its Normal Percentage. Each Bid Rate Loan shall be made
entirely by the Bank whose offer was accepted by Borrower pursuant to Section
2.4. Each Bank's interest in each Loan and each payment to such Bank under this
Agreement shall be for the account of such Bank's Lending Office.
(b) Each Loan and each payment of principal, interest and other sums
under this Agreement shall be made in immediately available funds (or such other
funds as Administrative Agent may require) at Bank of America's Agency
Administrative Services #5596, 1850 Gateway Blvd., Concord, California 94520,
Acct No. 12337-15346, Ref: Hughes Electronics Corporation or such other office
designated by Administrative Agent from time to time.
(c) Each Bank agrees it will make the funds which it is to advance
hereunder available to Bank of America's Agency Administrative Services #5596,
1850 Gateway Blvd., Concord, California 94520, Acct No. 12337-15346, Ref: Hughes
Electronics Corporation or such other office designated by Administrative Agent
from time to time not later than 11:00 a.m. California time on the Borrowing
Date, and Administrative Agent will thereupon promptly advance to Borrower the
amount so received from Banks.
(d) Payment of all sums under this Agreement shall be made by Borrower to
Administrative Agent, and the latter shall promptly distribute to each Bank its
share of such payments. Each payment by Borrower shall be made without setoff
or counterclaim and not later than 11:00 a.m. California time on the day such
payment is due. All sums received after such time shall be deemed received on
the next Business Day.
(e) If Administrative Agent makes available to Borrower an amount due
from any Bank which such Bank fails to make available to Administrative Agent,
or if Administrative Agent makes available to any Bank an amount due from
Borrower which Borrower fails to make available to Administrative Agent,
Borrower or such Bank, as the case may be, shall, on demand, refund such amount
to Administrative Agent, together with interest thereon for the period during
which such amount was available to Borrower or such Bank, as the case may be, at
the Federal Funds Rate.
(f) Any sum of principal or interest payable by Borrower hereunder if not
paid when due shall bear interest (payable on demand) from its due date until
payment in full (computed daily on the basis of a 365 or 366, as the case may
be, day year and actual days elapsed) at a rate per annum equal to the Base Rate
plus one percentage point.
2.12 Facility Fee. Borrower shall pay Administrative Agent for the
------------
account of the Banks, a facility fee at the rate per annum equal to the
Applicable Amount therefor on the Total Commitment (without regard to the amount
of Loans outstanding at any time hereunder and without giving effect to any
reduction pursuant to Section 2.1(c)) during the Availability Period; provided,
however, following any reduction in the Total Commitment pursuant to Section 3.5
or 3.6 (but not a reduction pursuant to Section 2.1(c)) the computation of the
facility fee shall be based upon such reduced Total Commitment as of the
effective date of such reduction. The facility fee shall be computed on a
calendar quarter basis. The facility fee shall be calculated on the basis of a
360-day year and actual days elapsed, which results in a higher fee than if a
365/366-day year were used, and shall be payable on the 10th day of each
January, April, July
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and October (for the facility fee accrued during the previous calendar quarter)
and on the Termination Date.
SECTION 3
PAYMENT OF COSTS AND REDUCTION
OF THE COMMITMENT
3.1 Indemnification Upon Failure to Pay Eurodollar Loan or Bid Rate Loan.
--------------------------------------------------------------------
If Borrower makes any payment of principal with respect to any Eurodollar Loan
or Bid Rate Loan on a day other than the last day of the then current Interest
Period applicable to such Loan (including without limitation any payment upon
reduction of the Commitments) or fails to borrow, continue, convert, pay or
prepay its Eurodollar Loan or Bid Rate Loan on a date designated to
Administrative Agent in a notice pursuant to this Agreement (if such failure
does not result from the application of Sections 4.1 or 4.2), Borrower shall
reimburse each Bank within 15 days after receipt of written demand for any loss
incurred by it as a result of the timing of such payment or non-borrowing not
reflected in the Eurodollar Rate or the Bid Rate, including without limitation
any loss incurred in liquidating or employing deposits from third parties and
loss of profit for the period after such payment or non-borrowing. A certificate
of such Bank setting forth the amounts reasonably necessary so to reimburse it
in respect of any loss shall be conclusive and binding absent manifest error.
3.2 Increased Costs. (a) If after the date hereof, any applicable law,
---------------
rule or regulation or any change therein or in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof or compliance
by any Bank (or its Lending Office) with any request or directive of any such
authority, central bank or comparable agency, whether or not having the force of
law, shall impose, modify or deem applicable:
(i) any reserve (including, without limitation, any imposed by the Board
of Governors of the Federal Reserve System), special deposit, compulsory loan or
similar requirements against assets, commitments or deposits or other
liabilities with, of or for the account of, or credit extended by, or any
acquisition of funds by or for the account of any Bank or its Lending Office or
the London interbank market or any other condition affecting its obligations to
make the Loans to Borrower hereunder;
(ii) any capital or similar requirements against (or against any class of
or change in or the amount of) assets or liabilities of, or commitments or
extensions of credit by, such Bank;
each Bank which is so affected shall give prompt notice to Borrower describing
such reserves or requirements at least four Business Days prior to the date such
Bank will begin to implement such additional charges with respect to Borrower.
If the result of any of the foregoing is to increase the cost or reduce the
profit to such Bank (or its Lending Office) under this Agreement by an amount
deemed by such Bank to be material, then, within 15 days after written demand by
such Bank, Borrower will pay to such Bank such additional amount or amounts as
will compensate such Bank for such increased cost incurred or reduction in
profit suffered by such Bank. Such Bank will designate a different Lending
Office if such designation will avoid the
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need for, or reduce the amount of, such compensation and will not be otherwise
disadvantageous to such Bank in the sole discretion of such Bank. A certificate
of such Bank setting forth the basis for determining such additional amount or
amounts necessary to compensate the Bank shall be conclusive in the absence of
manifest error.
(b) Without limiting the effect of the foregoing (but without
duplication), upon any Bank's prior written request, Borrower shall pay to such
Bank on the last day of each Interest Period, so long as such Bank may be
required to maintain reserves against "eurocurrency liabilities" under
Regulation D (as at any time amended) of the Board of Governors of the Federal
Reserve System, as additional interest on the unpaid principal amount of each
Eurodollar Loan by such Bank outstanding during such Interest Period, an
additional amount (determined by such Bank and notified to Borrower in writing)
up to but not exceeding such amount as would, together with payments of interest
on such Eurodollar Loan for such Interest Period, result in the receipt by such
Bank of total interest on such Eurodollar Loan, for such Interest Period at a
rate determined by such Bank to be equal to the sum of:
(i) the Eurodollar Rate divided by a sum equal to (a) 1 minus (b) the rate
(expressed as a decimal) of such reserves required by Regulation D, plus
(ii) the Applicable Amount for Eurodollar Loans.
In determining the additional amount payable for an Interest Period
pursuant to this Section, such Bank shall take into account any transitional
adjustment or phase-in provisions of such reserve requirements applicable during
such Interest Period, which would reduce the reserve requirement otherwise
applicable to eurocurrency liabilities during such Interest Period; provided,
however, each Bank in its sole discretion may determine the allocation of
reserve requirements to its Eurodollar Loans. Each such determination made by
such Bank, and each such notification by such Bank to Borrower under this
Section, shall be conclusive as to the matters set forth therein in the absence
of manifest error.
3.3 Taxes. All payments or reimbursements under this Agreement and any
-----
instrument or agreement required hereunder shall be made without setoff or
counterclaim and free and clear of and without deduction for any and all present
and future Taxes. Borrower agrees to cause all such Taxes to be paid on behalf
of any Bank or Administrative Agent directly to the appropriate governmental
authority. If Borrower is legally prohibited from complying with this
subsection, payments due to such Bank or Administrative Agent under this
Agreement and any instrument or agreement required hereunder shall be increased
so that, after provisions for Taxes and all Taxes on such increase, the amounts
received by such Bank or Administrative Agent will be equal to the amounts
required under this Agreement and any instrument or agreement required hereunder
as if no Taxes were due on such payments. Borrower shall indemnify each Bank
and Administrative Agent for the full amount of Taxes payable by such Bank or
Administrative Agent and any liabilities (including penalties, interest and
expenses) arising from such Taxes within 30 days from any written demand by such
Bank. Borrower shall provide evidence that all applicable Taxes have been paid
to the appropriate taxing authorities by delivering to Administrative Agent
official tax receipts or notarized copies or other evidence thereof satisfactory
to Administrative Agent, within 90 days after the due date for such Tax payment.
Such Bank will designate a different Lending Office if such designation will
avoid the
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<PAGE>
need for, or reduce the amount of, such payment or reimbursement and will not be
otherwise disadvantageous to such Bank in the sole discretion of such Bank.
3.4 Prepayment. Upon the irrevocable written notice of Borrower received
----------
by Administrative Agent by 11:00 a.m. California time at least one Business Day
prior to the prepayment of a Base Rate Loan and at least five Eurodollar Banking
Days prior to the prepayment of a Eurodollar Loan, Borrower may prepay any
Eurodollar Loan or Base Rate Loan; but such prepayment shall be in an amount of
at least $5,000,000 or multiple integrals of $1,000,000 in excess thereof. The
notice of prepayment shall specify the date of the prepayment, the amount of the
prepayment and the Loan to be prepaid. Each such prepayment shall be made on
the date specified and, in the case of a prepayment of any Eurodollar Loan shall
be accompanied by the payment of accrued interest on the amount prepaid.
Subject to compliance with the foregoing procedures, Base Rate Loans may be
prepaid at any time without cost or penalty of any kind. If Borrower elects to
prepay a Eurodollar Loan, Borrower shall, on demand by each Bank, pay such Bank
the amount (if any) by which (a) the additional interest which would have been
payable on the amount prepaid on such Bank's portion of such Loan had it not
been paid until the last day of the Interest Period of such Loan exceeds (b) the
interest which would have been recoverable by such Bank by placing such prepaid
amount on deposit in the offshore Dollar interbank markets for a period starting
on the date on which it was prepaid and ending on the last day of the Interest
Period for such Loan. Bid Rate Loans may not be prepaid.
3.5 Pro Rata Reduction of Commitments by Borrower. Borrower may, upon 30
---------------------------------------------
days' prior written notice (which notice shall be irrevocable) to Banks through
Administrative Agent, reduce the Total Commitment on a pro rata basis among the
Banks. Such a reduction shall be in an integral multiple of $5,000,000. Borrower
shall, on the effective date of each such reduction, repay to each Bank through
Administrative Agent that portion of each Loan which exceeds the amount of each
Bank's Commitment as reduced, together with accrued interest on the amount paid
and accrued facility fees subject to such reduction. After the effective date of
each reduction, the Banks' obligations under this Agreement shall be based on
the reduced Commitments.
3.6 Reduction of One Bank's Commitment by Borrower. If the amount of any
----------------------------------------------
payment to be made to or for the account of any Bank is increased under Section
3.3 or any Bank makes a claim under Section 3.2, then:
(a) Borrower may, within 60 days after the notice thereof and by not less
than five Business Days' written notice to Administrative Agent, cancel such
Bank's Commitment, whereupon such Bank shall cease to be obligated to
participate in further Loans hereunder and its Commitment shall be reduced to
the amount of its outstanding Loans until such Loans are repaid by Borrower
either on the Principal Repayment Date for such Loans or pursuant to Section
3.6(b), at which time such Bank's Commitment shall be reduced to zero;
(b) if Borrower cancels such Bank's Commitment pursuant to clause (a)
above and if Borrower so elects by written notice to Administrative Agent given
at the same time as the notice referred to in clause (a) above, Borrower shall
prepay such Bank's portion of each outstanding Loan together with any accrued
interest thereon plus all costs and expenses (including break and funding costs
in connection with the relending, reborrowing, funding or other employing of
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<PAGE>
funds) incurred by such Bank as a result of such cancellation or prepayment on a
date other than the Principal Repayment Date for such Loan; and
(c) Borrower shall repay all Bid Rate Loans from such Bank on the
Principal Repayment Date for such Loans and shall not request any additional Bid
Rate Loans from such Bank.
3.7 Notice of Reductions. Each notice of reduction or prepayment given
--------------------
pursuant to Section 3.4,.3.5 or 3.6 shall be irrevocable, shall specify the date
upon which such reduction or prepayment is to be made and, in the case of a
notice of prepayment, shall obligate Borrower to make such prepayment on such
date. Borrower may not give a notice of reduction of a part of the Commitment
pursuant to Section 3.6 at any time prior to the date so specified in any
previous such notice.
3.8 Designation of Replacement Bank. If the Commitment of any Bank is
-------------------------------
cancelled by Borrower pursuant to Section 3.6 or if any Bank terminates its
Commitment with respect to Eurodollar Loans pursuant to Section 4.2, Borrower,
with the consent of Administrative Agent, may designate an Eligible Assignee
(or, if it deems appropriate, more than one Eligible Assignee) acceptable to
Administrative Agent to act as a Bank hereunder and upon execution of a written
agreement in form satisfactory to Administrative Agent by such Eligible Assignee
in which it agrees to abide by all of the terms, conditions and obligations
applicable to a Bank herein and to have a Commitment as specified in such
agreement, such Eligible Assignee shall be deemed a Bank hereunder to the same
extent as if it were a signatory hereto and, thereafter, such Eligible Assignee
shall for all purposes be considered a "Bank" hereunder.
3.9 Effect of Reduction of Commitment. If, at any time:
---------------------------------
(a) the Commitment of any Bank is reduced to zero in accordance with the
terms of this Agreement;
(b) all indebtedness and other amounts owed to such Bank by Borrower
hereunder or in connection herewith have been satisfied in full; and
(c) such Bank is under no further actual or contingent obligation
hereunder,
then such Bank shall cease to be a party hereto and a Bank for the purposes
hereof; provided, however, that the obligations of Borrower under Sections 3.1,
-------- -------
3.2, 3.3, 11.14, 11.15 and 11.16 shall survive the cancellation of the
Commitment and the termination of this Agreement.
3.10 Accrued Fees. On the date of the cancellation of any portion of the
------------
Total Commitment in accordance with Section 3.5 or of any Bank's Commitment
under Section 3.6, all accrued facility fees for such portion of the Total
Commitment or of such Bank's Commitment shall be paid in full by Borrower.
3.11 Survival. The agreements and obligations of Borrower in this Section
--------
3 shall survive the termination of this Agreement.
SECTION 4
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<PAGE>
CHANGE IN CIRCUMSTANCES AFFECTING LOANS
4.1 Inability to Determine Eurodollar Rate. If any Reference Bank
--------------------------------------
determines (which determination shall be made in good faith and shall be
conclusive and binding upon Borrower) that (a) by reason of circumstances then
affecting the Eurodollar interbank market, adequate and reasonable means do not
or will not exist for ascertaining the interest rate applicable to any
Eurodollar Loans, or (b) Dollar deposits in the relevant amounts and for the
relevant Interest Period are not available to the Banks in the Eurodollar
interbank market, then it shall notify the Administrative Agent who shall
forthwith give written notice of such determination to Borrower and each Bank at
least one Business Day prior to the first day of any Interest Period so
affected; whereupon, until Administrative Agent shall notify Borrower that the
circumstances giving rise to such suspension no longer exist, (i) the
obligations of the Banks to make Eurodollar Loans shall be suspended and (ii)
Borrower shall repay in full, without premium or penalty, the then outstanding
principal amount of the Eurodollar Loans, together with accrued interest
thereon, on the last day of the then current Interest Period pursuant to the
next sentence. Unless Borrower notifies Administrative Agent to the contrary
within one Business Day after receiving a notice from Administrative Agent
pursuant to this Section, Borrower shall, concurrently with prepaying the
Eurodollar Loans pursuant to this Section, be deemed automatically without any
further notice to Administrative Agent or the Banks to have requested and
received Base Rate Loans in an equal principal amount from the Banks, the
proceeds of which are deemed to have been used to repay the other Loans.
4.2 Illegality. If, after the Effective Date, the introduction of or any
----------
change in any applicable law, rule or regulation or in the interpretation or
administration thereof by any governmental authority charged with the
interpretation or administration thereof or compliance by any Bank with any
request or directive (whether or not having the force of law) of any such
authority shall make it unlawful or impossible for such Bank (or its Lending
Office) to make, maintain or fund its Eurodollar Loans, such Bank shall
forthwith give written notice thereof to Administrative Agent and to Borrower.
Before giving any notice pursuant to this Section, such Bank shall designate a
different Lending Office if such designation will avoid the need for giving such
notice and will not be otherwise disadvantageous to such Bank in the sole
judgment of such Bank. Upon receipt of such notice (a) if such Bank has received
a request with respect to Eurodollar Loans and has not yet made such Loan, a
Base Rate Loan shall be deemed to have been designated without any further
notice; (b) all Loans which would otherwise be made by such Bank as Eurodollar
Loans shall be made instead as Base Rate Loans; and (c) Borrower shall prepay in
full, without premium or penalty, the then outstanding principal amount of such
Bank's Eurodollar Loans, together with accrued interest, on either (i) the last
day of the then-current Interest Period if such Bank may lawfully continue to
fund and maintain such Eurodollar Loans, to such day or (ii) immediately if such
Bank may not lawfully continue to fund and maintain such Eurodollar Loans to
such day together with an amount, if any, calculated as set forth in the last
sentence of Section 3.4. Concurrently with prepaying each such Eurodollar Loan
Borrower shall borrow a Base Rate Loan from such Bank in an amount equal to the
principal amount of such Bank's Eurodollar Loans, the proceeds of which are
deemed to have been used to repay such Bank's Eurodollar Loans. If circumstances
subsequently change so that such Bank is not further affected, and no Eligible
Assignee has been appointed pursuant to Section 3.8, such Bank shall so notify
Borrower and Administrative Agent and such Bank's obligation to make and
continue Eurodollar Loans shall be reinstated upon written request of Borrower.
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<PAGE>
SECTION 5
CONDITIONS PRECEDENT
5.1 Conditions Precedent to Signing Date. The occurrence of the Signing
------------------------------------
Date is subject to the condition that on the Signing Date this Agreement, duly
executed and delivered by the parties hereto, shall have been delivered to
Administrative Agent with counterparts for each Bank and in form and substance
satisfactory to Banks.
5.2 Conditions Precedent to Effective Date. The obligation of Banks to
--------------------------------------
make the initial Loans hereunder is subject to the condition that on the
Effective Date there shall have been delivered to the Administrative Agent with
counterparts for each Bank:
(a) The Notes, duly executed and delivered by the Borrower.
(b) The favorable written opinions, dated the Effective Date, of the
General Counsel or Assistant General Counsel of Borrower in the form set out in
Exhibit F.
(c) Certificate of the Secretary or an Assistant Secretary of Borrower
dated the Effective Date as to (i) the Certificate of Incorporation and the By-
laws of Borrower, (ii) the resolution of the Board of Directors of Borrower or
its Executive Committee in connection with this Agreement, and (iii) the
incumbency and signatures of the person authorized to execute and deliver this
Agreement and any other instrument, document or other agreement required
hereunder on the Effective Date.
(d) A certificate, signed by a vice president of Borrower dated the
Effective Date certifying: (i) that since December 31, 1996, there has been no
change in the financial condition, business, operations or properties of
Borrower and its Subsidiaries taken as a whole which constitutes a Material
Change; (ii) the unaudited pro forma condensed combined financial statements for
the nine months ended September 30, 1997 contained in the General Motors
Corporation. Registration Statement on form S-4 dated November 19, 1997, as
amended (the "GMC S-4") give effect to the Reorganization as set forth in the
GMC S-4; (iii) that no event has occurred and is continuing or would result from
the making of a Loan which constitutes or would constitute an Event of Default
or an Unmatured Event of Default; and (iv) the Debt Ratings as of the Effective
Date.
(e) Certificate of Good Standing in relation to Borrower issued by the
Secretary of the State of Delaware, dated not more than one month prior to the
Effective Date.
(f) Evidence satisfactory to Administrative Agent that all obligations of
Borrower outstanding under the Existing Agreements have been repaid in full and
all commitments thereunder have been terminated.
(g) Evidence of Borrower's Debt Ratings from both S&P and Moody's.
(h) Evidence satisfactory to Administrative Agent that the Reorganization
has been completed in accordance with the GMC S-4.
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<PAGE>
(i) The Master Bid Rate Notes, as referred to in Section 2.9, duly
executed by Borrower, shall have been delivered by Borrower to Administrative
Agent.
(j) The Administrative Agent shall have received all fees payable to it on
the Effective Date under the Letter Agreement.
5.3 Conditions Precedent to Loans. The obligation of Banks to disburse
-----------------------------
each Loan (including the first Loan) is subject to the following conditions and
by communicating a Loan Request Borrower is deemed to certify that: (a) to the
best knowledge of the Authorized Designee making such Loan Request, the
representations and warranties (excluding Section 6.6) contained in this
Agreement and any other documents delivered pursuant hereto are true and correct
in all material respects on the date of such Loan Request; (b) the financial
statements delivered to Administrative Agent by Borrower pursuant to Section 7.5
on the date most nearly preceding the Loan Request present fairly the financial
position and results of operation and changes in financial position of Borrower
and its consolidated Subsidiaries as at the end of, and for the fiscal period to
which such statements relate, (subject, in the case of unaudited financial
statements to year end adjustments); and (c) to the best knowledge of the
Authorized Designee making such Loan Request, no Event of Default or Unmatured
Event of Default has occurred and is continuing except such Events of Default or
Unmatured Events of Default as have been expressly waived by or on behalf of the
Banks.
SECTION 6
REPRESENTATIONS AND WARRANTIES
6. Borrower represents and warrants that as of the Effective Date:
6.1 Authority of Borrower. Borrower (a) is a corporation duly organized
---------------------
and existing under the laws of the State of Delaware, with its principal place
of business in Los Angeles, California, (b) has the corporate power to own its
property and carry on its business as now being conducted, (c) is duly qualified
and authorized to do business, and is in good standing in every state, country
or other jurisdiction where the failure to be so qualified, authorized and in
good standing would have a material adverse effect on Borrower, (d) has full
power and authority to borrow the sums provided for in this Agreement, to
execute, deliver and perform this Agreement and any instrument or agreement
required hereunder, and to perform and observe the terms and provisions hereof
and thereof, (e) has taken all corporate action on the part of Borrower, its
directors or stockholders, necessary for the authorization, execution, delivery
and performance of this Agreement, and any instrument or agreement required
hereunder on the date hereof, (f) requires no consent or approval of any trustee
or holder of any indebtedness or obligation of Borrower to enter into, deliver
or perform its obligations under this Agreement and the Notes, and (g) requires
no consent, permission, authorization, order or license of any governmental
authority in connection with the execution and delivery and performance of this
Agreement and any instrument or agreement required hereunder, or any transaction
contemplated hereby, except as may have been obtained and certified copies of
which have been delivered to Banks through Administrative Agent.
6.2 Binding Obligations. This Agreement is the legal, valid and
-------------------
binding obligation of Borrower, enforceable against it in accordance with its
terms, and any instrument or agreement
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<PAGE>
required hereunder, when executed and delivered, will be similarly valid,
binding and enforceable.
6.3 Incorporation of Restricted Subsidiaries. Each Restricted
----------------------------------------
Subsidiary of Borrower is a corporation duly incorporated, validly existing and
in good standing under the laws of the jurisdiction of its incorporation and, to
the best of Borrower's knowledge, is duly licensed or qualified as a foreign
corporation in all jurisdictions where the failure to be so qualified,
authorized and in good standing would have a material adverse effect on Borrower
and its Restricted Subsidiaries taken as a whole.
6.4 No Contravention. There is no charter, by-law, or capital stock
----------------
provision of Borrower and no provision of any indenture or material agreement,
written or oral, to which Borrower is a party or under which Borrower is
obligated, nor is there any statute, rule or regulation, or any judgment, decree
or order of any court or agency binding on Borrower which would be contravened
by the execution, delivery and performance of this Agreement, or any instrument
or agreement required hereunder, or by the performance of any provision,
condition, covenant or other term hereof or thereof.
6.5 Notices. Except as previously disclosed in writing to
-------
Administrative Agent, no event has occurred which, to the best of its knowledge,
would require Borrower to notify Administrative Agent and the Banks pursuant to
Section 7.3 hereof.
6.6 Financial Statements. The financial statements dated December 31,
--------------------
1996 furnished by Hughes Electronics Corporation (as in effect prior to the
Reorganization) to the Administrative Agent and Banks, present fairly the
financial position and results of operation and changes in financial position of
Hughes Electronics Corporation and its consolidated Subsidiaries as at the end
of, and for the fiscal periods to which such statements relate, and such
financial statements were prepared in accordance with GAAP. The unaudited pro
forma condensed combined financial statements for the nine months ended
September 30, 1997 contained in the GMC S-4 give effect to the Reorganization as
set forth therein. Since the date of the unaudited pro forma condensed combined
statements, there has been no Material Change. Neither Borrower nor any
Subsidiary had any contingent obligations, liabilities for taxes or other
outstanding financial obligations at September 30, 1997 on a pro forma basis
which are material in the aggregate, except as disclosed in such unaudited pro
forma condensed combined statements.
6.7 ERISA. Based upon ERISA and the regulations and published
-----
interpretations thereunder, the Plans of Borrower and its Subsidiaries and, to
the knowledge of Borrower, the Plans of any other ERISA Affiliates, are in
material and substantial compliance in all material respects with the applicable
provisions of ERISA and Borrower and its Subsidiaries are in compliance with
such Plans in all material respects. No Reportable Event which has or could be
reasonably be expected to result in termination thereof by the Pension Benefit
Guaranty Corporation or for the appointment by the appropriate United States
District Court of a trustee to administer such Plan has occurred and is
continuing with respect to any Plan.
6.8 Regulation U. Borrower is not engaged principally, or as one of its
------------
important activities, in the business of extending credit for the purposes of
purchasing or carrying any
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<PAGE>
"margin stock" within the meaning of Regulation U of the Board of Governors of
the Federal Reserve System; and neither Borrower nor any of its Subsidiaries is
an "investment company" within the meaning of the Investment Company Act of
1940.
6.9 Taxes. Borrower has filed all federal and state tax returns which
-----
to the knowledge of the financial officers of Borrower are required to have been
filed, and has paid prior to delinquency all taxes that have become due pursuant
to said returns or pursuant to any assessment, except as are being contested in
good faith by appropriate proceedings and as to which adequate reserves have
been provided on the books of Borrower in accordance with GAAP.
6.10 Insurance. Borrower and its Restricted Subsidiaries maintain
---------
insurance with responsible insurance companies, in such amounts and against such
risks as is customarily carried by owners of similar businesses and property,
including protection against loss of use and occupancy, to the extent such
insurance is reasonably available at commercially reasonable rates, and it will
furnish Administrative Agent, upon written request, with full information as to
the insurance carrier; provided, however, that Borrower and its Restricted
-------- -------
Subsidiaries may self insure to the extent they deem prudent.
6.11 Liens. The properties and assets of Borrower and its Restricted
-----
Subsidiaries, real, personal and mixed, are not subject to any Liens, except for
Liens permitted by this Agreement.
SECTION 7
AFFIRMATIVE COVENANTS OF BORROWER
7. Borrower covenants and agrees that so long as the credit hereby
granted shall remain available in whole or in part or until the full and final
payment of all indebtedness incurred hereunder, unless Majority Banks waive
compliance in writing:
7.1 Use of Proceeds of Loans. It will use the proceeds of the Loans
------------------------
made by Banks to Borrower hereunder for the repayment of Commercial Paper and
for its general working capital requirements, including acquisition and
improvement of plant, property and equipment and acquisitions.
7.2 Management of Business. It will manage its business and conduct its
----------------------
affairs such that the representations and warranties contained in Sections 6.1
through 6.3 and 6.7 through 6.9 remain true and correct at all times during the
Availability Period.
7.3 Notice of Certain Events. It will, and it will cause each of its
------------------------
Restricted Subsidiaries to, give prompt written notice to Administrative Agent
(who shall promptly notify the Banks) of:
(a) all Events of Default or Unmatured Events of Default under any of the
terms or provisions of this Agreement;
(b) any event of default under any other agreement, contract, indenture,
document or instrument entered, or which may be entered, into by it that could,
if settled unfavorably, result in a Material Change;
-22-
<PAGE>
(c) all material changes in senior management otherwise publicly
announced;
(d) all litigation, arbitration or administrative proceedings involving
Borrower or any of its Subsidiaries which could in the reasonable opinion of
Borrower be expected to result in a Material Change;
(e) any other matter which has resulted in, or might in the reasonable
opinion of Borrower result in, a Material Change;
(f) concurrently with the public announcement thereof, any proposed Merger
or Disposition affecting any Restricted Subsidiary; and
(g) any change in any Debt Rating by S&P or Moody's.
7.4 Records. It will, and it will cause each of its Restricted
-------
Subsidiaries to, keep and maintain full and accurate accounts and records of its
operations according to GAAP and will permit Administrative Agent, and its
designated officers, employees, agents, and representatives, to have access
thereto and to make examination thereof at all reasonable times, to make audits,
and to inspect and otherwise check its properties, real, personal and mixed;
provided, however, that such examination and access shall be in compliance with
- -------- -------
security and confidentiality requirements of all governmental authorities and,
subject to Section 11.16, Borrower's corporate policies.
7.5 Information Furnished. It will furnish to Banks and Administrative
---------------------
Agent:
(a) Within 60 days after the close of each quarter, except for the last
quarter of each fiscal year, its consolidated balance sheet as of the close of
such quarter and its consolidated profit and loss statement and cash flow
statement for that quarter and for that portion of the fiscal year ending with
such quarter, all prepared in accordance with GAAP, and all certified by its
Treasurer or an Assistant Treasurer as presenting fairly the financial position
and results of operation and changes in financial position of Borrower and its
consolidated Subsidiaries as at the end of, and for the fiscal period to which
such statements relate, subject to normal year-end adjustments.
(b) Within 120 days after the close of each fiscal year, a complete copy
of its annual financial statements, which statements shall include at least its
consolidated balance sheet as of the close of such fiscal year and its
consolidated profit and loss statement and cash flow statement for such fiscal
year, prepared by Deloitte & Touche (or such other independent certified public
accountants of recognized international standing selected by Borrower) in
accordance with GAAP applied on a basis consistent with that of the previous
year, and which statements shall include the opinion of such accountants, such
opinion not to be qualified or limited because of any restricted or limited
nature of examination made by such accountants or because of a "going concern"
qualification.
(c) Within 60 days after the close of each quarter except for the last
quarter of each fiscal year, (and within 120 days after the close of each fiscal
year) its certificate executed by Borrower's Treasurer or an Assistant Treasurer
that (i) the representations and warranties set forth in Section 6 (with the
exception of Section 6.6) are true and correct in all material respects;
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<PAGE>
and (ii) no Event of Default or Unmatured Event of Default has occurred and is
continuing except such Events of Default or Unmatured Events of Default as have
been expressly waived by or on behalf of the Banks.
(d) Such other information concerning its affairs as Administrative Agent
or the Majority Banks may reasonably request.
7.6 Execution of Other Documents. It will promptly, upon demand by
----------------------------
Administrative Agent, execute all such additional agreements, documents and
instruments in connection with this Agreement as Administrative Agent or
Majority Banks may deem necessary.
7.7 ERISA. It will, and it will cause each of its Subsidiaries to:
-----
(a) At all times, make prompt payment of contributions required to meet
the minimum funding standard set forth in ERISA with respect to its Plans,
except to the extent that waivers are granted by the appropriate governmental
agencies;
(b) Notify Administrative Agent immediately of (i) any Reportable Event
which could reasonably be expected to result in aggregate liability to Borrower
and its Subsidiaries in excess of $75,000,000 and (ii) any other fact arising in
connection with any of its Plans or a Plan of any ERISA Affiliate which has
resulted, or could reasonably be expected to result, in termination thereof by
the Pension Benefit Guaranty Corporation or for the appointment by the
appropriate United States District Court of a trustee to administer such Plan,
in each case together with a statement, if requested by Administrative Agent, as
to the reasons therefor and the action, if any, which Borrower or such ERISA
Affiliate proposes to take with respect thereto; and
(c) Furnish to Administrative Agent, upon its written request, such
information concerning any of its Plans as may be reasonably requested.
7.8 Administrative Agent's Fees. It will compensate Administrative Agent
---------------------------
as set forth in the Letter Agreement.
7.9 Compliance with Law. It will, and will cause each of its
-------------------
Subsidiaries to, comply with the requirements of all applicable laws, rules,
regulations, and orders of any governmental or regulatory authority, a breach of
which would result in a Material Change, except where contested in good faith by
appropriate proceedings diligently pursued.
SECTION 8
NEGATIVE COVENANTS OF BORROWER
8. Borrower covenants and agrees that so long as the credit hereby
granted shall remain available in whole or in part or until the full and final
payment of all indebtedness incurred hereunder, unless Majority Banks waive
compliance in writing:
8.1 Liens.
-----
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<PAGE>
(a) Borrower will not, nor will it permit any Restricted Subsidiary to,
issue, incur, guaranty or assume any indebtedness for money borrowed secured by
a Lien upon any property or assets of Borrower or any Restricted Subsidiary or
upon any shares of stock or indebtedness of any Restricted Subsidiary (whether
such property, assets, shares of stock or indebtedness are now owned or
hereafter acquired) without in any such case effectively providing concurrently
with the issuance, incurrence, guarantee or assumption of any such indebtedness
that the Commitments and Loans and any other obligations of Borrower to the
Banks (together with, if Borrower shall so determine, any other indebtedness of
Borrower or such Restricted Subsidiary ranking equally with the Commitments and
Loans and such other obligations and then existing or thereafter created) shall
be secured equally and ratably with or prior to such indebtedness by a Lien upon
such property, assets, shares of stock or indebtedness, unless the aggregate
amount of such indebtedness for money borrowed secured by such Liens, together
with all other indebtedness for money borrowed of Borrower and its Subsidiaries
which (if originally issued, incurred, guaranteed or assumed at such time) would
otherwise be subject to the foregoing restrictions (but not including
indebtedness for money borrowed permitted to be secured under sub-clauses (1)
through (7) of Section 8.1(b)), does not at the time exceed 5% of Consolidated
Adjusted Net Worth.
(b) The above restrictions shall not apply to indebtedness of Borrower or
any of its Restricted Subsidiaries secured by:
(1) Liens existing as of the date hereof and listed in Exhibit E;
(2) Liens on property, assets, shares of stock or indebtedness of any
corporation existing at the time such corporation becomes a Restricted
Subsidiary;
(3) Liens on property existing at the time of acquisition of such
property by Borrower or a Restricted Subsidiary, or Liens to secure the
payment of all or any part of the purchase price of property upon the
acquisition of such property by Borrower or a Restricted Subsidiary or to
secure any indebtedness incurred or guaranteed prior to, at the time of, or
within 180 days after, the later of the date of acquisition of such
property and the date such property is placed in service, for the purpose
of financing all or any part of the purchase price thereof, or Liens to
secure any indebtedness incurred or guaranteed for the purpose of financing
the cost to Borrower or a Restricted Subsidiary of improvements to such
acquired property; provided, however, that for purposes of this clause 3,
-------- -------
(i) a satellite will be treated as a newly-acquired asset as of the date it
is placed in service and (ii) any satellite transponder acquired through
the exercise of an early buy-out option shall be treated as a newly-
acquired asset as of the date such option is exercised;
(4) Liens securing indebtedness of a Restricted Subsidiary owing to
Borrower or to another Restricted Subsidiary;
(5) Liens on property of a corporation existing at the time such
corporation is merged or consolidated with Borrower or a Restricted
Subsidiary (in accordance with Section 8.2) or at the time of a sale, lease
or other disposition of the properties of a corporation as an entirety or
substantially as an entirety to Borrower or a Restricted Subsidiary;
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(6) Liens on property of Borrower or a Restricted Subsidiary in favor
of the United States of America or any state thereof, or any department,
agency or instrumentality or political subdivision of the United States of
America or any state thereof, or in favor of any other country, or any
political subdivision thereof, to secure partial, progress, advance or
other payments pursuant to any contract or statute or to secure any
indebtedness incurred for the purpose of financing all or any part of the
purchase price or the cost of construction of the property subject to such
Liens; or
(7) any extension, renewal or replacement (or successive extensions,
renewals or replacements) in whole or in part of any Liens referred to in
the foregoing sub-clauses (1) to (6), inclusively; provided, however, that
-------- -------
the principal amount of indebtedness secured thereby shall not exceed the
principal amount of indebtedness so secured at the time of the incurrence
or guarantee thereof and that such extension, renewal or replacement shall
be limited to all or a part of the property which secured the Lien so
extended, renewed or replaced (plus improvements on such property).
8.2 Mergers, Liquidations and Sales of Assets. It will not, nor will it
-----------------------------------------
permit any of its Restricted Subsidiaries to liquidate or dissolve or enter into
any consolidation, merger, partnership, joint venture, syndicate, pool or other
combination which results in a Material Change in the nature of Borrower's
business taken as a whole (collectively, the "Mergers") or convey, sell or lease
all or substantially all of its assets or business (collectively,
"Dispositions"), except for:
(a) mergers between Subsidiaries, or between Subsidiary and Borrower where
Borrower is the surviving corporation;
(b) mergers where Borrower is the surviving corporation;
(c) transfers of assets from one Restricted Subsidiary to another
Restricted Subsidiary or from any Restricted Subsidiary to Borrower;
(d) sales, leases, transfers or assignments of operating rights, licenses
or franchises in transactions which do not result in a Material Change different
from changes heretofore publicly disclosed;
(e) Dispositions of any Restricted Subsidiary provided both Debt Ratings
remain Investment Grade on the effective date of any such dispositions; and
(f) the Reorganization;
provided, however, no Disposition or Merger otherwise permitted by clauses (a)
- -------- -------
through (e) above shall take place if before, or after giving effect to any such
Disposition or Merger, an Event of Default or Unmatured Event of Default exists
is or would exist.
8.3 Defaults. It will not, nor will it permit any of its Restricted
--------
Subsidiaries to, commit or do any act or thing which would constitute an event
of default under any of the material terms or provisions of any other material
agreement, contract, indenture, document or
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instrument executed, or to be executed by any of them, except those that may be
contested in good faith and would not, if settled unfavorably, result in a
Material Change.
8.4 Compliance with Regulations. Borrower will not engage principally,
---------------------------
or as one of its important activities, in the business of extending credit for
the purposes of purchasing or carrying any "margin stock" within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System; and it
will not use the proceeds of any Loan for the purpose, directly or indirectly,
whether immediate, incidental or ultimate, (a) to purchase or carry, within the
meaning of such Regulation U, any such margin stock or to extend credit to
others for the purpose of purchasing or carrying any such margin stock, unless
done in strict compliance with such Regulation U and other applicable law and
Borrower shall have executed and delivered to each Bank prior to such use a Form
U-1 statement evidencing compliance with such Regulation U and such other
documents relating thereto as Administrative Agent or any Bank shall request, or
(b) in a manner which would violate, or result in a violation of, Regulation G,
T, U, or X of the Board of Governors of the Federal Reserve System.
SECTION 9
EVENTS OF DEFAULT
9.1 Events of Default. If one or more of the following described
-----------------
Events of Default shall occur:
(a) Borrower shall default in the due and punctual payment of (i) the
principal of or the interest on any Loan within two Business Days of its due
date, (ii) any fee due hereunder within 10 Business Days of its due date; or,
(iii) any other amount due from it hereunder within 30 Business Days of its due
date; or
(b) Borrower or any of its Restricted Subsidiaries shall fail to perform
or observe any of the terms, provisions, covenants, conditions, agreements or
obligations contained herein (other than Section 7.3, and Sections 8.1 through
8.4,) and such failure shall continue for more than 20 days after written notice
from Administrative Agent to Borrower of the existence and character of such
failure to perform or observe; or
(c) Borrower or any of its Restricted Subsidiaries shall fail to perform
or observe any of the terms, provisions, covenants, conditions agreements or
obligations contained in Section 7.3 and Sections 8.1 through 8.4; or
(d) (i) Borrower, or any of its Restricted Subsidiaries shall become
insolvent, or be unable, or admit in writing its inability, to pay its debts as
they become due; or (ii) Borrower or any Restricted Subsidiary shall make an
assignment for the benefit of creditors or to an agent authorized to liquidate
any substantial amount of its properties or assets; or (iii) Borrower or any
Restricted Subsidiary shall file or have filed against it a petition in
bankruptcy or seeking reorganization or to effect a plan or other arrangement
with creditors or winding up or dissolution and such filing against it shall not
be dismissed within 60 days after the date of such filing; or (iv) Borrower or
any Restricted Subsidiary shall apply for or consent to the appointment of or
consent that an order be made appointing any receiver or trustee for any of its
or their properties, assets or business, or if a receiver or a trustee shall be
appointed for all or a substantial part of its or their properties, assets or
business; or (v) an order for relief shall be
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<PAGE>
entered against Borrower or any Restricted Subsidiary under the United States
federal bankruptcy laws as now or hereafter in effect; or (vi) Borrower or any
Restricted Subsidiary shall take any action indicating its consent to, approval
of or acquiescence in, any of the foregoing; or
(e) Any representation or warranty made by Borrower herein or in any
certificate or financial or other statement heretofore or hereafter furnished by
Borrower or any of its officers to Administrative Agent or the Banks proves to
be in any material respect false or misleading as of the date when made, deemed
made or reaffirmed; or
(f) Any final judgment, decrees, writs of execution, attachments or
garnishments or any Liens, or any other legal processes shall be issued or
levied against any of the assets or property of Borrower or any of its
Restricted Subsidiaries (and shall not have been vacated, discharged or stayed)
in amounts which in the aggregate would result in a Material Change (without
limiting the generality of the foregoing, a judgment in excess of $75,000,000 in
the aggregate shall, for purposes only of this Section 9.1(f), be deemed to
result in a Material Change); provided, however, that such aggregate amount
-------- -------
shall include only amounts in excess of (i) insurance coverage therefor and (ii)
reserves on the books of Borrower or any of its Restricted Subsidiaries
therefore; provided, further, that such aggregate amount shall not include any
-------- -------
amounts with respect to matters subject to appeal conducted in good faith and
diligently pursued or other further legal process by Borrower or any of its
Restricted Subsidiaries or any amounts with respect to any such legal process
which Borrower or any of its Restricted Subsidiaries has detached from such
property by posting of a bond or equivalent process; or
(g) All, or substantially all, of the assets and property of Borrower or
any of its Restricted Subsidiaries shall be condemned, seized or otherwise
appropriated; or
(h) Any fact or circumstance (including without limitation a Reportable
Event), which results in, or which Majority Banks determine in good faith could
reasonably be expected to result in, the termination of any Plan of Borrower,
any of its Subsidiaries or any ERISA Affiliate by the Pension Benefit Guaranty
Corporation or the appointment by an appropriate United States District Court of
a trustee to administer any such Plan, shall occur and shall continue for 30
days after written notice of such determination shall have been given to
Borrower or any of its Subsidiaries by Administrative Agent, or a trustee shall
be appointed by the appropriate United States District Court to administer any
Plan of Borrower or any of its Subsidiaries, or the Pension Benefit Guaranty
Corporation shall institute proceedings to terminate any Plan of Borrower or any
of its Subsidiaries or to appoint a trustee to administer any such Plan and,
upon the occurrence of any of the foregoing, the aggregate amount of the
unfunded vested liability for the benefits guaranteed by the Pension Benefit
Guaranty Corporation under all such Plans and the present value of any
Withdrawal Liability which remains unpaid is reasonably estimated to be in
excess of $75,000,000 and such liability is not covered by insurance; or
(i) Borrower or any of its Restricted Subsidiaries (i) fails to make any
payment (or otherwise satisfy) in respect of any indebtedness for money borrowed
when due (whether by scheduled maturity, required prepayment, acceleration,
demand, or otherwise) and such failure continues after the applicable grace or
notice period, if any, specified in the document relating thereto on the date of
such failure; or (ii) an event of default shall occur which permits the
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<PAGE>
acceleration of indebtedness for money borrowed under any other agreement,
contract, indenture, document or instrument executed, or which may be executed,
by Borrower or any of its Restricted Subsidiaries, which failure or event of
default has not been waived or cured; provided, however, that no Event of
-------- -------
Default shall exist hereunder if the amount of the indebtedness which is not
paid or may be accelerated with respect to the defaulted obligations shall not
exceed in the aggregate $75,000,000; or
(j) Either Debt Rating is less than Investment Grade;
(k) Any disposition of any Restricted Subsidiary shall have occurred, and:
(i) prior to such disposition, either S&P or Moody's shall have
publicly announced that Borrower's Debt Rating will be below Investment
Grade after giving effect to such disposition; or
(ii) as soon as reasonably practicable after its public announcement
of such disposition, Borrower shall not have requested S&P and Moody's to
publicly announce, prior to or no later than concurrently with the
consummation of such disposition, that Borrower's Debt Rating will remain
at least Investment Grade after giving effect to such disposition; or
(iii) notwithstanding clause (ii), either S&P or Moody's shall not
have publicly announced within 10 days after the consummation of such
disposition that Borrower's Debt Ratings will remain at least Investment
Grade after giving effect to such disposition; or
(l) Any sale, spin-off, disposition or other transaction whereby General
Motors Corporation will no longer beneficially own directly or indirectly at
least 51 percent of the issued and outstanding capital stock of Borrower having
voting power under ordinary circumstances to elect directors of Borrower (a
"transaction") shall have occurred and:
(i) prior to such transaction, either S&P or Moody's shall have
publicly announced that its Debt Rating will be below Investment Grade
after giving effect to such transaction; or
(ii) as soon as reasonably practicable after its public announcement
of such transaction, Borrower shall not have requested S&P and Moody's to
publicly announce, prior to or no later than concurrently with the
consummation of such transaction, that Borrower's Debt Rating will remain
at least Investment Grade after giving effect to such transaction; or
(iii) notwithstanding clause (ii), either S&P or Moody's shall not
have publicly announced within 10 days after the consummation of such
transaction that its Debt Ratings will remain at least Investment Grade
after giving effect to such transaction.
Then (a) automatically upon the occurrence of an Event of Default under Section
9.1(d), the Commitments shall immediately terminate, and all Loans and other
liabilities and obligations outstanding under this Agreement shall, without
presentment, demand, protest, or notice of any
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<PAGE>
kind, all of which are hereby expressly waived, be forthwith due and payable, if
not herein otherwise then due and payable, together with all costs and expenses
(including break and funding costs and other costs in connection with the
relending, reborrowing, funding or other employing of funds) incurred by the
Banks as a result thereof, anything herein or in any agreement, contract,
indenture, document or instrument contained to the contrary notwithstanding; and
(b) at any time after the occurrence of an Event of Default other than under
Section 9.1(d), and in each and every such case, unless such Event of Default
shall have been remedied by Borrower to the satisfaction of Majority Banks or
waived in writing by Majority Banks (except in the case of an Event of Default
under Section 9.1(a), the waiver of which shall require the consent of all the
Banks), Administrative Agent may, with the consent of the Majority Banks, or
shall, upon the direction of Majority Banks, immediately terminate the
Commitments, whereupon the same shall be cancelled and reduced to zero and any
Loan Request given in respect of a Borrowing Date occurring on or after the date
of such notice of cancellation shall cease to have effect and all Loans and all
accrued interest thereon and all other liabilities and obligations outstanding
under this Agreement shall, thereupon, without presentment, demand, protest, or
notice of any kind, all of which are hereby expressly waived, be forthwith due
and payable, if not otherwise then due and payable, together with all reasonable
costs and expenses (including break and funding costs and other costs in
connection with the relending, reborrowing, funding or other employing of funds)
incurred by the Banks as a result thereof, anything herein or in any other
agreement, contract, indenture, document or instrument contained to the contrary
notwithstanding. Thereafter any Bank or the Banks may immediately, and without
expiration of any period of grace, enforce payment of all liabilities and
obligations of Borrower under this Agreement and under any other agreements,
contracts, indentures, documents and instruments between Borrower and the Banks.
9.2 Recovery of Amounts Due. If any amount payable hereunder is not
-----------------------
paid as and when due, Borrower hereby authorizes Administrative Agent, each Bank
and their respective affiliates to proceed, to the fullest extent permitted by
applicable law, without prior notice, by right of set-off, banker's lien or
counterclaim, against any moneys or other assets of Borrower in any currency
that may at any time be in the possession of Administrative Agent or any of its
affiliates or such Bank or any of its affiliates, at any branch or office
thereof, to the full extent of all amounts payable to Administrative Agent and
the Banks hereunder. Any Bank that so proceeds or that has an affiliate that so
proceeds shall forthwith give notice to Administrative Agent of any action taken
by such Bank or affiliate pursuant to this Section 9.2.
9.3 Rights Cumulative. The rights of Administrative Agent and the
-----------------
Banks provided for herein are cumulative and are not exclusive of any other
rights, powers, privileges or remedies provided by law or in equity.
SECTION 10
THE BANKS
10.1 Administration of Loan. The general administration of the Loans
----------------------
shall be by Administrative Agent and shall be governed by the provisions set
forth in Exhibit C attached hereto and incorporated herein by reference.
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10.2 Representations By Banks. Each Bank hereby represents that it will
------------------------
make each Loan hereunder in the ordinary course of its business and not with a
view to engage in any distribution of any evidence of indebtedness to the public
and any participation or disposition of the Master Bid Rate Note shall not,
without the consent of Borrower, require Borrower to file a registration
statement with the Securities and Exchange Commission or apply to qualify any
Master Bid Rate Note under the blue sky law of any state; provided, however,
disposition of any evidence of indebtedness held by such Bank shall at all times
be within its exclusive control subject only to the provisions of Section 11.11
and Section 10 of Exhibit C.
SECTION 11
MISCELLANEOUS PROVISIONS
11.1 Amendments and Waivers. No amendment or waiver of any provision of
----------------------
this Agreement, and no consent with respect to any departure by the Borrower
therefrom, shall be effective unless the same shall be in writing and signed by
the Majority Banks (or by the Administrative Agent at the written request of the
Majority Banks) and the Borrower and acknowledged by the Administrative Agent,
and then any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given; provided, however, that
-------- -------
no such waiver, amendment, or consent shall, unless in writing and signed by all
the Banks and the Borrower and acknowledged by the Administrative Agent, do any
of the following: (a) increase or extend the Commitment of any Bank (or
reinstate any Commitment terminated pursuant to Section 9.1); (b) postpone or
delay any date fixed by this Agreement for any payment of principal, interest,
fees or other amounts due to the Banks (or any of them) hereunder; (c) reduce
the principal of, or the rate of interest specified herein on any Loan, or any
fees or other amounts payable hereunder; (d) change the percentage of the
Commitments or of the aggregate unpaid principal amount of the Loans which is
required for the Banks or any of them to take any action hereunder; or (e) amend
this Section or any provision herein providing for consent or other action by
all Banks; provided, further, that no amendment, waiver or consent shall, unless
-------- -------
in writing and signed by the Administrative Agent in addition to the Majority
Banks or all the Banks, as the case may be, affect the rights or duties of the
Administrative Agent under this Agreement or rights or privileges thereunder.
11.2 Notices. All notices, payments, requests, reports, information,
-------
demands and other communications which any party hereto may desire, or may be
required, to give or make to any other party hereto, shall (unless otherwise
permitted as a telephonic notice or request hereunder) be given by mailing the
same, postage prepaid, or by telex, or rapifax transmission, or by hand delivery
or courier, to each party at its address set forth in Exhibit D attached hereto
and incorporated herein by reference, or to such other address as may, from time
to time, be specified in writing by Borrower or any Bank. Such communications
shall be deemed to have been duly given and received in the case of a telex,
when the telex is sent and the appropriate answer-back is received, in the case
of mail when sent by pre-paid certified or registered mail correctly addressed
to the addressee, in the case of rapifax transmission, when transmission has
been sent, in the case of hand delivery or courier, when received.
Administrative Agent may rely and act upon any Loan Request made by telex or
other telexed, telephonic or facsimile instructions to Administrative Agent by
any Person purporting to be an authorized Person of Borrower, and Borrower shall
be unconditionally and absolutely estopped from denying the authenticity and
validity of any transaction or act made by Administrative Agent or any Bank in
reliance thereon.
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Each party hereto shall promptly confirm by telex or rapifax any telephone
communication made by it to another pursuant to this Agreement but the absence
of such confirmation shall not affect the validity of such communication, which
shall be effective upon receipt. If there is any conflict between any telephonic
communication and a written confirmation, the written communication shall
govern; provided, however, that the recipient of such communication shall be
-------- -------
held harmless by all parties hereto with respect to any action taken in reliance
on the telephonic communication prior to the time such recipient receives and
has had reasonable time to review the subsequent written confirmation and
initiate such corrective action as the recipient deems reasonable under the
circumstances.
11.3 Waiver. Neither the failure of, nor any delay on the part of, any
------
party hereto in exercising any right, power or privilege hereunder, or under any
agreement, contract, indenture, document or instrument mentioned herein, shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege hereunder, or under any agreement, contract,
indenture, document or instrument mentioned herein, preclude other or further
exercise thereof or the exercise of any other right, power or privilege; nor
shall any waiver of any right, power, privilege or default hereunder, or under
any agreement, contract, indenture, document or instrument mentioned herein,
constitute a waiver of any other right, power, privilege or default or
constitute a waiver of any other default of the same or of any other term or
provision. All rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies otherwise provided by law.
11.4 California Law. The interpretation, enforcement and effect of this
--------------
Agreement, the Loans and any agreements, contracts, indentures, documents or
instruments delivered in accordance herewith, shall be governed and controlled
in all respects by and construed according to the substantive laws of the State
of California, to the jurisdiction of whose courts the parties hereto hereby
agree to submit.
11.5 Headings. The headings set forth herein are solely for the purpose
--------
of identification and shall not be construed as a part of the sections or
subsections which they head.
11.6 Accounting Terms. All accounting terms not otherwise defined herein
----------------
have the meaning assigned to them in accordance with GAAP, provided, however,
any act or condition in accordance herewith and permitted hereunder when taken,
created or occurring, shall not become a violation of any section of this
Agreement as a result of a subsequent change in GAAP.
11.7 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the different parties hereto on separate counterparts, and
all of said counterparts taken together shall constitute one and the same
instrument.
11.8 Written Disclosure. Wherever written disclosure by Borrower to Banks
------------------
is required or permitted by this Agreement, written disclosure to
Administrative Agent by Borrower shall constitute such disclosure.
11.9 Singular; Plural. Whenever used herein, the singular number shall
----------------
include the plural, the plural the singular, and the use of any gender shall be
applicable to all genders.
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11.10 Illegality. The illegality or unenforceability of any provision of
----------
this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
11.11 Assignments. This Agreement shall bind and inure to the benefit of
-----------
the parties hereto and their respective successors and assigns. No party hereto
may assign or transfer all or any part of its rights and obligations hereunder,
except that:
(a) Any Bank may, with the prior written consent of Borrower at all times
other than during the existence of an Event of Default, and the Administrative
Agent, which consents shall not be unreasonably withheld, at any time assign and
delegate to one or more Eligible Assignees (provided that no written consent of
Borrower or the Administrative Agent shall be required in connection with any
assignment and delegation by Bank to an Approved Bank Affiliate of such Bank or
another Bank) (each an "Assignee"), all, or any ratable part of all, of the
Loans, the Commitments and the other rights and obligations of such Bank
hereunder; provided, however, that any assignment to an Eligible Assignee which
is not a Bank or an Approved Bank Affiliate shall be of all, but not less than
all, of the Loans, the Commitment and the other rights and obligations of such
Bank hereunder; provided, further, that upon any such assignment hereunder, such
Bank shall concurrently assign to the same Assignee a ratable portion of its
loans, commitments and other rights and obligations under the Revolving Credit
Agreement (364-Day Facility) dated as of even date herewith, among Borrower,
the banks parties thereto, Bank of America National Trust and Savings
Association, as administrative agent, Morgan Guaranty Trust Company of New York,
as syndication agent and Citicorp USA, Inc. and The Chase Manhattan Bank as
documentation agents. Upon execution of a written agreement in form
satisfactory to Administrative Agent by such Eligible Assignee in which it
agrees to abide by all of the terms, conditions and obligations applicable to a
Bank herein and to have a Commitment as specified in such agreement, such
Eligible Assignee shall be deemed a Bank hereunder to the same extent as if it
were a signatory hereto and, thereafter, such Eligible Assignee shall for all
purposes be considered a "Bank" hereunder. Administrative Agent shall be
entitled to a $2,500 processing fee, payable by the assignor, with respect to
any such assignment by a Bank.
(b) Subject to Section 11.16, Borrower authorizes each Bank and the
Arranger to disclose to any prospective assignee and assignee any and all
information in such Bank's or the Arranger's possession concerning Borrower,
this Agreement and any collateral.
11.12 Obligations Several. The obligations of each Bank under this
-------------------
Agreement are several. Neither Administrative Agent nor any Bank shall be
liable for the failure of any other Bank to perform its obligations under this
Agreement.
11.13 Participations. Any Bank may at any time sell, or grant
--------------
participations in all or part of its Commitment or any Loan or Loans made to
Borrower under this Agreement to any other Person, other than an individual, (a
"Participant"); provided, however, no Bank may be relieved of its obligations
under this Agreement except with the consent of Borrower and Administrative
Agent. Any such sale or grant of a participation is subject to the following
conditions:
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<PAGE>
(a) Administrative Agent and Borrower may, for all purposes of this
Agreement, deem and treat a Bank party to this Agreement as the owner of such
Bank's Loans hereunder for all purposes hereof until a written notice of the
sale or participation shall have been received by Administrative Agent, together
with Borrower's consent to treat such Participant as owner of such Loan.
(b) Subject to Section 11.16, Borrower authorizes each Bank and the
Administrative Agent to disclose to any prospective Participant and to any
Participant any and all information in such Bank's or the Administrative Agent's
possession concerning Borrower, this Agreement and any collateral.
(c) Any agreement pursuant to which a Bank grants a participation in its
rights with respect to any Loan or Loans shall provide that, with respect to any
such Loan or Loans, such Bank shall retain the sole right and responsibility to
exercise the rights of a Bank under this Agreement including, without
limitation, the right to approve any amendment, modification or waiver of any
provision of this Agreement and the right to take action to declare any amount
due and payable pursuant to Section 9; provided that such participation
agreement may provide that such Bank will not agree to any modification,
amendment or waiver of this Agreement without the consent of the Participant if
such modification, amendment or waiver would (i) increase the amount of the
Total Commitment or change the Commitment of such Bank, (ii) reduce interest,
principal or fees owing to such Bank hereunder, (iii) extend the fixed date on
which any sum is due hereunder, or (iv) release or subordinate any collateral.
(d) Except as provided in this Section 11.13, no recipient of a
participation in a Loan or Loans of any Bank shall have any rights under this
Agreement other than to receive payment of principal of, and interest on the
Loans and of such other amounts as Banks are entitled to receive pursuant to
Sections 3.1, 3.2, 3.3, and 3.4 of this Agreement; provided, however such
recipients shall be entitled to receive pursuant to Sections 3.1, 3.2 and 3.3
only the lesser of (i) the amount that the Bank from which the recipient
received its participation would have received had such Bank not transferred an
interest in its Loans to such recipient and (ii) the additional costs actually
incurred by such recipient; and any demand by a Participant for payment
hereunder shall certify that the amount demanded does not exceed the amount
Participant is entitled to receive under this subsection (d).
(e) Notwithstanding any other provision set forth in this Agreement, any
Bank may at any time create a security interest in all or any portion of its
rights under this Agreement (including, without limitation, the Loans owing to
it) in favor of any Federal Reserve Bank in accordance with Regulation A of the
Board of Governors of the Federal Reserve System.
11.14 Fees and Expenses. Borrower agrees to pay on demand (a) to
-----------------
Administrative Agent all reasonable costs, expenses and attorneys' fees
(including allocated costs for in-house legal services) incurred by
Administrative Agent in connection with the preparation and administration of
this Agreement and any documents including any amendments, waivers, or other
modifications and (b) all reasonable costs, expenses and attorneys' fees
(including allocated costs for in-house legal services) incurred by
Administrative Agent and Banks in connection with the enforcement of this
Agreement and any instrument or agreement required hereunder and in connection
with any refinancing or restructuring of the Loans in the nature of a "work-
out";
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provided, however that, in addition to costs of Administrative Agent's in-house
counsel, Borrower shall be obligated to pay for the costs of no more than one
counsel for Administrative Agent and all Banks (without prejudice to any Bank's
right to engage additional counsel at its own cost and expense) unless any Bank
shall in good faith reasonably determine that there is a conflict of interest
that causes it to be reasonably necessary for such Bank to be represented by
separate counsel.
11.15 Indemnity. Borrower agrees to indemnify the Administrative Agent,
---------
the Arranger the Syndication Agent, the Documentation Agents, each Bank and
their respective directors, officers, agents and employees (collectively, the
"Indemnitees") from and hold each of them harmless against any and all losses,
liabilities, claims, damages or expenses reasonably incurred by any of them
arising out of or by reason of any investigation by governmental or judicial
authorities or being made a party to any litigation or other similar proceeding
related to any use made or proposed to be made by Borrower of the proceeds of
any Loan for the acquisition of any other Person including, without limitation,
the reasonable fees and disbursements of counsel (including allocated costs for
in-house legal services) incurred in connection with any such investigation,
litigation or other proceeding; provided, however, that Borrower shall have no
-------- -------
obligation to indemnify or pay for the costs and expenses of more than one
counsel for the Indemnitees, unless any Indemnitee shall in good faith
reasonably determine that there is a conflict of interest that causes it to be
reasonably necessary for any Indemnitees to be represented by other counsel.
Counsel chosen to represent the any Indemnitee pursuant to the previous sentence
shall be reasonably satisfactory to Borrower. The obligations of Borrower under
this Section shall survive the termination of this Agreement.
11.16 Confidentiality. In consideration of Borrower furnishing
---------------
Confidential Information(as defined below) to the Banks, the Arranger, the
Administrative Agent, the Syndication Agent and the Documentation Agents,
(collectively, the "Recipients") and their respective directors, officers and
employees (collectively, the "Representatives"), each Recipient agrees for
itself that:
(a) Such Recipient shall keep the Confidential Information confidential
and shall not, without Borrower's prior written consent, disclose it in any
manner whatsoever, in whole or in part, and shall not use the Confidential
Information other than in connection with this Agreement. Each Recipient agrees
to reveal the Confidential Information only to its Representatives, bank
affiliates, auditors, counsel and other advisors, representatives or agents who
need to know the Confidential Information for the purpose of this Agreement, who
are informed by such Recipient of the confidential nature of the Confidential
Information and who shall agree to act in accordance with the terms and
conditions of this section. Each Recipient shall be responsible for any breach
of this Section by its Representatives.
(b) Without Borrower's prior written consent, no Recipient shall
disclose to any Person the fact that the Confidential Information has been made
available, that such Recipient is entering into this Agreement, or any other
facts with respect to this Agreement.
(c) All copies of the Confidential Information shall be returned to
Borrower immediately upon its request, except for that portion of the
information which consists of analyses, compilations, forecasts, studies or
other documents prepared by a Recipient or its
-35-
<PAGE>
Representatives based on Confidential Information, which portion shall, upon
Borrower's election, be destroyed (as evidenced by a certificate of destruction
signed by a duly authorized offer of such Recipient) or held by such Recipient
and kept confidential and subject to the terms of this section. Any oral
Confidential Information shall continue to be subject to the terms of this
Section.
(d) Confidential Information shall not include such portions of the
information furnished to a Recipient which (i) are or become generally available
to the public other than as a result of a disclosure by such Recipient or its
Representatives in violation of this Agreement, (ii) become available to such
Recipient on a non-confidential basis from a source (other than Borrower or its
Representatives) which is not known by such Recipient to be prohibited from
disclosing such information to such Recipient, or (iii) were in such Recipient's
possession prior to being furnished to such Recipient or its Representatives
provided that the source of such information was not known by such Recipient to
be prohibited from disclosing the information to such Recipient.
(e) Except as otherwise expressly set forth in this Agreement, each
Recipient acknowledges that neither Borrower nor any of its Representatives
makes any express or implied representation or warranty as to the accuracy or
completeness of the information furnished to such Recipient, and that neither
Borrower nor any of its Representatives shall have any liability resulting from
the use of the information furnished to any Recipient, errors therein or
omissions therefrom.
(f) In the event any Recipient or any person to whom it transmits the
Confidential Information pursuant to this Agreement becomes legally compelled to
disclose any of the information, such Recipient shall, to the extent permitted
by law, provide Borrower with prompt written notice thereof so that the Borrower
may seek a protective order or other appropriate remedy and/or waiver such
Recipient's compliance with the provisions of this section. In the event that
such protective order or other remedy is not obtained, or that Borrower waives
any Recipient's compliance with the provisions of this section, such Recipient
may furnish only that portion of the Confidential Information which it is
advised by written opinion of counsel that the disclosure thereof is legally
required, and shall exercise its best efforts to obtain reliable assurance that
confidential treatment will be accorded the Confidential Information so
disclosed.
(g) Notwithstanding the foregoing, a Recipient may (i) disclose any
Confidential Information to bank examiners; (ii) use any Confidential
Information in connection with the management, supervision and enforcement of
this Agreement, including the enforcement of such Recipient's rights under any
agreement executed in connection therewith; (iii) disclose any Confidential
Information in connection with any litigation or dispute involving any such
Person or the Borrower and related to this Agreement or to any use of proceeds
of the Loans; (iv) disclose any Confidential Information to other Recipients;
and (v) disclose Confidential Information to prospective assignees and
Participants and assignees and Participants pursuant to Sections 3.8, 11.11(b)
and 11.13(b); provided, further, that in each of the foregoing cases, such
Person shall use its best efforts to ensure that any such disclosure will be
made under procedures reasonably calculated to maintain the confidentiality of
such Confidential Information.
-36-
<PAGE>
For purposes of this Section, "Confidential Information" means information
relating to the business, operation or technology of Borrower or its affiliates
which Borrower has furnished to the Banks, the Arranger, the Administrative
Agent, the Syndication Agent, the Documentation Agents or their Representatives
which is either non-public, confidential or proprietary in nature, together with
copies and other reproductions thereof, and analyses, compilations, forecasts,
studies or other documents prepared by any Banks or its Representatives which
contain or otherwise reflect such information.
This section shall survive termination of the Agreement.
11.17 Termination of Existing Agreements. The parties hereto agree that,
----------------------------------
effective as of the Effective Date, the Existing Agreements, and the commitments
thereunder, are terminated and no party has any outstanding obligations
thereunder.
-37-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
in Los Angeles, California as of the date first hereinabove written.
HUGHES NETWORK SYSTEMS, INC.
(to be renamed HUGHES
ELECTRONICS CORPORATION)
By:___________________________
Title:________________________
S-1
<PAGE>
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION,
as Administrative Agent
By:___________________________
Janice Hammond
Vice President
S-2
<PAGE>
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as
Syndication Agent and a Bank
By: ___________________________
Name: _________________________
Title: ________________________
S-3
<PAGE>
CITICORP USA, INC., as Documentation
Agent and a Bank
By: ___________________________
Name: _________________________
Title: ________________________
S-4
<PAGE>
THE CHASE MANHATTAN BANK, as
Documentation Agent and a Bank
By: ___________________________
Name: _________________________
Title: ________________________
S-5
<PAGE>
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION,
as a Bank
By:___________________________
Dianne Allen
Vice President
S-6
<PAGE>
BANKERS TRUST COMPANY
By: __________________________
Name: ________________________
Title: _______________________
S-7
<PAGE>
CREDIT SUISSE FIRST BOSTON
By: __________________________
Name: ________________________
Title: _______________________
By: __________________________
Name: ________________________
Title: _______________________
S-8
<PAGE>
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD., LOS ANGELES AGENCY
By: ___________________________
Name: _________________________
Title: ________________________
S-9
<PAGE>
THE MITSUBISHI TRUST & BANKING
CORPORATION, NEW YORK BRANCH
By: ___________________________
Name: _________________________
Title: ________________________
S-10
<PAGE>
NATIONSBANK OF TEXAS, N.A.
By: ____________________________
Name: __________________________
Title: _________________________
S-11
<PAGE>
TORONTO-DOMINION (TEXAS), INC.
By: ___________________________
Name: _________________________
Title: ________________________
S-12
<PAGE>
BANCA DI ROMA - SAN FRANCISCO
BRANCH
By: ___________________________
Name: _________________________
Title: ________________________
By: ___________________________
Name: _________________________
Title: ________________________
S-13
<PAGE>
THE BANK OF NEW YORK
By: ___________________________
Name: _________________________
Title: ________________________
S-14
<PAGE>
CIBC INC.
By: ___________________________
Name: _________________________
Title: ________________________
S-15
<PAGE>
CREDIT LYONNAIS NEW YORK
BRANCH
By: ___________________________
Name: _________________________
Title: ________________________
S-16
<PAGE>
DEUTSCHE BANK AG NEW YORK
AND/OR CAYMAN ISLANDS
BRANCHES
By: ___________________________
Name: _________________________
Title: ________________________
By: ___________________________
Name: _________________________
Title: ________________________
S-17
<PAGE>
THE FIRST NATIONAL BANK OF
CHICAGO
By: ___________________________
Name: _________________________
Title: ________________________
S-18
<PAGE>
FIRST NATIONAL BANK OF
MARYLAND
By: ___________________________
Name: _________________________
Title: ________________________
S-19
<PAGE>
THE FUJI BANK, LIMITED
LOS ANGELES AGENCY
By: ___________________________
Name: _________________________
Title: ________________________
S-20
<PAGE>
THE INDUSTRIAL BANK OF JAPAN,
LIMITED LOS ANGELES AGENCY
By: ___________________________
Name: _________________________
Title: ________________________
S-21
<PAGE>
ISTITUTO BANCARIO SAN PAOLO DI
TORINO SpA
By: ___________________________
Name: _________________________
Title: ________________________
By: ___________________________
Name: _________________________
Title: ________________________
S-22
<PAGE>
UNION BANK OF CALIFORNIA, N.A.
By: ___________________________
Name: _________________________
Title: ________________________
S-23
<PAGE>
SCHEDULE 1
BANKS AND COMMITMENTS
<TABLE>
<CAPTION>
Bank Commitment Normal Percentage
- ---- ---------- -----------------
<S> <C> <C>
Bank of America National 59,062,500 7.8750%
Trust and Savings Association
The Chase Manhattan Bank 59,062,500 7.8750%
Citicorp USA 59,062,500 7.8750%
Morgan Guaranty Trust Company 59,062,500 7.8750%
of New York
Bankers Trust Company 37,500,000 5.0000%
Credit Suisse First Boston 37,500,000 5.0000%
The Long-Term Credit Bank of 37,500,000 5.0000%
Japan, Ltd., Los Angeles
Agency
The Mitsubishi Trust and 37,500,000 5.0000%
Banking Corporation, New
York Branch
NationsBank of Texas, N.A. 37,500,000 5.0000%
The Toronto-Dominion Bank 37,500,000 5.0000%
Banca di Roma - San Francisco 26,250,000 3.5000%
Branch
The Bank of New York 26,250,000 3.5000%
CIBC Inc. 26,250,000 3.5000%
Credit Lyonnais New York 26,250,000 3.5000%
Branch
Deutsche Bank AG New York 26,250,000 3.5000%
and/or Cayman Island Branches
</TABLE>
-1-
<PAGE>
<TABLE>
<S> <C> <C>
The First National Bank of 26,250,000 3.5000%
Chicago
First National Bank of 26,250,000 3.5000%
Maryland
The Fuji Bank, Limited, Los 26,250,000 3.5000%
Angeles Agency
The Industrial Bank of Japan, 26,250,000 3.5000%
Limited, Los Angeles Agency
Istituto Bancario San Paolo 26,250,000 3.5000%
di Torino SpA
Union Bank of California 26,250,000 3.5000%
Total $750,000,000 100.0000%
</TABLE>
-2-
<PAGE>
EXHIBIT A-1
LOAN REQUEST
TO: Bank of America National Trust and
Savings Association, as Administrative
Agent for Banks
FROM: Hughes Electronics Corporation
DATE:
RE: Hughes Electronics Corporation -
Revolving Credit Agreement (Multi-Year Facility)
Gentlemen:
1. We refer to the Revolving Credit Agreement (Multi-Year Facility)
dated as of December 5, 1997 and made among Hughes Electronics Corporation, the
banks parties thereto ("Banks"), Bank of America National Trust and Savings
Association, as administrative agent for the Banks (in such capacity
"Administrative Agent"), Morgan Guaranty Trust Company of New York, as
Syndication Agent and Citicorp USA, Inc. and The Chase Manhattan Bank as
Documentation Agents (the "Agreement"). Terms defined in the Agreement shall
have the same meaning herein.
2. We hereby request that a [Base Rate Loan] [Eurodollar Loan] is made
to us as follows:
(i) Principal Amount:
(ii) Borrowing Date:
(iii) Interest Period (if a Eurodollar Loan):
3. For the purposes of inducing the Banks to make the Loan requested
herein, we confirm that, pursuant to Section 5.2 of the Agreement, as of the
date hereof:
(i) to the best of the knowledge of the undersigned, the
representations and warranties set out in Section 6 of the
Agreement (with the exception of Section 6.6) are true and
correct in all material respects;
(ii) the most current financial statements delivered pursuant to
Section 7.5 of the Agreement present fairly the financial
position and results of operation
A-1-1
<PAGE>
and changes in financial position of Borrower and its
consolidated Subsidiaries as at the end of, and for the fiscal
period to which such statements relate as of the date thereof
(subject, in the case of unaudited financial statements, to
year end adjustments); and
(iii) to the best of the knowledge of the undersigned, no Event of
Default or Unmatured Event of Default has occurred and is
continuing.
HUGHES ELECTRONICS CORPORATION
By:__________________________
Title:_______________________
A-1-2
<PAGE>
EXHIBIT A-2
LOAN REQUEST - BID RATE LOANS
TO: Bank of America National Trust and
Savings Association, as Administrative
Agent for Banks
FROM: Hughes Electronics Corporation
DATE:
RE: Hughes Electronics Corporation -
Revolving Credit Agreement (Multi-Year Facility)
Gentlemen:
1. We refer to the Revolving Credit Agreement (Multi-Year Facility)
dated as of December 5, 1997 and made among Hughes Electronics Corporation, the
banks parties thereto ("Banks"), Bank of America National Trust and Savings
Association, as administrative agent for the Banks (in such capacity
"Administrative Agent"), Morgan Guaranty Trust Company of New York, as
Syndication Agent and Citicorp USA, Inc. and The Chase Manhattan Bank as
Documentation Agents (the "Agreement"). Terms defined in the Agreement shall
have the same meaning herein.
2. We hereby give you notice pursuant to Section 2.4 of the Revolving
Credit Agreement that we request offers for the following proposed Bid Rate
Loans:
(i) Borrowing Date:
(ii) Principal Amount:
(iii) Interest Period(s):
Each Bid Rate Loan offer should specify an amount, the Interest Period and
the Bid Rate upon which each Bank desires to advance a Bid Rate Loan.
3. For the purposes of inducing the Banks to make the Loan requested
herein, we confirm that, pursuant to Section 5.2 of the Agreement, as of the
date hereof:
(i) to the best of the knowledge of the undersigned, the
representations and warranties set out in Section 6 of the
Agreement (with the exception of Section 6.6) are true and
correct in all material respects;
<PAGE>
(ii) the most current financial statements delivered pursuant to
Section 7.5 of the Agreement present fairly the financial
position and results of operation and changes in financial
position of Borrower and its consolidated Subsidiaries as at
the end of, and for the fiscal period to which such statements
relate as of the date thereof (subject, in the case of
unaudited financial statements, to year end adjustments); and
(iii) to the best of the knowledge of the undersigned, no Event of
Default or Unmatured Event of Default has occurred and is
continuing.
HUGHES ELECTRONICS CORPORATION
By: _________________________
Title: ______________________
A-2-2
<PAGE>
EXHIBIT B
MASTER BID RATE NOTE
Los Angeles, California December 5, 1997
HUGHES ELECTRONICS CORPORATION, a Delaware corporation (formerly named
Hughes Network Systems, Inc.) (the "Borrower"), for value received, hereby
promises to pay to the order of _____________________ (the "Bank"), at Agency
Administrative Services #5693 of Bank of America National Trust and Savings
Association, as Administrative Agent, for the account of Bank, 1850 Gateway
Blvd., Concord, California 94520, on the dates specified in the Credit Agreement
(as herein defined), in lawful money of the United States, the total unpaid
principal amount of all Bid Rate Loans made by Bank to Borrower from the date of
this Note through the Termination Date pursuant to the Credit Agreement. This
Note shall bear interest as set forth in the Credit Agreement for Bid Rate
Loans. Interest payable under this Note shall be payable at the times specified
in the Credit Agreement. No Loan shall be made under this Note if, as a result
of such Loan, the total aggregate principal amount of Loans outstanding under
the Credit Agreement exceeds the Total Commitment.
This Note is one of the Master Bid Rate Notes referred to in the Revolving
Credit Agreement (Multi-Year Facility) dated as of December 5, 1997 (as in
effect from time to time, the "Credit Agreement"), among Borrower, the banks
parties thereto ("Banks"), Bank of America National Trust and Savings
Association, as administrative agent for the Banks (in such capacity
"Administrative Agent"), Morgan Guaranty Trust Company of New York, as
Syndication Agent and Citicorp USA, Inc. and The Chase Manhattan Bank as
Documentation Agents, and is subject to prepayment in whole or in part and its
maturity is subject to acceleration upon the terms provided in the Credit
Agreement.
This Note shall be governed by, and construed and interpreted in accordance
with, the laws of the State of California.
B-1
<PAGE>
All Bid Rate Loans made by Bank to Borrower pursuant to the Credit
Agreement and all payments of principal thereof may be indicated by Bank upon
the grid attached hereto which is a part of this Note. Such notations shall be
presumptively correct as to the aggregate unpaid principal amount of all Bid
Rate Loans made by Bank pursuant to the Credit Agreement.
HUGHES ELECTRONICS CORPORATION
By: _________________________
Title: ______________________
B-2
<PAGE>
Bid Rate Loans and Payments of Principal
<TABLE>
<CAPTION>
_______________________________________________________________________________________________________
Unpaid
Amount of Interest Interest Amount of Principal Name of Person
Date Loan Period Rate Principal Paid Balance Marking Notation
_______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
_______________________________________________________________________________________________________
</TABLE>
B-3
<PAGE>
EXHIBIT C
RELATIONS AMONG THE BANKS AND AGENTS
1. Administration of the Credit. Payment of interest and principal on the
----------------------------
Loans and the facility fee and all other amounts payable by Borrower hereunder
shall be made by Borrower in immediately available funds, directly to each Bank
in the case of amounts payable under Sections 3.1, 3.2 and 3.3 and, in all other
cases, to Administrative Agent, and Administrative Agent shall promptly
distribute to the other Banks in immediately available funds their shares of
principal, interest and fees and to each Bank as provided herein such other
amounts as paid by Borrower.
2. Pro Rata Distribution. All facility fees will be divided among the
---------------------
Banks in accordance with their Normal Percentage, and interest and principal
payments on each Loan will be divided pro rata among Banks in accordance with
their percentage interest in the Loan.
3. Right of Setoff. Any Bank which shall receive payment of or on account
---------------
of all or part of its share of the Loans through the exercise of any right of
setoff, counterclaim, or banker's lien, or otherwise in a greater proportion
than the proportionate amount of principal and interest due it under this
Agreement immediately prior to such payment shall purchase a ratable proportion
of the portions of the Loan held by the other Banks so that all recoveries of
principal and interest shall be shared by the Banks in accordance with their pro
rata interests in the Loans outstanding hereunder. If all or any portion of such
excess payment is thereafter recovered from such Bank, such purchase shall be
rescinded and the purchase price restored to the extent of such recovery, but
without interest. Any sum received by Bank through exercise of the right of
setoff, counterclaim, or banker's lien shall be deemed to be first applied to
such Bank's portion of the indebtedness under this Agreement, second as herein
above provided and any balance remaining thereafter shall be deemed applied to
any other indebtedness of Borrower to such Bank.
4. Notice of Event of Default. Upon receipt by Administrative Agent from
--------------------------
Borrower of any communication calling for an action on the part of Banks, or
upon notice to Administrative Agent of an Unmatured Event of Default or an Event
of Default, it will in turn promptly inform the other Banks in writing of the
nature of such communication or of the Unmatured Event of Default or Event of
Default, as the case may be.
5. Actions by Administrative Agent. Upon any occasion requiring or
-------------------------------
permitting an approval, consent, election or other action on the part of Banks,
action shall be taken by Administrative Agent for and on behalf or for the
benefit of all Banks upon the direction of the required number of Banks and the
Administrative Agent, if applicable, as set forth in Section 11.1 of the
Agreement.
6. Several Liability of Banks. The obligation of each Bank hereunder is
--------------------------
several, and the failure of one Bank to perform hereunder shall in no way
relieve the other Banks from performance.
7. Liability of Administrative Agent. Administrative Agent shall not be
---------------------------------
liable or answerable for anything whatsoever in connection with this Agreement
except for its willful
C-1
<PAGE>
misconduct or gross negligence, and Administrative Agent shall have no duties or
obligations other than as provided herein. Administrative Agent shall be
entitled to rely on any opinion of counsel (including counsel for Borrower) in
relation to this Agreement, and upon statements and communications received from
Borrower, or from any other person, believed by it to be authentic, and shall
not be liable for any action taken or omitted in good faith on such reliance.
8. Indemnification of Administrative Agent. Each Bank agrees to indemnify
---------------------------------------
Administrative Agent (to the extent not reimbursed by Borrower and without
limiting the obligation of Borrower to do so), ratably according to its Normal
Percentage, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever which may be imposed on, incurred by or
asserted against Administrative Agent in any way relating to or arising out of
this Agreement or any action taken or omitted by Administrative Agent under this
Agreement except for Administrative Agent's gross negligence or willful
misconduct. The obligations of the Banks under this Section 8 shall survive
termination of the Agreement.
9. Rights of Administrative Agent as Bank. With respect to its obligation
--------------------------------------
to lend under this Agreement and the Loans made by it, Bank of America shall
have the same rights and powers hereunder as any other Bank and may exercise the
same as though it were not Administrative Agent; and the term "Banks" shall
include Bank of America in its individual capacity. Bank of America may accept
deposits from, lend money to, and generally engage in any kind of banking, trust
or other business with Borrower as if it were not Administrative Agent.
10. Assignment by Bank of its Obligations. Administrative Agent may deem
--------------------------------------
and treat a Bank party to this Agreement as the owner of such Bank's portion of
the Loans for all purposes hereof unless and until a written notice of the
assignment or transfer of such Bank's obligations otherwise permitted under the
Agreement executed by such Bank shall have been received by Administrative
Agent, together with Borrower's consent to such assignment or transfer and such
other documentation from such Bank and its assignee or transferee as
Administrative Agent may reasonably request.
11. Representations by Banks. Neither Administrative Agent nor any Bank
------------------------
has made or makes to any other Bank any representation, and neither
Administrative Agent nor any Bank assumes any responsibility, in respect to the
execution, construction or enforcement of this Agreement or any other instrument
or agreement executed by Borrower or by any other person or entity.
12. Independent Investigation by Banks. Each Bank has made and shall
----------------------------------
continue to make its own independent investigation of the financial condition
and affairs of Borrower in connection with the making and the continuance of the
Loans and has made and covenants that it shall continue to make its own
appraisal of the creditworthiness of Borrower. Each Bank agrees Administrative
Agent has no duty or responsibility, either initially or on a continuing basis,
to provide any Bank with any credit or other information with respect to
Borrower, whether coming into its possession before the making of the Loans or
at any time or times thereafter except as expressly provided in this Agreement.
C-2
<PAGE>
13. Successor Administrative Agent. Administrative Agent shall have the
------------------------------
right, at any time, to resign as Administrative Agent for the Banks hereunder.
Such resignation shall not be effective until a successor Administrative Agent
chosen by Majority Banks, and accepted by Borrower, shall accept appointment as
Administrative Agent for the Banks hereunder. If no successor Administrative
Agent shall have been so appointed by the Majority Banks and shall have accepted
such appointment, within 30 days after the retiring Administrative Agent has
given notice of resignation, the retiring Administrative Agent may, on behalf of
the Banks, appoint a successor Administrative Agent reasonably acceptable to
Borrower, which successor Administrative Agent shall be a commercial bank
organized under the laws of the United States of America or a State thereof
having a combined capital and surplus of at least $100,000,000. Upon the
acceptance by the successor Administrative Agent of its appointment hereunder,
the successor Administrative Agent shall succeed to and become vested with all
the rights and obligations of the retiring Administrative Agent, and the
retiring Administrative Agent shall be discharged from its obligations under
this Agreement. The provisions of this Article shall inure to the benefit of the
retiring Administrative Agent as to any actions taken or omitted to be taken by
it while it was Administrative Agent under this Agreement. After any retiring
Administrative Agent's resignation hereunder as Administrative Agent, the
provisions of this Exhibit C and Section 11.14 shall inure to its benefit as to
any actions taken or omitted to be taken by it while it was Administrative Agent
under this Agreement.
14. Syndication Agent; Documentation Agents. None of the Banks identified
---------------------------------------
on the facing page or signature pages of this Agreement as Syndication Agent or
Documentation Agents shall have any right, power, obligation, liability,
responsibility or duty under this Agreement other than those applicable to all
Banks as such. Without limiting the foregoing, none of the Banks so identified
shall have or be deemed to have any fiduciary relationship with any Bank. Each
Bank acknowledges that it has not relied, and will not rely, on any of the Banks
so identified in deciding to enter into this Agreement or in taking or not
taking action hereunder.
C-3
<PAGE>
EXHIBIT D
LENDING OFFICES OF BANKS AND ADDRESSES FOR NOTICES
BORROWER
7200 Hughes Terrace, Mail Station A-135, Building C-1
P.O. Box 45066
Los Angeles, Ca. 90045-0066
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, AS ADMINISTRATIVE AGENT
Bank of America National Trust
and Savings Association
555 South Flower Street, 11th Floor
Los Angeles, California 90071
Attention: Gina Meador
Vice President
Agency Management-Los Angeles #20529
Telephone: (213) 228-5245
Facsimile: (213) 228-2299
Administrative Agent's Payment Office:
--------------------------------------
Bank of America National Trust
and Savings Association
1850 Gateway Boulevard, Fifth Floor
Concord, California 94520
Attention: Glenis Croucher
Sr. Agency Administrative Officer
Agency Administrative Services #5596
Telephone: (510) 675-8447
Facsimile: (510) 675-8500
D-1
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, AS A BANK
Domestic and Offshore Lending Office:
-------------------------------------
Bank of America National Trust
and Savings Association
GPO-Domestic Account Administration #5693
1850 Gateway Blvd., 3rd Floor
Concord, CA 95420
Attention: Donna Cowan
Sr. Account Administrator
Telephone: (510) 675-7502
Facsimile: (510) 675-7531
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
Bank of America National Trust
and Savings Association
555 South Flower Street, 11th Floor
Los Angeles, California 90071
Attention: Dianne Allen
Vice President
Credit Products #5618
Telephone: (213) 228-2435
Facsimile: (213) 623-1959
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
Domestic and Offshore Lending Office:
-------------------------------------
Morgan Guaranty Trust Company
of New York
c/o J.P. Morgan Services Inc.
500 Stanton Christiana Road
Newark, DE 19713
Attention: Jeannie Mattson
Associate
Telephone: (302) 634-1852
Facsimile: (302) 634-1938
D-2
<PAGE>
Notices for all Libor, CD, Base Rate Borrowings and or Repayments:
------------------------------------------------------------------
Morgan Guaranty Trust Company of New York
c/o J.P. Morgan Services Inc.
500 Stanton Christiana Road
Newark, DE 19713
Attention: Thomas Lazlo
Telephone: (302) 634-1852
Facsimile: (302) 634-1893
Notices (other than Borrowing notices and Notices of Conversion/
Continuation):
----------------------------------------------------------------
Morgan Guaranty Trust Company of New York
60 Wall Street, 22nd Floor
New York, NY 10260-0060
Attention: Robert Osieski
Vice President
Telephone: (212) 648-5018
Facsimile: (212) 648-7173
THE CHASE MANHATTAN BANK
Domestic and Offshore Lending Office:
-------------------------------------
The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017
Attention: Lenora Kiernan
Telephone: (212) 552-7309
Facsimile: (212) 552-5650
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017
Attention: Richard C. Smith
Vice President
Telephone: (212) 270-5435
Facsimile: (213) 270-5100
D-3
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LTD., LOS ANGELES AGENCY
Domestic and Offshore Lending Office:
-------------------------------------
The Long-Term Credit Bank of Japan, Ltd.,
Los Angeles Agency
350 South Grand Avenue, Suite 3000
Los Angeles, CA 90071
Attention: Mitchell Davis
Telephone: (213) 689-6238
Facsimile: (213) 626-1067
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
The Long-Term Credit Bank of Japan, Ltd.,
Los Angeles Agency
350 South Grand Avenue, Suite 3000
Los Angeles, California 90071
Attention: Tamotsju Ukai
Vice President
Telephone: (213) 381-6345
Facsimile: (213) 626-1067
THE MITSUBISHI TRUST AND BANKING
CORPORATION, NEW YORK BRANCH
Domestic and Offshore Lending Office:
-------------------------------------
The Mitsubishi Trust and Banking
Corporation, New York Branch
520 Madison Avenue
New York, New York 10022
Attention: Ming Hwa Chou
Telephone: (212) 891-8263
Facsimile: (212) 755-2349
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
The Mitsubishi Trust and Banking
Corporation, New York Branch
520 Madison Avenue
New York, New York 10022
Attention: Scott J. Paige
Special Finance
Telephone: (212) 891-8216
Facsimile: (212) 644-6825
D-4
<PAGE>
THE TORONTO-DOMINION BANK
Domestic and Eurodollar Lending Office:
---------------------------------------
The Toronto-Dominion Bank
909 Fanin, Suite 1700
Houston, Texas 77010
Attention: Jorge A. Garcia
Manager - Credit Administration
Telephone: (713) 653-8242
Facsimile: (713) 951-9921
Full Money Market Lending Office:
---------------------------------
The Toronto-Dominion Bank
31 West 52nd Street, 21st Floor
New York, New York 10019-6101
Attention: Senior Dealer
Telephone: (212) 468-0400
Facsimile: (212) 974-5283
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
The Toronto-Dominion Bank
31 West 52nd Street, 21st Floor
New York, New York 10019-6101
Attention: Michael Bandziere
Telephone: (212) 468-0713
Facsimile: (212) 262-1928
CREDIT LYONNAIS NEW YORK BRANCH
Domestic and Offshore Lending Office:
-------------------------------------
Credit Lyonnais New York Branch
1301 Avenue of the Americas
New York, New York 10019
Attention: Deborah Sachs
Telephone: (212) 261-7837
Facsimile: (212) 261-3318
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
Credit Lyonnais New York Branch
1301 Avenue of the Americas
New York, New York 10019
Attention: Mark Campellare
Telephone: (212) 261-7306
Facsimile: (212) 261-3288
D-5
<PAGE>
DEUTSCHE BANK AG
NEW YORK AND/OR CAYMAN ISLANDS BRANCH
Domestic and Offshore Lending Office:
-------------------------------------
Deutsche Bank AG
New York and/or Cayman Islands Branch
31 West 52nd Street
New York, New York 10019
Attention: Noble Samuel/Cheryl H. Manbelbaum
Telephone: (212) 469-4091
Facsimile: (212) 469-4139
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
Deutsche Bank AG
New York and/or Cayman Islands Branch
31 West 52nd Street
New York, New York 10019
Attention: Robert M. Wood, Jr.
Director
Telephone: (212) 469-7839
Facsimile: (212) 469-8212
THE FIRST NATIONAL BANK OF CHICAGO
Domestic and Offshore Lending Office:
-------------------------------------
The First National Bank of Chicago
One First National Plaza
Chicago, Illinois 60670
Attention: Sharon Bosch
Telephone: (312) 732-7112
Facsimile: (312) 732-4840
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
The First National Bank of Chicago
777 S. Figueroa Street, 4th Floor
Los Angeles, California 90017
Attention: Stewart Klein
Telephone: (213) 683-4950
Facsimile: (213) 683-4999
D-6
<PAGE>
with a copy to:
--------------
The First National Bank of Chicago
777 S. Figueroa Street, 4th Floor
Los Angeles, California 90017
Attention: Mark A. Isley
First Vice President
Telephone: (213) 683-4964
Facsimile: (213) 683-4999
FIRST NATIONAL BANK OF MARYLAND
Domestic and Offshore Lending Office:
-------------------------------------
First National Bank of Maryland
25 S. Charles Street, MC101-745
Baltimore, Maryland 21201
Attention: Peg Miedzianowski
Telephone: (410) 244-4839
Facsimile: (410) 244-4239
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
First National Bank of Maryland
25 S. Charles Street, MC101-745
Baltimore, Maryland 21201
Attention: Jennifer Putnam
Telephone: (410) 244-4721
Facsimile: (410) 244-4239
THE FUJI BANK LIMITED, LOS ANGELES AGENCY
Domestic and Offshore Lending Office:
-------------------------------------
The Fuji Bank Limited, Los Angeles Agency
333 South Hope Street, 39th Floor
Los Angeles, CA 90071
Attention: Wayne Wong
Telephone: (213) 253-4132
Facsimile: (213) 253-4178
D-7
<PAGE>
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
The Fuji Bank Limited, Los Angeles Agency
333 South Hope Street, 39th Floor
Los Angeles, California 90071
Attention: Yuka Giles
Assistant Vice President
Telephone: (213) 253-4162
Facsimile: (213) 253-4178
THE INDUSTRIAL BANK OF JAPAN, LIMITED
LOS ANGELES AGENCY
Domestic and Offshore Lending Office:
-------------------------------------
The Industrial Bank of Japan, Limited
Los Angeles Agency
350 S. Grand Avenue, Suite 1500
Los Angeles, CA 90071
Attention: Maria Lopez/Lynn Santos
Telephone: (213) 893-6355/(213) 893-6345
Facsimile: (213) 688-7486
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
The Industrial Bank of Japan, Limited
Los Angeles Agency
350 S. Grand Avenue, Suite 1500
Los Angeles, California 90071
Attention: J. Blake Seaton
Telephone: (213) 893-6448
Facsimile: (213) 488-9840
CITICORP USA
Domestic and Offshore Lending Office:
-------------------------------------
Citibank, N.A.
c/o 2 Pennsway, 2nd Floor
Newcastle, Delaware 19720
Attention: Suzanne Watson
Telephone: (302) 894-6060
Facsimile: (302) 894-6120
D-8
<PAGE>
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
Citibank, N.A.
725 S. Figueroa Street, 5th Floor
Los Angeles, California 90017
Attention: Walt Larsen
Managing Director
Telephone: (213) 239-1501
Facsimile: (213) 623-3592
BANCA DI ROMA - SAN FRANCISCO BRANCH
Domestic and Offshore Lending Office:
-------------------------------------
Banca Di Roma - San Francisco Branch
One Market Street, Steuart Tower, Suite 1000
San Francisco, California 94105
Attention: Francesco Barolo
Telephone: (415) 977-7303
Facsimile: (415) 357-9869
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
Banca Di Roma - San Francisco Branch
One Market Street, Steuart Tower, Suite 1000
San Francisco, California 94105
Attention: Augusto Bianchi
First Vice President
Telephone: (415) 977-7306
Facsimile: (415) 357-9869
THE BANK OF NEW YORK
Domestic and Offshore Lending Office:
-------------------------------------
The Bank of New York
One Wall Street, 22nd Floor
New York, New York 10286
Attention: Sandra Morgan/Dawn Hertling
Telephone: (212) 635-6743 or 6742
Facsimile: (212) 635-6877 or 6899
D-9
<PAGE>
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
The Bank of New York
10990 Wilshire Blvd, Suite 1125
Los Angeles, California 90024
Attention: Johathan Rollins
Assistant Vice President
Telephone: (310) 996-8658
Facsimile: (310) 996-8667
ISTITUTO BANCARIO SAN PAOLIO DI TORINO SpA
Domestic and Offshore Lending Office:
-------------------------------------
San Paolo Bank
245 Park Avenue
New York, New York 10167
Attention: Carmela Romanello-Schaden
Telephone: (212) 692-3126
Facsimile: (212) 599-5303
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
San Paolo Bank
444 South Flower Street
Los Angeles, California 90071
Attention: Donald Brown
Telephone: (213) 489-3105
Facsimile: (213) 622-2514
UNION BANK OF CALIFORNIA, N.A.
Domestic and Offshore Lending Office:
-------------------------------------
Union Bank of California, N.A.
445 S. Figueroa Street, 16th Floor
Los Angeles, California 90071
Attention: Jason Kim
Credit Associate
Telephone: (213) 236-7735
Facsimile: (213) 236-7636
D-10
<PAGE>
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
Union Bank of California, N.A.
445 S. Figueroa Street, 16th Floor
Los Angeles, California 90071
Attention: Steele Fairbanks
Vice President
Telephone: (213) 236-5791
Facsimile: (213) 236-7636
NATIONSBANK OF TEXAS, N.A.
Domestic and Offshore Lending Office:
-------------------------------------
NationsBank of Texas, N.A.
901 Main Street
Dallas, Texas 75202
Attention: Jean North
Telephone: (214) 508-2151
Facsimile: (214) 508-9390
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
NationsBank of Texas, N.A.
901 Main Street
Dallas, Texas 75202
Attention: Rosalyn Reid
Vice President
Telephone: (214) 508-0988
Facsimile: (214) 508-9390
CIBC, INC.
Domestic and Offshore Lending Office:
-------------------------------------
CIBC, Inc.
2727 Park Ferry Road, Suite 1200
Atlanta, Georgia 30339
Attention: Vickie Rollins
Telephone: (770) 319-4802
Facsimile: (770) 319-4950
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
CIBC, Inc.
425 S. Lexington Avenue
New York, New York 10017
Attention: Laura Hom
Telephone: (212) 856-3985
Facsimile: (212) 856-3985
D-11
<PAGE>
BANKERS TRUST COMPANY
Domestic and Offshore Lending Office:
-------------------------------------
Bankers Trust Company
One Bankers Trust Plaza
New York, New York 10006
Attention: Hsing Huang
Telephone: (212) 250-2431
Facsimile: (212) 250-7351
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
Bankers Trust Company
One Bankers Trust Plaza
New York, New York 10006
Attention: Gina Thompson
Vice President
Telephone: (212) 250-7396
Facsimile: (212) 250-7351
CREDIT SUISSE FIRST BOSTON
Domestic and Offshore Lending Office:
-------------------------------------
Credit Suisse First Boston
11 Madison Avenue
New York, New York 10020
Attention: Matt Wilson
Telephone: (212) 325-0303
Facsimile: (212) 325-6509
Notices (other than Borrowing notices and Notices of Conversion/
Continuation) :
----------------------------------------------------------------
Credit Suisse First Boston
11 Madison Avenue
New York, New York 10010
Attention: Mark Sampson
Vice President
Telephone: (212) 325-3641
Facsimile: (212) 325-6509
D-12
<PAGE>
EXHIBIT E
EXISTING LIENS
Hughes Software Systems Ltd.
Revolving Credit Facility $1,670,000.00
Term Loan 800,000.00
Letter of Credit Line 1,670,000.00
Galaxy Latin America
Capital Lease of AT&T Telephone Switch $300,000.00
-------------
Total $4,440,000.00
E-1
EXISTING LIENS
<PAGE>
EXHIBIT F
OPINION OF COUNSEL
December 5, 1997
To: The Banks listed on Schedule A hereto; Bank
of America National Trust and Savings
Association, as Administrative Agent; Morgan
Guaranty Trust Company of New York, as
Syndication Agent; and Citicorp USA, Inc.
and The Chase Manhattan Bank as
Documentation Agents
Re: Hughes Electronics Corporation
Revolving Credit Agreement
--------------------------
Gentlemen:
I am the Assistant General Counsel of Hughes Electronics Corporation, a
Delaware corporation (the "Borrower"), in connection with the extension to
Borrower of a revolving line of credit extended under and subject to the terms
and provisions of a Revolving Credit Agreement (Multi-Year Facility) dated as of
December 5, 1997 (the "Credit Agreement") by and among Borrower, the banks named
therein (the "Banks"), Bank of America National Trust and Savings Association,
as administrative agent for the Banks (in such capacity "Administrative Agent"),
Morgan Guaranty Trust Company of New York, as Syndication Agent and Citicorp
USA, Inc. and The Chase Manhattan Bank as Documentation Agents. Capitalized
terms not otherwise defined herein shall have the meanings set forth in the
Credit Agreement. This opinion is rendered to you pursuant to Section 5.1(a) of
the Credit Agreement.
As Assistant General Counsel to Borrower, I have caused to be made such
legal and factual examinations and inquiries, including an examination of
originals or copies, certified or otherwise identified to my satisfaction as
authentic, of such corporate records, agreements, instruments and other
documents as I have deemed necessary or appropriate for the purposes of this
opinion. I have caused to be obtained such certificates and other assurances
(copies of which have been delivered to you) from public officials and officers
and other employees of Borrower as I considered necessary or appropriate for the
purpose of rendering this opinion. I have assumed the genuineness of all
signatures (except that of Borrower), the authenticity of all documents
submitted to me as originals, and the conformity with the originals of all
documents submitted to me as copies.
F-1
<PAGE>
Subject to the limitations herein set forth, I am opining herein as to the
effect on the subject transaction only of United States federal law, the laws of
the State of California and the General Corporation Law of the State of
Delaware. I am licensed to practice law in the State of California. I assume
no responsibility as to the applicability to the subject transaction or the
effect thereon of the laws of any other jurisdiction.
Based upon the foregoing and in reliance thereon, and subject to the
qualifications, limitations and assumptions set forth herein, I am of the
opinion that, as of the date hereof:
1. Borrower is a corporation duly incorporated and validity existing as a
corporation in good standing under the laws of the State of Delaware, with full
corporate power and authority to own and lease its properties and conduct its
business as presently owned and conducted.
2. Borrower is duly qualified to do business as a foreign corporation in
good standing in the State of California.
3. Borrower has full corporate power and authority to borrow the sums
provided for in the Credit Agreement, to execute and deliver the Credit
Agreement and to perform its obligations thereunder.
4. All corporate action required to be taken by Borrower for the
authorization, execution and delivery of the Credit Agreement by Borrower and
the performance by Borrower of its obligations thereunder has been duly taken.
5. The officer of Borrower executing the Credit Agreement is duly and
properly in office and duly authorized to execute the same.
6. The Credit Agreement is a valid and binding agreement of Borrower,
subject to the limitations, qualifications, exceptions and assumptions set forth
below.
7. To my knowledge, after causing to be conducted such legal and factual
examination and inquiries and causing to be conducted such discussions with and
obtaining such certificates or other confirmations from officers and other
employees of Borrower as I considered appropriate in the circumstances, no
consent, permission, authorization, order or license of any United States
federal or California governmental authority is necessary in connection with the
execution and delivery of the Credit Agreement by Borrower and Borrower's
performance of its obligations under the Credit Agreement.
8. There is no provision of the Certificate of Incorporation or the By-
laws of Borrower which would be contravened by the execution and delivery of the
Credit Agreement by Borrower or by the performance by Borrower of its
obligations under the Credit Agreement.
9. Borrower is not an "investment company" as defined in the Investment
Company Act of 1940, as amended.
10. To my knowledge, after causing to be conducted such legal and factual
examination and inquiries and causing to be conducted such discussions with and
obtaining such
F-2
<PAGE>
certificates or other confirmations from officers and other employees of
Borrower as I considered appropriate in the circumstances, no consent or
approval of any trustee or holder of any material indebtedness of Borrower is
necessary in connection with the execution and delivery of the Credit Agreement
by Borrower and Borrower's performance of its obligations under the Credit
Agreement.
11. There is no provision of any indenture or material agreement for
borrowed money to which Borrower is a party or under which Borrower is
obligated, and of which I am aware, after causing to be conducted such legal and
factual examinations and inquiries and causing to be conducted such discussion
with and obtaining such certificates or other confirmations from officers and
other employees of Borrower as I considered appropriate in the circumstances,
which would be contravened by the execution and delivery of the Credit Agreement
and the Notes by Borrower or by the performance by Borrower of its obligations
under the Credit Agreement.
12. To my knowledge, after causing to be conducted such legal and factual
examinations and inquiries and causing to be conducted such discussions with and
obtaining such certificates or other confirmations from officers and other
employees of Borrower as I considered appropriate in the circumstances, there is
no judgment, decree or order of any court or governmental agency binding on
Borrower which would be contravened by the execution and delivery of the Credit
Agreement by Borrower and Borrower's performance of its obligations under the
Credit Agreement and the Notes.
13. To my knowledge, after causing to be conducted such legal and factual
examinations and inquiries and obtaining certificates or other confirmations
from officers and employees of Borrower as I considered appropriate in the
circumstances, except as set forth in Attachment 1 hereto, there is no claim,
suit, action or proceeding pending or threatened against Borrower before any
court or governmental agency in which there is a specific claim, including
environmental matters, in excess of $75,000,000.
The opinion expressed in paragraph 6 is subject to the following
limitations, qualifications, exceptions and assumptions:
(a) the enforcement of the Credit Agreement and the Notes may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws or
by equitable principles relating to or limiting the rights of creditors
generally;
(b) the use of the term enforceable shall not imply any opinion as to the
availability of equitable remedies;
(c) I advise you that a California court may not strictly enforce certain
covenants contained in the Credit Agreement or allow acceleration of the
maturity of the indebtedness thereunder if it concludes that such enforcement or
acceleration would be unreasonable under the then existing circumstances. I do
believe, however, that subject to the limitations expressed elsewhere in this
opinion, enforcement or acceleration would be available if an Event of Default
occurs as a result of a material breach of a material covenant contained in the
Credit Agreement.
F-3
<PAGE>
Further, certain rights, remedies and waivers contained in the Credit Agreement
may be limited or rendered ineffective by applicable California laws or judicial
decisions governing such provisions, but such laws or judicial decisions do not
render the Credit Agreement invalid as a whole;
(d) The effect of California court decisions, invoking statutes or
principles of equity, which have held that certain covenants and provisions of
agreements are unenforceable where (i) the breach of such covenants or
provisions imposes restrictions or burdens upon the debtor, including the
acceleration of indebtedness due under debt instruments, and it cannot be
demonstrated that the enforcement of such restrictions or burdens is reasonably
necessary for the protection of the creditor, or (ii) the creditor's enforcement
of such covenants or provisions under the circumstances would violate the
creditor's implied covenant of good faith and fair dealing;
(e) The unenforceability under certain circumstances, under California or
federal law or court decisions, of provisions expressly or by implication
waiving broadly or vaguely stated rights, unknown future rights, defenses to
obligations or rights granted by law, where such waivers are against public
policy or prohibited by law;
(f) The unenforceability under certain circumstances of provisions to the
effect that rights or remedies are not exclusive, that every right or remedy is
cumulative and may be exercised in addition to or with any other right or
remedy, that election of a particular remedy or remedies does not preclude
recourse to one or more other remedies or that failure to exercise or delay in
exercising rights or remedies will not operate as a waiver of any such right or
remedy;
(g) The effect of Section 1717 of the California Civil Code, which
provides that, where a contract permits one party to the contract to recover
attorneys' fees, the prevailing party in any action to enforce any provision of
the contract shall be entitled to recover its reasonable attorneys' fees;
(h) The unenforceability under certain circumstances of provisions
indemnifying a party against liability for its own wrongful or negligent acts or
where such indemnification is contrary to public policy or prohibited by law;
and
(i) The enforceability under certain circumstances of provisions imposing
penalties, forfeitures, late payment charges or an increase in interest rate
upon delinquency in payment or the occurrence of a default.
To the extent that the obligations of Borrower may be dependent upon such
matters, I assume for purposes of this opinion that each of the Banks is duly
incorporated or organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation or organization; that each of the Banks is
duly qualified to engage in the transaction covered by this opinion; that the
Credit Agreement has been duly authorized, executed and delivered by each of the
Banks and that the Credit Agreement constitutes the valid and binding obligation
of each of the Banks, enforceable in accordance with its terms; and that each of
the Banks has the requisite corporate or organizational and legal power and
authority to own its properties, to carry on its business as now being conducted
and to perform its obligations under the Credit Agreement,
F-4
<PAGE>
including without limitation, to make the loans under the Credit Agreement. I am
not expressing any opinion as to the effect of or the compliance by any Bank
with any state or federal laws or regulations applicable to the transactions
because of the nature of its respective business.
This opinion is rendered to the Banks and Administrative Agent and is
solely for their benefit in connection with the above transaction. This opinion
may not be relied upon by the Banks or Administrative Agent for any other
purpose, or furnished to, quoted to or relied upon by any other person, firm or
corporation for any purpose without my prior written consent.
Very truly yours,
F-5
<PAGE>
SCHEDULE A TO OPINION OF COUNSEL
Bankers Trust Company
Credit Suisse First Boston
The Long-Term Credit Bank of Japan, Ltd., Los Angeles Agency
The Mitsubishi Trust & Banking Corporation, New York Branch
NationsBank of Texas, N.A.
The Toronto-Dominion Bank
Banca di Roma - San Francisco Branch
The Bank of New York
CIBC Inc.
Credit Lyonnais New York Branch
Deutsche Bank AG New York and/or Cayman Islands Branches
The First National Bank of Chicago
First National Bank of Maryland
The Fuji Bank, Limited, Los Angeles Agency
The Industrial Bank of Japan, Limited, Los Angeles Agency
Istituto Bancario San Paolo di Torino SpA
Union Bank of California
F-6
<PAGE>
ATTACHMENT A TO OPINION OF COUNSEL
LITIGATION
None.
F-7
<PAGE>
EXHIBIT 10.4
HUGHES ELECTRONICS CORPORATION
FIRST AMENDMENT
TO REVOLVING CREDIT AGREEMENT (MULTI-YEAR FACILITY)
This FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT (MULTI-YEAR FACILITY)
(this "Amendment") is dated as of December 15, 1998 and entered into by and
among HUGHES ELECTRONICS CORPORATION (formerly known as HUGHES NETWORK SYSTEMS,
INC.), a Delaware corporation (the "Borrower"), the financial institutions
listed on the signature pages hereof (the "Banks"), BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, as the administrative agent for the Banks (in
such capacity the "Administrative Agent"), MORGAN GUARANTY TRUST COMPANY OF NEW
YORK as syndication agent (the "Syndication Agent") and CITICORP USA, INC. and
THE CHASE MANHATTAN BANK as documentation agents (in such capacity the
"Documentation Agents") and is made with reference to that certain Credit
Agreement (Multi-Year Facility) dated as of December 5, 1997 (as so amended, the
"Credit Agreement"), by and among the Borrower, the lending institutions
identified therein, the Administrative Agent, the Syndication Agent and the
Documentation Agents. Capitalized terms used herein without definition shall
have the same meanings herein as set forth in the Credit Agreement.
RECITAL
WHEREAS, Borrower and Banks desire to amend the Credit Agreement to
make certain amendments as set forth below;
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
1. AMENDMENTS TO THE CREDIT AGREEMENT
1.1 Amendments to Section 1: Definitions
-------------------------------------
(A) The definition of "References Banks" in Subsection 1.1 of the
Credit Agreement is hereby amended and restated in its entirety as follows:
"'Reference Banks' means Bank of America, Morgan Guaranty Trust
Company of New York, The Chase Manhattan Bank and Citibank, N.A."
1.2 Amendment to Section 11: Miscellaneous Provisions
--------------------------------------------------
The following shall be deleted from the end of the first sentence of
Section 11.11(a):
"; provided, further, that upon any such assignment hereunder, such Bank shall
concurrently assign to the same Assignee a ratable portion of its loans,
commitments and other rights and obligations under the Revolving Credit
Agreement (364-Day Facility) dated as of even date herewith, among Borrower, the
banks parties thereto, Bank of America National Trust and Savings Association,
as administrative agent, Morgan Guaranty Trust Company of New York, as
-1-
<PAGE>
syndication agent and Citicorp USA, Inc. and The Chase Manhattan Bank as
documentation agents."
2. BORROWER'S REPRESENTATIONS AND WARRANTIES
In order to induce Banks to enter into this Amendment and to amend the
Credit Agreement in the manner provided herein, Borrower represents and warrants
to each Bank that the following statements are true, correct and complete:
(A) Corporate Power and Authority. Borrower has all requisite
-----------------------------
corporate power and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, the Credit
Agreement as amended by this Amendment (the "Amended Agreement").
(B) Authorization of Agreements. The execution and delivery of this
---------------------------
Amendment and the performance of the Amended Agreement have been duly authorized
by all necessary corporate action on the part of Borrower.
(C) No Contravention. There is no charter, by-law, or capital stock
----------------
provision of Borrower and no provision of any indenture or material agreement,
written or oral, to which Borrower is a party or under which Borrower is
obligated, nor is there any statute, rule or regulation, or any judgment, decree
or order of any court or agency binding on Borrower which would be contravened
by the execution, delivery and performance of any provision, condition, covenant
or other term of this Amendment or the Amended Agreement.
(D) Binding Obligation. This Amendment and the Amended Agreement are
------------------
the legal, valid and binding obligation of Borrower, enforceable against it in
accordance with their terms, and any instrument or agreement required hereunder
or by the Amended Agreement, when executed and delivered, will be similarly
valid, binding and enforceable.
(E) Incorporation of Representations and Warranties From Credit
-----------------------------------------------------------
Agreement. The representations and warranties contained in Section 6 of the
- ---------
Credit Agreement are and will be true, correct and complete in all material
respects on and as of the First Amendment Effective Date to the same extent as
though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were
true, correct and complete in all material respects on and as of such earlier
date.
(F) Absence of Default. No event has occurred and is continuing or
------------------
will result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Unmatured Event of
Default.
3. MISCELLANEOUS
(A) Reference to and Effect on the Credit Agreement and the Other
-------------------------------------------------------------
Loan Documents.
- --------------
(i) On and after the First Amendment Effective Date, each reference
in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or
words of like import
-2-
<PAGE>
referring to the Credit Agreement, and each reference in the other documents
entered pursuant to the Credit Agreement to the "Credit Agreement",
"thereunder", "thereof" or words of like import referring to the Credit
Agreement shall mean and be a reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment, the Credit
Agreement and the other documents entered pursuant to the Credit Agreement shall
remain in full force and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of any provision
of, or operate as a waiver of any right, power or remedy of the Administrative
Agent or any Bank under, the Credit Agreement or any of the other Loan
Documents.
(B) Headings. Section and subsection headings in this Amendment
--------
are included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
(C) California Law. The interpretation, enforcement and effect of
--------------
this Agreement, the Loans and any agreements, contracts, indentures, documents
or instruments delivered in accordance herewith, shall be governed and
controlled in all respects by and construed according to the substantive laws of
the State of California, to the jurisdiction of whose courts the parties hereto
hereby agree to submit.
(D) Counterparts; Effectiveness. This Amendment may be executed in
---------------------------
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This Amendment shall become
effective upon the execution of a counterpart hereof by Borrower and the
Majority Banks and receipt by Borrower and the Administrative Agent of written
or telephonic notification of such execution and authorization of delivery
thereof.
[Remainder of page intentionally left blank]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
HUGHES ELECTRONICS CORPORATION
By: __________________________
Name:
Title:
-1-
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Administrative
Agent
By: __________________________
Gina Meador
Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Bank
By: __________________________
Dianne Allen
Vice President
NATIONSBANK, N.A., as a Bank, successor by
merger to NationsBank of Texas, N.A.
By: __________________________
Dianne Allen
Vice President
-2-
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as a Bank
By: __________________________
Name:
Title:
-3-
<PAGE>
THE CHASE MANHATTAN BANK, as
Documentation Agent and a Bank
By: ___________________________
Name:
Title:
-4-
<PAGE>
LONG-TERM CREDIT BANK OF JAPAN, LTD.,
LOS ANGELES AGENCY, as a Bank
By: __________________________
Name:
Title:
-5-
<PAGE>
THE MITSUBISHI TRUST & BANKING
CORPORATION, NEW YORK BRANCH, as a
Bank
By: __________________________
Name:
Title:
-6-
<PAGE>
TORONTO DOMINION (TEXAS), INC., as a
Bank
By: __________________________
Name:
Title:
-7-
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH, as a
Bank
By: __________________________
Name:
Title:
-8-
<PAGE>
DEUTSCHE BANK AG NEW YORK AND/OR
CAYMAN ISLANDS BRANCHES, as a Bank
By: __________________________
Name:
Title:
-9-
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO,
as a Bank
By: __________________________
Name:
Title:
-10-
<PAGE>
FIRST NATIONAL BANK OF MARYLAND, as a
Bank
By: __________________________
Name:
Title:
-11-
<PAGE>
THE FUJI BANK LIMITED LOS ANGELES
AGENCY, as a Bank
By: __________________________
Name:
Title:
-12-
<PAGE>
CITICORP USA, INC., as Documentation Agent
and a Bank
By: __________________________
Name:
Title:
-13-
<PAGE>
BANCA DI ROMA-SAN FRANCISCO BRANCH,
as a Bank
By: __________________________
Name:
Title:
-14-
<PAGE>
THE BANK OF NEW YORK, as a Bank
By: __________________________
Name:
Title:
-15-
<PAGE>
INSTITUTO BANCARIO SAN PAOLO DI
TORINO SpA, as a Bank
By: __________________________
Name:
Title:
-16-
<PAGE>
UNION BANK OF CALIFORNIA, N.A., as a Bank
By: __________________________
Name:
Title:
-17-
<PAGE>
CIBC, INC., as a Bank
By: __________________________
Name:
Title:
-18-
<PAGE>
BANKERS TRUST COMPANY, as a Bank
By: __________________________
Name:
Title:
-19-
<PAGE>
CREDIT SUISSE FIRST BOSTON, as a Bank
By: __________________________
Name:
Title:
-20-
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LIMITED
LOS ANGELES AGENCY, as a Bank
By: __________________________
Name:
Title:
-21-
<PAGE>
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, as a Bank
By: __________________________
Name:
Title:
-22-
<PAGE>
Exhibit 10.5
DBS DISTRIBUTION AGREEMENT
BETWEEN
HUGHES COMMUNICATIONS
GALAXY, INC.
AND
NATIONAL RURAL TELECOMMUNICATIONS
COOPERATIVE
=============================================
CONFIDENTIAL INFORMATION
------------------------
This document is the subject of a
confidentiality agreement. Do not disclose
any of the contents without ascertaining that
disclosure is in full compliance with Hughes'
obligations.
=============================================
<PAGE>
<TABLE>
<CAPTION>
DOCUMENT TAB
- ---------------------------------------------------------------------------------------------------
<S> <C>
HCG/NRTC DBS Distribution Agreement 1
Addendum to DBS Distribution Agreement (Defined Terms) 2
Exhibits to DBS Distribution Agreement
1.01(a)-1 Members 3
1.01(a)-2 Early Sign Up Incentive Plan 4
1.01(b)(i) RSAs 4
1.01(b)(iii)(4) MSA Parts (to be delivered by NRTC) 6
1.01(b)(v)-1 Financial Institutions 7
1.01(b)(v)-2 Form of Escrow Agreement 8
2.02 TT&C Services Statement of Work 9
2.03(a) Access Control Services Statement of Work 10
2.03(b) Transmission Services Statement of Work 11
2.04-1 Subscriber Terminal Equipment Pricing 12
2.04-2 Subscriber Terminal Equipment Performance Specifications 13
2.04-3 Subscriber Terminal Equipment Manufacturing Production
Commencement Date 14
2.06 Security Services Statement of Work 15
3.04 Security Services Fee 16
3.08 Form of Irrevocable, Standby Letter of Credit 17
4.04 Acceptance 18
7.01 Minimum Requirements 19
7.07 Program Services 20
19 Modifications to Agreement 21
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Attachments to Exhibit 19:
Attachment 2.01(c) Transponder Components 22
Attachment 7.02 Bill of Sale 23
Attachment 10.05 Priority to Spares 24
Attachment 10.08 Transponder Performance Specifications 25
Attachment 20 High Power Option 26
Exhibits to DBS Distribution Agreement (cont'd.)
19-A Form of Relief Notice 27
19-B Form of Relief Notice Assignment or Fulfillment Assignment 28
HCG Side Letter Regarding USSB 29
CFC Side Letter Regarding Financing 30
Member Contract 31
Member Contract Summary 32
First Amendment to DBS Distribution Agreement 33
Second Amendment to DBS Distribution Agreement 34
</TABLE>
2
<PAGE>
DBS
DISTRIBUTION
AGREEMENT
BETWEEN
HUGHES COMMUNICATIONS
GALAXY, INC.
AND
NATIONAL RURAL
TELECOMMUNICATIONS
COOPERATIVE
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Business Relationships............................................... 3
1.01 NRTC Role...................................................... 3
1.02 HCG Role....................................................... 9
1.03 Contract Decision Process...................................... 10
1.04 Progress Certification and Core Cable Programming.............. 11
1.05 Conditions Precedent........................................... 12
2. The DBS Distribution Services........................................ 13
2.01 Transponder Capacity........................................... 13
2.02 TT&C Services.................................................. 13
2.03 Ground Services................................................ 13
2.04 Subscriber Terminal Equipment Availability..................... 14
2.05 Development of Ground System................................... 14
2.06 Security Services.............................................. 15
2.07 Programming Services........................................... 15
2.08 NRTC Right to Independent Business System...................... 17
2.09 Eligible Commercial Establishments............................. 18
3. Payment Terms........................................................ 18
3.01 Transponder Capacity Fee....................................... 18
3.02 TT&C Fee....................................................... 18
3.03 Ground Services Fees........................................... 20
3.04 Security Services Fee.......................................... 21
3.05 Programming Fees............................................... 22
3.06 NRTC Revenue Fee............................................... 23
3.07 Place of Payment............................................... 24
3.08 Letter of Credit, HCG Priority to Payment...................... 24
3.09 Prompt Repayment............................................... 24
3.10 HCG Suspension of Services..................................... 25
3.11 Late Payment and Interest...................................... 26
3.12 Other Fees..................................................... 26
4. Service Commencement, Service Term and Related Matters............... 26
4.01 Service Commencement Date...................................... 26
4.02 Late Commencement Payments..................................... 28
4.03 [Intentionally Omitted.]....................................... 28
4.04 Acceptance..................................................... 28
4.05 Ownership of Service Equipment................................. 29
4.06 Service Term: Programming Renewal; Design of Satellite......... 29
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
5. Marketing Rights..................................................... 30
5.01 Marketing of DBS Distribution Services in NRTC Territories..... 30
5.02 Marketing DirecTv Programming Services......................... 32
5.03 Cross-Marketing and Promotions................................. 34
5.04 Advertising.................................................... 34
5.05 Non-NRTC Territories........................................... 34
6. Representations and Warranties....................................... 35
6.01 Authority...................................................... 35
6.02 Corporate Action............................................... 35
6.03 FCC and Other Authorizations................................... 35
6.04 Litigation..................................................... 36
6.05 No Broker...................................................... 36
6.06 Notification of Significant Events............................. 36
7. Additional Representations, Warranties and Obligations of HCG........ 37
7.01 Minimum Requirements........................................... 37
7.02 [Intentionally Omitted]........................................ 37
7.03 Government Regulations......................................... 37
7.04 Laws........................................................... 37
7.05 Indemnification................................................ 38
7.06 Assurances of HCG.............................................. 38
7.07 Sale and Use of Transponders................................... 38
7.08 Cessation of Program Services.................................. 41
7.09 Patents, Trademarks and Copyrights............................. 43
7.10 Insurance...................................................... 43
8. Additional Representations, Warranties and Obligations of NRTC....... 43
8.01 Uplinking...................................................... 43
8.02 Laws........................................................... 43
8.03 Indemnification................................................ 44
8.04 Use of Transponder Capacity.................................... 44
8.05 Non-Conforming Uses............................................ 46
9. Preemptive Rights to Protect Overall Satellite Performance........... 47
10. Service Outages...................................................... 47
10.01 Outage/Outage Period.......................................... 47
10.02 Outage Credit................................................. 48
10.03 Outage Termination Rights..................................... 49
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
11. Termination Rights................................................... 50
11.01 Termination by NRTC........................................... 50
11.02 Termination by HCG............................................ 53
11.03 Automatic Termination......................................... 56
11.04 HCG's Right to Deny Access.................................... 56
11.05 Right to Use Service Equipment................................ 57
12. Force Majeure........................................................ 57
12.01 Failure to Deliver............................................ 57
12.02 Failure of Performance........................................ 58
13. Limitation of Liability.............................................. 58
14. Limitations on Transfer.............................................. 59
14.01 Transfers..................................................... 59
14.02 Financing Transaction......................................... 59
14.03 Affiliate(s).................................................. 59
15. NRTC's Right of First Refusal: Successor Satellites.................. 59
15.01 Right of First Refusal........................................ 59
15.02 Terms of Successor ROFR....................................... 60
15.03 Successor Satellite Defined................................... 60
16. Progress Reports, Inspections and Access to Work in Progress......... 60
16.01 Progress Reports.............................................. 60
16.02 Inspection Rights of NRTC..................................... 61
16.03 After Delivery Reports........................................ 61
17. Confidentiality and Press Releases................................... 61
17.01 Confidentiality............................................... 61
17.02 Subscriber Information........................................ 62
17.03 Press Releases................................................ 63
17.04 Confidentiality Survival...................................... 63
18. Miscellaneous........................................................ 63
18.01 Interest...................................................... 63
18.02 Applicable Law; Entire Agreement; Modification................ 63
18.03 Notices....................................................... 64
18.04 Severability.................................................. 66
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
18.05 Taxes......................................................... 66
18.06 Successors, Assignment........................................ 66
18.07 Headings...................................................... 66
18.08 Survival of Representations and Warranties.................... 66
18.09 No Third-Party Beneficiary.................................... 67
18.10 Non-Waiver of Breach.......................................... 67
18.11 Counterparts.................................................. 67
18.12 Documents..................................................... 67
18.13 Arbitration................................................... 67
18.14 DBS Transponder Capacity...................................... 68
18.15 Rescission Option............................................. 68
19. Modifications of Agreement in Certain Circumstances.................. 68
</TABLE>
iv
<PAGE>
DBS DISTRIBUTION AGREEMENT
This DBS Distribution Agreement (the "Agreement") (all such defined
terms herein are so capitalized and referenced in Addendum I) is made and
entered into as of this 10th day of April, 1992 (the "Execution Date"), by and
between Hughes Communications Galaxy, Inc. ("HCG"), a corporation organized and
existing under the laws of the State of California, and National Rural
Telecommunications Cooperative ("NRTC"), a corporation organized and existing
under the laws of the District of Columbia.
RECITALS
WHEREAS, HCG and its Affiliates are in the business of, among other
things, designing, constructing and operating satellites, and providing
transponder capacity thereon;
WHEREAS, HCG has been granted Federal Communications Commission
("FCC") authority to construct, launch and operate two Ku-band direct broadcast
service ("DBS") satellites for a total of 27 FCC channels at the 101degrees W.L.
orbital location, and to sell or lease Transponders or provide capacity on each
such satellite on a private, non-common carrier basis;
WHEREAS, HCG intends to construct, launch and operate one or more
satellite(s) containing Ku-band DBS Transponder capacity at the 101degrees W.L.
orbital location (the "101degrees Satellite(s)");
WHEREAS, HCG has sold to United States Satellite Broadcasting Company,
Inc. ("USSB") a payload consisting of five Ku-band DBS transponders that,
subject to FCC consent, will be located on the 101degrees Satellite(s) and will
utilize the FCC channels assigned to USSB at the 101degrees W.L. orbital
location;
WHEREAS, the twenty-seven FCC channels licensed to HCG at the
101degrees W.L. orbital location (the "HCG Frequencies") and the five FCC
channels licensed to USSB at the 101degrees W.L. orbital location constitute all
the DBS channels now authorized by the FCC for such 101degrees W.L. orbital
location;
WHEREAS, HCG and/or DirecTv, an Affiliate of HCG, intends to use the
101degrees Satellite(s) to operate its own DBS business and to use reasonable
efforts to provide sports, movie and other entertainment and information
programming on those Satellite(s) (as determined by HCG and/or DirecTv in its
sole discretion) for distribution to consumers;
WHEREAS, HCG currently anticipates that the services transmitted on
the HCG Frequencies will consist primarily of entertainment and information
programming;
<PAGE>
WHEREAS, HCG and Thomson Consumer Electronics, Inc. ("TCE") have
entered into a "Signal Processing Segment Developer Agreement" (the "SPS
Developer Agreement"), dated February 2, 1992, whereby TCE shall, subject to the
terms and conditions therein, design, test, initially manufacture, construct and
distribute the "Subscriber Terminal Equipment" (meaning the hardware to be
developed by TCE under the SPS Developer Agreement and utilized by subscribers
to receive DBS service from the 101 degrees Satellite(s)) and certain other
components of the system used to process and distribute DBS signals;
WHEREAS, HCG and News Data Security Products Limited ("NDSPL") have
entered into a "Conditional Access Segment Developer Agreement", dated February
2, 1992, whereby NDSPL shall, subject to the terms and conditions therein,
design, test, manufacture and install the conditional access segment ("CAS") to,
among other things, control the encryption and decryption of the DBS signals
transmitted on the 101 degrees Satellite(s) so as to provide controlled access
to DBS programming;
WHEREAS, HCG and NDSPL have entered into a "Conditional Access
Security Services Agreement", dated February 2, 1992 (the "CAS Security
Agreement"), whereby NDSPL shall, subject to the terms and conditions therein,
provide CAS security services, including periodic replacement of conditional
access module ("CAM") units and certain activities designed to prevent and/or
respond to security breaches;
WHEREAS, HCG and News Datacom, Inc. ("NDI") have entered into a
"Conditional Access Management Center Services Agreement", dated February 2,
1992, whereby NDI shall, subject to the terms and conditions therein, provide
certain personnel to operate the conditional access management center ("CAMC");
WHEREAS, HCG desires to provide to NRTC, and NRTC desires to have HCG
provide and to compensate HCG for providing, certain DBS Distribution Services,
consisting of the provision of Transponder Capacity, TT&C Services, Ground
Services, Subscriber Terminal Equipment Availability, Security Services and
Programming Services;
WHEREAS, NRTC intends to market and sell the rights to distribute the
DBS Distribution Services to Members (as defined in Section 1.01(a)) and to
other persons and entities as permitted in this Agreement who in turn intend to
distribute such services to persons and entities who reside in the NRTC
Territories (as provided in this Agreement);
WHEREAS, NRTC intends to market and sell the DBS Distribution Services
to persons and entities who reside outside the NRTC Territories through
programming distribution rights that may be obtained independently by NRTC;
WHEREAS, HCG and NRTC intend that any Member who is interested in
distributing all or part of the DBS Distribution Services must execute a Member
Contract by and between NRTC and such Member (with HCG as an intended third
party
2
<PAGE>
beneficiary), pursuant to which such DBS Distribution Services will be made
available for such Member for distribution, and that any other person or entity
whom NRTC (pursuant to the terms hereof) wishes to allow to distribute all or
part of the DBS Distribution Services must execute a similar agreement to be
agreed upon by HCG and NRTC;
WHEREAS, each of HCG and NRTC desires to provide the other with
certain marketing rights with respect to the programming services to be
transmitted on the 101 degrees Satellite(s);
WHEREAS, HCG and Hughes Communications Satellite Services, Inc.
("HCSS"), an Affiliate of HCG, shall perform and/or provide certain satellite
operational services on the terms and conditions specified herein and HCG and/or
other Affiliates of HCG, or subcontractors for or assignees of HCG, may perform
and/or provide any or al1 of the other DBS Distribution Services; and
WHEREAS, HCG and NRTC intend that this Agreement shall become
effective only upon the occurrence of the condition precedent of agreeing upon
the form of Member Contract.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises set forth
below, and for other good and valuable consideration, the adequacy and receipt
of which are hereby acknowledged, HCG and NRTC hereby mutually agree as follows:
1. Business Relationships.
----------------------
This Section 1 outlines the basic business relationship between NRTC and
HCG. The roles, rights, obligations and responsibilities of HCG and NRTC (as
appropriate) are identified below. The contract decision process, which
determines the applicability of Exhibit 19 regarding modifications to this
Agreement in certain circumstances, also is set forth in this Section 1.
Finally, the conditions precedent to the effectiveness of this Agreement are
identified.
1.01 NRTC Role. NRTC shall complete each of the following tasks and
---------
responsibilities:
(a) Marketing to Members. NRTC shall market and attempt to sell the
--------------------
right to distribute the DBS Distribution Services (as defined below in Section
2) to all Members of NRTC. The term "Members" means (i) the members of NRTC
listed on Exhibit 1.01(a)-1, which Exhibit is current as of this date and may be
amended by NRTC from time to time to reflect additions and deletions of such
members, (ii) certain non-locally owned and operated telephone or utility
companies that serve the NRTC Territories and are listed on Exhibit 1.01(a)-1,
and (iii) prospective members of NRTC
3
<PAGE>
that are mutually agreed upon by the parties and are listed on Exhibit
1.01(a)-1. NRTC shall encourage and promote each such Member's execution of a
Member Contract (defined below in Section 1.01(b)). The Member Contract shall be
executed by Committed Members in substantially identical form and shall include
the provisions set forth in Section 1.01(b). NRTC may use persons and entities
other than Members to distribute the DBS Distribution Services; provided that
any such distributor shall be bound by an agreement between NRTC and such
distributor (with HCG as an intended third party beneficiary) substantially
similar to the Member Contract, whose form shall be agreed to by HCG and NRTC in
each party's sole discretion and executed (or agreed to, as applicable) by HCG,
NRTC and such distributor in each party's sole discretion (such discretion of
HCG and NRTC not to be arbitrarily exercised). Any such distributor bound by
such an agreement shall be deemed a "Committed Member" for all purposes of this
Agreement. NRTC shall consult with HCG with respect to, and provide HCG with
information regarding, any such marketing efforts and provide HCG with
reasonable notice of and an opportunity to participate in such efforts. In any
case, however, such marketing shall be conducted in NRTC's sole discretion and
NRTC shall be solely responsible for such marketing obligations. As part of such
marketing efforts, NRTC shall encourage early execution of the Member Contract
by Members through the implementation of an "early sign-up" incentive plan as
set forth in Exhibit 1.01(a)-2.
(b) Member Contract. The contract by which a Member commits to
---------------
distribute the DBS Distribution Services (the "Member Contract") (each such
contractually committing Member being referred to herein as a "Committed
Member") shall be drafted by NRTC and shall include and provide, among other
additional obligations to be agreed upon by HCG and NRTC, the following:
(i) RSA Areas. With respect to rural service areas identified in
---------
Exhibit l.01(b)(i) ("RSAs") in which a Committed Member wishes to
distribute the DBS Distribution Services, the Committed Member shall pay to
NRTC an amount (a "Committed Member Payment") (which amount may be financed
by National Rural Utilities Cooperative Finance Corporation ("CFC") or
other lenders or obtained from other sources), equal to the amount
specified under one of the following options (as selected by NRTC and/or
the relevant Committed Member):
(1) The product of (x) Thirty-Five Dollars ($35),
multiplied by (y) the number of Eligible Residences to which such
-------------
Committed Member wishes to distribute the DBS Distribution Services,
with such Eligible Residences specifically identified pursuant to
Sections l.01(b)(ix) and 1.01(b)(xvi) in an exhibit to the Member
Contract (the "RSA Residences Option");
(2) The product of (x) Thirty-One Dollars and Fifty Cents
($31.50), multiplied by (y) the number of all Eligible Residences
-------------
within a specified county or counties in one or more RSA(s) (based
upon the 1990 U.S. Census figures for such county(ies)), with such
county(ies)
4
<PAGE>
and number of Eligible Residences identified in an exhibit to the
Member Contract (the "RSA Territory Option"); or
(3) The product of (x) Thirty-Five Dollars ($35),
multiplied by (y) the number of all Non-Cabled Eligible Residences
-------------
within a specified county or counties in one or more RSA(s), with such
county(ies) and number of Non-Cabled Eligible Residences identified in
an exhibit to the Member Contract (the "RSA Non-Cabled Territory
Option").
(ii) MSA Parts. With respect to MSA Parts identified by zip code
---------
on Exhibit l.0l(b)(iii)(4) in which a Committed Member wishes to
distribute the DBS Distribution Services, the Committed Member shall pay a
Committed Member Payment equal to the amount specified under one of the two
following options (as selected by NRTC and/or the relevant Committed
Member):
(1) The product of (x) Thirty-Five Dollars ($35),
multiplied by (y) the number of Eligible Residences to which such
-------------
Committed Member wishes to distribute the DBS Distribution Services,
with such Eligible Residences specifically identified pursuant to
Sections l.01(b)(ix) and 1.01(b)(xvi) in an exhibit to the Member
Contract (the "MSA Residences Option"); or
(2) The product of (x) Thirty-Five Dollars ($35) multiplied
----------
by (y) the number of all Non-Cabled Eligible Residences within
--
applicable, specified zip code(s) that represent MSA Parts, with such
zip code(s) and number of Non-Cabled Eligible Residences identified in
an exhibit to the Member Contract (the "MSA Non-Cabled Territory
Option").
(iii) The following defined terms shall be included within Member
Contracts and apply as set forth in this Agreement:
(1) "Committed Member Residences" means (x) under the RSA
Residences Option or the MSA Residences option, all Eligible
Residences for which a Committed Member Payment has been made; and (y)
under the RSA Territory Option, all Eligible Residences (then or
thereafter existing) within the specified county(ies); and (z) under
the RSA Non-Cabled Territory Option and/or the MSA Non-Cabled
Territory Option, all Non-Cabled Eligible Residences (then or
thereafter existing) within the specified county(ies) or zip code(s),
as applicable.
(2) "Eligible Residence(s)" means any household(s) located
within the NRTC Territories. The Eligible Residences within any MSA
Part shall not be located outside the geographic area (by zip code)
set forth in the final form of Exhibit 1.01(b)(iii)(4).
5
<PAGE>
(3) "Non-Cabled Eligible Residences" means only those
Eligible Residences within specified county(ies) (or zip code(s) in
the case of MSA Parts) that do not have available cable television
service (i.e., are not "passed" by cable television service). The
----
number of Non-Cabled Eligible Residences as to any county (or zip
code) as to which payment shall be made under the RSA Non-Cabled
Territory Option and/or the MSA Non-Cable Territory Option shall be
based upon Warren Publishing (Spring 1992 version, "Data for All
Operating U.S. Cable Systems") figures for such county or zip code and
identified in an exhibit to the Member Contact.
(4) The "NRTC Territory(ies)" means (x) all RSA(s) and (y)
those zip code(s) within metropolitan statistical areas ("MSA Parts")
in which any electric or telephone utility service is currently
provided by a Member, all as specifically identified on Exhibit
1.0l(b)(iii)(4). The identification on Exhibit 1.01(b)(iii)(4) of MSA
Parts in which electric or telephone utility service is currently
provided by a Member may be amended by NRTC within one hundred twenty
(120) days from the date hereof to correct omissions from such list,
provided that such amendments are not inconsistent with the numeric
and geographic limitations (by zip code) set forth in the final form
of Exhibit 1.01(b)(iii)(4) and it is understood that such amendments
shall reflect only those MSA Parts in which such service LS provided
as of the Execution Date.
(iv) In no event shall the aggregate amount of the Committed
Member Payments paid to HCG exceed $250 million. Each Committed Member
Payment paid to HCG will reflect payment for the provision of the
Transponder Capacity and for the Ground Capital Fee, in amounts allocated
pursuant to Sections 3.01 and 3.03(a).
(v) All Committed Member Payments paid to NRTC before December
1, 1992, shall be promptly deposited into an interest-bearing escrow
account (the "Escrow Account") with any one of the financial institutions
selected by NRTC from the list contained in Exhibit l.01(b)(v)-1 (the
"Escrow Agent"), pursuant to an escrow agreement in substantially the same
form as Exhibit 1.01 (b) (v)-2 (the "Escrow Agreement"). Promptly upon
receipt of such escrowed Committed Member Payments, the Escrow Agent shall
notify HCG in writing and such Committed Member Payments (excluding any
interest accrued thereon) shall thereafter be deemed "Escrowed Committed
Member Payments." NRTC shall be responsible for the payment of all costs
and fees required by the Escrow Agent.
(vi) All Committed Member Payments paid to NRTC on or after
December 1, 1992, shall promptly be remitted in full by NRTC to HCG; except
only as set forth in Section 1.04(a).
6
<PAGE>
(vii) The Member Contract shall provide the Committed Member
with the option, with respect to Member Contracts executed after December
11, 1992, to either (xx) pay the full Committed Member Payment to HCG
through NRTC upon execution of the Member Contract, or (yy) pay 50% of the
Committed Member Payment to HCG through NRTC upon execution of the Member
Contract, and commit to pay to HCG through NRTC upon Acceptance, the
remaining 50% of such Committed Member Payment (the "Second Payment") as
well as commit to pay interest on such Second Payment, at the rate set
forth in Section 18.01, from the date of the Member Contract until the date
of Acceptance, as set forth in Section 4.04. In all cases as provided
above, any and all such payments to NRTC (and any applicable interest
thereon) shall be promptly paid to HCG. If any Second Payment (plus
interest) is not timely paid to NRTC (by the Committed Member) or to HCG
(by NRTC), then the provisions of Section 3.10 shall apply. In addition, if
any Second Payment is not timely made by a Committed Member (or by NRTC as
provided in Section 3.10(b)) and the fifteen (15) day cure period has
expired without a cure, then (A) HCG shall have the right and option to
require NRTC to (and NRTC shall) terminate the Member Contract, and if the
Member Contract is so terminated, the Committed Member shall have no
further rights thereunder, and (B) regardless of whether the Member
Contract is so terminated and, in addition to having the right to collect
the full amount of the Second Payment (less any amounts reasonably
mitigated by HCG as required under the California Uniform Commercial Code)
and Expenses associated therewith, HCG shall be entitled to retain (as
liquidated damages) the 50% of the Committed Member Payment already paid to
HCG, and unless and until the provisions of Exhibit 19 apply, NRTC shall
have no rights whatsoever to market and sell the DBS Distribution Services
to the Committed Member Residences associated with such Committed Member.
(viii) It is expressly understood and agreed that NRTC may obtain
payments from a Committed Member in excess of Committed Member Payments to
satisfy NRTC's marketing and other requirements, but that such additional
amounts paid to NRTC shall not be considered Committed Member Payments for
any purposes of this Agreement.
(ix) The Committed Member Residences associated with a
Committed Member exercising the RSA Residences Option and/or the MSA
Residences Option shall be identified by NRTC and such Committed Member to
HCG (and to the HCG billing system and the CAMC) by postal address, city,
county, state, and zip code in an exhibit to, and be determined as of the
date of, and as a deliverable under, the respective Member Contract. Such
information about Committed Member Residences will be treated by HCG as
Confidential Information under Section 17.
(x) The Member Contract shall contain an acknowledgment that
the right to distribute a Programming Service (as defined below in Section
2.07(a)) to Committed Member Residences that have available cable
television
7
<PAGE>
service will be governed by the provisions of the Programming Agreement for
such Programming Service, and that such agreement may not include rights to
distribute such Programming Service to such Committed Member Residences.
(xi) The Committed Member shall warrant that it will pay for
programming fees, if applicable and required under the Programming
Agreement(s) (as provided in Section 2.07(a)), based on a minimum number of
NRTC Subscribers with respect to each program service provided under the
Programming Services, in an amount equal to the product of (x) the number
of its Committed Member Residences, multiplied by (y) the minimum NRTC
---------- --
Subscriber commitment percentage agreed to in each respective Programming
Agreement. "NRTC Subscriber(s)" means Committed Member Residences that
subscribe to all or a portion of the DBS Distribution Services as set forth
in Section 3. It is expressly understood and agreed that HCG may rely upon
such minimum NRTC Subscriber commitments by each Committed Member in HCG's
negotiation and execution of the Programming Agreements (as defined below)
and as the basis for HCG's commitment therein (if any) to provide a minimum
number of NRTC Subscribers for each Programming Service. Each Committed
Member shall be responsible for (i) a pro-rata portion (based on the
percentage of its Committed Member Residences specified above and
identified in the Programming Agreements) of any payment or other
obligations due under the Programming Agreements which are applicable and
relevant to such Committed Member and attributable to a minimum NRTC
Subscriber commitment and (ii) any Programming Fees due and owing to HCG
for Programming Services utilized by such Committed Member's NRTC
Subscribers.
(xii) The Committed Member shall promote to its Committed Member
Residences, and distribute to its NRTC Subscribers, the DBS Distribution
Services.
(xiii) Each Committed Member shall be responsible for any Ground
Services Fees, TT&C Fees, Security Services Fees and Programming Fees due
and owing to HCG for the provision of DBS Distribution Services provided to
such Committed Member in an amount allocable to such Committed Member under
the Member Contract.
(xiv) The Committed Member shall be obligated to make monthly
payments to NRTC (for payment to HCG or directly to HCG if applicable
pursuant to Section 3.10) for Ground Services, TT&C Services, Security
Services and Programming Services in an amount allocable to such Committed
Member under the Member Contract.
(xv) The Member Contract shall specifically provide that HCG
may (subject to the provisions of Section 3.10) cease providing (and/or not
commence) any and/or all of the DBS Distribution Services to such Committed
Member and/or any or all of its NRTC Subscribers upon non-payment by such
8
<PAGE>
Committed Member of any amounts payable by such Committed Member pursuant
to the Member Contract, subject to NRTC's right to cure as provided in
Section 3.10(b). The Committed Member shall explicitly agree to and
acknowledge HCG's right not to commence and/or cease providing the DBS
Distribution Services pursuant to Section 3.10. In any case, HCG shall also
have the right as an intended third party beneficiary to seek payment from,
and seek any available judicial remedy, or the right to seek arbitration,
against the Committed Member for non-payment.
(xvi) The Member Contract shall be executed by the Committed
Member and NRTC; and HCG shall be an intended third-party beneficiary
thereto. An original copy of each such executed Member Contract shall be
provided to HCG concurrently with delivery to HCG, or the deposit of such
monies into the Escrow Account, as appropriate, of the Committed Member
Payment. In addition, in cases where the RSA Residences Option and/or the
MSA Residences Option is exercised, the executed Member Contract shall be
accompanied by a list (in electronic media form (based on industry standard
and compatible with the requirements of the HCG billing system and the CAMC
databases) of all Committed Member Residences, as set forth above in
Section l.01(b)(ix). HCG shall not be obligated in any way to provide any
DBS Distribution Services to a Member or its NRTC Subscribers until and
unless the full Committed Member Payment (including the Second Payment owed
by such Committed Member), the electronic media list described above, and
an executed Member Contract are received by HCG.
(xvii) The Member Contract shall include provisions relative to
the obligations and rights under Section 3.10 and HCG's agreement with NRTC
to deliver the DBS Distribution Services directly to Committed Members
pursuant to Section 11.02(e) if NRTC breaches this Agreement.
(c) Member Administration. NRTC shall administer the Member Contracts
---------------------
as follows: NRTC shall (1) use its reasonable best efforts to collect any and
all monies owed by Committed Members under the Member Contracts and shall
deposit such monies with the Escrow Agent (as appropriate) or pay to HCG the
payments contemplated by Section 1.01(b); and (2) provide all accounting
services relative to such collection process. NRTC shall keep records with
respect to such accounting.
(d) CFC or Other Lender Coordination. NRTC shall coordinate with and
--------------------------------
assist CFC and other lenders with respect to financing the Committed Member
Payment of any potential Committed Member.
1.02 HCG Role. HCG shall be responsible for the acquisition, availability
--------
and/or provision (as applicable) of the DBS Distribution Services, as defined in
and pursuant to Section 2.
9
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1.03 Contract Decision Process. On December 11, 1992, and again on May 1,
-------------------------
1993 and/or July 31, 1993 (if the May Extension and/or the July Extension
apply), decisions will be made regarding (a) the termination of this Agreement;
(b) the unmodified continuation of this Agreement; and/or (c) the modification
of this Agreement as set forth below in Section 19.
(a) If, on or before December 11, 1992, NRTC has paid HCG $250
million in aggregate Committed Member Payments pursuant to Section 1.01(b), then
this Agreement shall be modified as set forth in Section 19.
(b) If, on December 11, 1992, NRTC has paid HCG at least $100
million, but less than $250 million, in aggregate Committed Member Payments,
then NRTC shall automatically be granted an extension until May 1, 1993 to pay
HCG (and/or have Committed Members commit to pay HCG, as applicable, in Second
Payments) $250 million in aggregate Committed Member Payments (the "May
Extension"). If the May Extension has been granted and if on or before May 1,
1993, NRTC has paid HCG (and/or Committed Members have committed to pay HCG, as
applicable, in Second Payments) $250 million in aggregate Committed Member
Payments, then this Agreement shall be modified as set forth in Section 19;
otherwise this Agreement shall continue unmodified by Exhibit 19, unless a July
Extension is granted pursuant to Section 1.03(c), below.
(c) If the May Extension has been granted and if on or before May 1,
1993, NRTC has paid HCG (and/or Committed Members have committed to pay HCG, as
applicable, in Second Payments) at least $175 million (but less than $250
million) in aggregate Committed Member Payments, then NRTC shall automatically
be granted an extension until July 31, 1993 to pay HCG (and/or have Committed
Members commit to pay MCG, as applicable, in Second Payments) $250 million in
aggregate Committed Member Payments (the "July Extension"); otherwise, this
Agreement shall continue unmodified by Exhibit 19.
(d) If the July Extension has been granted and if on or before July
31, 1993, NRTC has paid HCG (and/or Committed Members have committed to pay HCG,
as applicable, in Second Payments) $250 million in aggregate Committed Member
Payments, then this Agreement shall be modified as set forth in Section 19;
otherwise this Agreement shall continue unmodified by Exhibit 19.
(e) If, on December 11, 1992, NRTC has paid HCG less than $100
million in aggregate Committed Member Payments, then the applicable provisions
of Section 1.04(a) shall apply.
(f) NRTC may make payments to HCG and/or the Escrow Agent (if still
applicable) for HCG's benefit to meet the $100 million, $175 million and/or $250
million targets, as appropriate and as specified in this Section 1.03 in excess
of aggregate Committed Member Payments actually paid or owed to HCG as Second
Payments, where
10
<PAGE>
applicable, by Committed Members and any and all such amounts shall be deemed
part of the Committed Member Payments for all purposes of this Agreement.
1.04 Progress Certification and Core Cable Programming.
-------------------------------------------------
(a) If, on December 1, 1992, (i) the December Conditions (as defined
below) have occurred and (ii) the aggregate Escrowed Committed Member Payments
equal at least $100 million, then HCG may instruct the Escrow Agent pursuant to
the Escrow Agreement to release all Escrowed Committed Member Payments,
including any accrued interest thereon, to HCG. If, however, on December 1,
1992, the December Conditions have occurred, but the aggregate Escrowed
Committed Member Payments are less than $100 million, then the release of such
amounts to HCG shall be delayed until December 11, 1992, or such earlier date as
the aggregate Escrowed Committed Member Payments equal or exceed $100 million as
a result of additional deposits of Committed Member Payments by NRTC into the
Escrow Account by such date. If, on December 11, 1992, (i) the December
Conditions have occurred, but (ii) the aggregate Escrowed Committed Member
Payments are still less than $100 million, then this Agreement shall
automatically terminate ten (10) days later unless HCG, in its sole discretion,
grants NRTC the July Extension by such date. If this Agreement so terminates,
then NRTC may instruct the Escrow Agent pursuant to the Escrow Agreement to
release the Escrowed Committed Member Payments, including any accrued interest
thereon, to NRTC. If HCG so grants the July Extension, then HCG may instruct the
Escrow Agent pursuant to the Escrow Agreement to release the Escrowed Committed
Member Payments, including any interest thereon, to HCG and this Agreement shall
not be subject to termination under this Section 1.04 because the aggregate
Escrowed Committed Member Payments are less than $100 million. The "December
Conditions" mean (a) HCG having obtained the contract rights to distribute the
Core Cable Programming to Eligible Residences (specifically excluding, unless
applicable in the relevant Programming Agreement, households that have available
cable television service as of the execution date of the relevant Programming
Agreement) (the "Core Cable Rights"), and (b) HCG having provided NRTC with a
certification by the Chief Executive Officer of HCG, under oath or affirmation,
stating that, based on then-existing facts, the Transponder Capacity, TT&C
Services, Ground Services, Security Services and Subscriber Terminal Equipment
Availability development process is proceeding in a manner that, in HCG's
reasonable judgment, will allow the provision of the Transponder Capacity and
such services no later than ninety (90) days following the Scheduled Service
Commencement Date (the "HCG Certification"). Such HCG Certification shall be
accompanied by a status report on work completed and a schedule of remaining
projects. "Core Cable Programming" means four program services from different
program categories that are identified as "Priority 1" in Exhibit 7.07.
"Priority 2" and "Priority 3" program services are also identified on Exhibit
7.07.
(b) (i) If, on December 1, 1992, HCG has obtained the Core Cable
Rights, but has not provided NRTC with the HCG Certification, then each of
NRTC and HCG shall have the right to terminate this Agreement on or before
December 11, 1992 by providing written notice to the other, or such right
will
11
<PAGE>
expire. Upon such timely termination NRTC may instruct the Escrow Agent
pursuant to the Escrow Agreement to release all Escrowed Committed Member
payments, including any interest thereon, to NRTC.
(ii) If, on December 1, 1992, HCG has provided the HCG
Certification, but has not obtained the Core Cable Rights, then NRTC shall
have the right to terminate this Agreement by providing written notice to
HCG by December 11, 1992, or such right will expire. If NRTC so terminates
this Agreement, then NRTC may instruct the Escrow Agent pursuant to the
Escrow Agreement to release all Escrowed Committed Member Payment,
including any interest thereon, to NRTC. If NRTC does not so terminate this
Agreement, then NRTC shall have the right, on or before March 1, 1993, to
deliver to HCG the Relief Notice (as defined in Section 19(b)) and HCG
shall have the right, after delivery of the Relief Notice, to instruct the
Escrow Agent pursuant to the Escrow Agreement to release all Escrowed
Committed Member Payments, including any interest thereon, to HCG. If NRTC
delivers the Relief Notice by March 1, 1993, then this Agreement shall
continue; if not, this Agreement automatically shall terminate as of March
1, 1993 and NRTC may instruct the Escrow Agent pursuant to the Escrow
Agreement to release all Escrowed Committed Member Payments, including any
interest thereon, to NRTC.
(iii) If both of the December Conditions have not occurred on
December 1, 1992, then each of NRTC and HCG shall have the right to
terminate this Agreement on or before December 11, 1992 by providing
written notice to the other, or such right will expire. Upon such timely
termination, NRTC may instruct the Escrow Agent pursuant to the Escrow
Agreement to release all Escrowed Committed Member Payments, including any
interest thereon, to NRTC.
1.05 Conditions Precedent. The following conditions precedent to the
--------------------
effectiveness of this Agreement must be met on or before May 11, 1992; and, if
it is not timely met, this Agreement automatically shall be deemed to have no
force or effect and neither HCG nor NRTC shall have any obligations to the other
hereunder:
(a) The final form of the Member Contract must be agreed to by HCG
and NRTC in each party's sole discretion and completed.
(b) NRTC shall initially provide (and each party shall approve in its
sole discretion) the final form of Exhibit l.01(b)(iii)(4), which Exhibit shall
specify (i) those MSA Parts, identified by zip code(s), in which electric or
telephone utility service is currently provided by a Member and (ii) the number
of Non-Cabled Eligible Residences within each zip code that represents an MSA
Part.
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<PAGE>
2. The DBS Distribution Services
-----------------------------
The products and services to be provided under this Agreement
(collectively, the "DBS Distribution Services") consist of the Transponder
Capacity, TT&C Services, Ground Services, Subscriber Terminal Equipment
Availability, Security Services and Programming Services, all as defined and as
provided below.
2.01 Transponder Capacity. Prior to Satellite launch, HCG will designate
--------------------
sufficient Transponder capacity to distribute twenty (20) Program Channels to
NPTC Subscribers, regardless of video compression rates that may be achieved for
the DBS Distribution Services (the "Transponder Capacity"). Subject to the
provisions of this Agreement, HCG shall provide the Transponder Capacity in
compliance with Section 4.04 below. The term "Transponder" means a specified set
of components of the Satellite which, for a particular frequency band, receives,
amplifies, translates frequency and retransmits radio signals. The term "Program
Channel" means a single, digitally-compressed NTSC-source signal having the
performance characteristics set forth in Exhibit 7.01. The term "Satellite"
means the 101 degrees Satellite(s) on which the Transponder Capacity is located.
If a launch failure of the Satellite occurs and HCG elects to launch a
replacement Satellite, then HCG will designate replacement Transponder Capacity
for NRTC on the replacement Satellite. Subject to HCG's continued rights to use
Transponder Capacity on the failed Satellite, and subject to such capacity being
able to meet the Minimum Requirements, HCG will attempt to provide to NRTC
(pursuant to Sections 4.04 and 4.01(b)) the Transponder Capacity on the failed
Satellite to the fullest extent possible until such time as the replacement
Satellite is available.
2.02 TT&C Services. The "TT&C Services" may be provided by HCSS, an
-------------
Affiliate of HCG, or a subcontractor to or an assignee of HCG hereunder, and
means telemetry, tracking and control services necessary to monitor the status
of the Satellite and to maintain the Satellite's operational condition. A
statement of work for the TT&C Services is set forth in Exhibit 2.02.
2.03 Ground Services. The term "Ground Services" means Access Control
---------------
Services and Transmission Services, all as defined and provided below.
(a) Access Control Services. The term "Access Control Services" means
-----------------------
services performed on NRTC's behalf that (i) control NRTC Subscriber access to
programming and other services transmitted over the Transponder Capacity, and
(ii) provide report-back information related to NRTC Subscribers, including NRTC
Subscriber program purchase data. Such services may be provided by HCSS, an
Affiliate of HCG, or a subcontractor to or an assignee of HCG hereunder. A
statement of work for the Access Control Services is set forth in Exhibit
2.03(a).
(b) Transmission Services. The term "Transmission Services" means
---------------------
services, including uplinking services, that (i) provide access to the original
satellite feed of the source material for the Program Channels (including,
without limitation, satellite receive facilities), (ii) process such source
signals into Program Channels (including,
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<PAGE>
without limitation, the compression, encryption and modulation of such signals
and commercial insertion services), and (iii) transmit the Program Channels to
the Transponder Capacity for subsequent retransmission by the Satellite.
Transmission Services shall also include the transmission of certain data
signals to the Transponder Capacity, as described in Exhibit 2.03(b) (the "Data
Services"). Transmission Services may be provided by HCSS or another Affiliate
of HCG or a subcontractor to or an assignee of HCG hereunder. A statement of
work for the Transmission Services is set forth in Exhibit 2.03(b).
2.04 Subscriber Terminal Equipment Availability. Subscriber Terminal
------------------------------------------
Equipment Availability means HCG's representation on the date hereof that, under
the SPS Developer Agreement, TCE has represented to HCG that (i) the price that
TCE will charge for the sale of Subscriber Terminal Equipment on an original
equipment manufacturer basis will not exceed the pricing as set forth in Exhibit
2.04-1 for purchases on the terms set forth therein; (ii) TCE's suggested retail
price to a retailer for the Subscriber Terminal Equipment will not exceed Seven
Hundred Dollars ($700.00) per unit; (iii) the Subscriber Terminal Equipment will
meet the specific performance specifications set forth in Exhibit 2.04-2; and
(iv) manufacturing production of the Subscriber Terminal Equipment is scheduled
to commence no later than the date set forth on Exhibit 2.04-3. It is expressly
agreed and understood by the parties (x) that HCG does not guarantee the
availability of any quantities of any Subscriber Terminal Equipment from TCE to
NRTC (which only TCE can guarantee); and (y) that the performance specifications
of Exhibit 2.04-2 may be modified or expanded by HCG from time-to-time to
reflect modifications or expansions reasonably agreed upon by HCG and TCE that
do not substantially and adversely affect such performance specifications, and
that HCG shall promptly provide written notice to NRTC of any such modifications
or expansions. The development status of the Subscriber Terminal Equipment shall
be included in the progress reports provided to NRTC pursuant to Section 16.01.
NRTC may negotiate directly with TCE to seek to obtain volume shipments, price
discounts, and design changes or equipment additions that NRTC may need for its
own DBS business; provided that any such design changes or equipment additions
shall not eliminate or degrade any of the Subscriber Terminal Equipment
specifications contained in Exhibit 2.04-2 or otherwise adversely affect HCG's
ability to operate its DBS business or to perform its obligations under this
Agreement. NRTC shall bear the full cost of any such design changes or equipment
additions and NRTC agrees that any such changes or additions may not be
implemented in a way that could delay the development, shipment dates, quantity,
or manufacture of, or degrade the performance of, the Subscriber Terminal
Equipment under the SPS Developer Agreement. HCG shall provide NRTC with a
contract summary of the SPS Developer Agreement, compiled by HCG and TCE, and
shall use its reasonable best efforts to provide such summaries within forty-
five (45) days of the Execution Date.
2.05 Development of Ground System. HCG shall provide NRTC with the
----------------------------
opportunity, upon reasonable request, to express its view regarding the ongoing
development of the ground system used to provide the DBS Distribution Services
(the
14
<PAGE>
"Ground System") NRTC shall be kept abreast by HCG of any developments relating
thereto. NRTC shall have the right to consult with HCG regarding, and may
provide HCG with suggestions related to, the development of the Ground System,
and HCG will consider incorporating any suggestions from NRTC that do not
adversely affect the price, development schedule, marketability, or performance
of such system and that do not otherwise adversely affect HCG's agreements with
the developers of such system, but any decisions about the development of the
Ground System shall remain in HCG's sole and absolute discretion.
2.06 Security Services. The term "Security Services" means the
-----------------
implementation of certain procedures and activities designed to prevent and/or
respond to and remedy Security Breaches (as defined in Exhibit 2.06). A
statement of work for the Security Services is set forth in Exhibit 2.06. HCG
shall provide NRTC with contract summaries of the Conditional Access Segment
Developer Agreement, the CAS Security Agreement and the Conditional Access
Management Center Services Agreement, compiled by HCG and NDSPL (or NDI, as
applicable), and shall use its reasonable best efforts to provide such summaries
within forty-five (45) days of the Execution Date.
2.07 Programming Services.
--------------------
(a) Subject to Sections 4.06(b), 7.08 and 19, HCG shall provide
Programming Services. The term "Programming Service(s)" means HCG's provision of
Cable Programming for transmission over the Transponder Capacity to NRTC
Subscribers. The term "Cable Programming" means a package of 20 program services
selected from Exhibit 7.07, including (x) at least twelve (12) Priority 1
program services from any program categories, (y) no more than five (5) Priority
2 program services from any program categories, and (z) at least three (3)
program services from program category 5, all as set forth on such Exhibit.
Prior to executing a Programming Agreement (as defined below) for the
seventeenth (17th) such program service, HCG shall so notify NRTC in writing.
NRTC shall have the right at any time prior to such notice and for a period of
fifteen (15) days from receipt of such notice, in its sole discretion, to
require that "ABC," "CBS," and "NBC" be included as part of the Cable
Programming. In any event, if HCG or NRTC elects to provide any or all of "ABC,"
"CBS," and "NBC" as part of the Programming Services, then (xx) NRTC will be
able to designate the source of any or all of the "ABC"/"CBS"/"NBC" programming
and (yy) NRTC will provide and pay for the additional costs of delivery of the
signal, if any, from such designated source to the transmission facilities. If
the provisions of 17 United States Code (S) 111 or (S) 119 (or similar statutes)
are not available to HCG for purposes of distributing "ABC," "CBS," or "NBC" as
part of the Cable Programming under a compulsory copyright license, then HCG
shall have no obligation to include "ABC," "CBS," or "NBC" as part of the Cable
Programming, but will use reasonable efforts at NRTC's written request to
attempt to include such services as part of the Cable Programming from such
sources and at such prices as are reasonably acceptable to NRTC. HCG shall be
responsible for acquiring the rights to distribute Cable Programming to all
Eligible Residences that do not have available cable television service (as of
the execution date of the relevant Programming Agreement, but in no event later
than the Scheduled Service Commencement Date)
15
<PAGE>
through agreements with the holders of such rights (collectively, the
"Programming Agreements") and/or compulsory copyright licenses. HCG shall use
reasonable efforts to obtain the rights to distribute Cable Programming to
Eligible Residences that have cable television service available (as of the
execution date of the relevant Programming Agreement, but in no event later than
the Scheduled Service Commencement Date), but NRTC and HCG acknowledge that such
rights may not be possible to obtain on commercially reasonable terms, if at
all, and that HCG's failure to obtain such rights shall not constitute a breach
of this Agreement. The terms and conditions of such Programming Agreements shall
be based upon cable industry standards for C-band TVRO satellite delivery and
the pricing will be based substantially on accepted cable industry rate cards
for each service. If the Programming Agreements require a guarantee as to
minimum subscriber levels, then NRTC and HCG shall mutually agree on the amount
of any such guarantee, but agree that, in any event, a minimum subscriber
commitment level of five percent (5%) (with respect to Committed Member
Residences) by the third anniversary of the Service Commencement Date is
acceptable. Unless and until the Relief Notice Assignment or the Fulfillment
Assignment is executed, NRTC shall not be liable for any penalties, guarantees
or costs under the Programming Agreements for any period prior to the Service
Commencement Date. If a material term of any such potential Programming
Agreement would significantly differ from such standards, then the parties shall
discuss such term, and may agree to accept such term, prior to HCG's final
agreement with the program rights holder. NRTC shall have the right to consult
with HCG regarding, and to review, all potential Programming Agreements prior to
execution and, shall, if requested by HCG, assist HCG in related negotiations or
discussions. The Programming Agreements shall be assignable by HCG to NRTC and
HCG shall provide a copy of each such agreement, exclusive only of provisions
regarding distribution rights in non-NRTC Territories, to NRTC promptly after
execution.
(b) NRTC expressly acknowledges and agrees that HCG may independently
negotiate for and/or obtain program distribution rights to non-NRTC Territories
for Cable Programming and other program services carried on the Transponder
Capacity, in addition to entering into the Programming Agreements and that HCG
may distribute some or all of the DBS Distribution Services to such non-NRTC
Territories.
(c) If required by any person or entity granting program distribution
rights to HCG (a "Rights Holder"), HCG shall have the option, but not the
obligation, upon ten (10) business days' notice to NRTC, not to transmit (or
allow to be transmitted) (a "Blackout") Sports Programming that otherwise would
be transmitted by a Superstation carried on the Transponder Capacity if HCG or
any other User will carry such Sports Programming on the HCG Frequencies on a
premium basis (e.g., pay TV) simultaneously with such Superstation's planned
----
transmission. Notwithstanding the foregoing sentence, if the provisions of any
Programming Agreement would allow NRTC to compensate the Rights Holder, HCG,
and/or any other appropriate person or entity as determined by HCG, and thereby
avoid the need to Blackout certain Sports
16
<PAGE>
Programming; then HCG shall advise NRTC of such provisions, and, to the extent
permitted under the Programming Agreements and after NRTC's timely satisfaction
of any requirements any Rights Holder or other person or entity may establish to
waive such Blackout requirement with respect to certain Sports Programming, HCG
will not Blackout such Sports Programming on the Transponder Capacity. In
addition, and to the extent permitted by Law, NRTC shall have the right to
insert or substitute other programming during such Blackouts. NRTC shall be
responsible for any additional costs incurred by HCG in receiving and/or
transmitting such substitute programming. "Sports Programming" means any video
entertainment or information services that consist primarily of the transmission
of an athletic or sporting event or activity. "Superstation" has the meaning
provided in 17 United States Code (S) 119(d)(9) or any similar or any successor
statute. The term "User" means any owner of a Transponder on a Satellite,
including HCG if there remain any unsold Transponders, or any permitted lessee,
licensee, user or assignee of such Transponder, but shall not include NRTC or
its successors or assigns.
(d) NRTC expressly acknowledges and agrees that if HCG acquires the
rights to provide as part of the Cable Programming the transmission of any
television broadcast station owned by, operated by, or affiliated with, ABC,
CBS, NBC, Fox or PBS, through a compulsory copyright license under 17 United
States Code (S) 119 (or any similar or successor statute), that such services
may be provided only to households who qualify as "Unserved Households" (as
defined in 17 U.S.C. (S) 119(d)(10) (or any similar or successor statute)). To
this end, NRTC agrees to provide to HCG promptly upon request (and in any event
within ten (10) days) a list (in electronic media form based on industry
standards) and compatible with the requirements of HCG's billing provider and
the CAMC databases) identifying all NRTC Subscribers who receive such services
by address, county and zip code, as well as any other information that may be
required by Law to be provided to the holders of the rights for such program
services. The information contained in such list will be deemed Confidential
Information for purposes of Section 17, except that HCG shall have the right to
provide such list to the relevant network and/or the Copyright Royalty Tribunal
as required by such (S) 119, or as otherwise required by Law, without seeking
confidential treatment.
2.08 NRTC Right to Independent Business System. Subject to the provisions
-----------------------------------------
on marketing set forth in Section 5 (which provisions supersede this Section
2.08 to the extent they are inconsistent), nothing herein shall infringe on the
right of NRTC to establish and operate its own partitioned and independent DBS
business. Such business includes the right to control NRTC Subscriber access to
programming and other services transmitted over the 101 degrees Satellite(s),
but only to the extent such access control occurs through Subscriber Terminal
Equipment utilized by such NRTC Subscribers that is owned by NRTC or Committed
Members. HCG agrees to reasonably cooperate with NRTC to provide such control.
Nothing herein shall prevent NRTC from negotiating on its own behalf with Users
to combine NRTC's business system with the system(s) of such Users.
Notwithstanding the foregoing, the parties expressly acknowledge and agree that,
if HCG has the right to distribute programming distributed or carried by USSB or
other
17
<PAGE>
Information below, marked with [**], has been omitted pursuant to a request for
confidential treatment. A complete copy of this document has been supplied to
the Securities and Exchange Commission under separate cover.
Users, then such programming will be deemed DirecTv Programming and may be
distributed to Eligible Residences (including Committed Member Residences and
NRTC Subscribers) in the same manner as other DirecTv Programming may be so
distributed, and HCG will have the same Subscriber Terminal Equipment access
rights, and the same marketing rights and obligations, as provided under Section
5.02.
2.09 Eligible Commercial Establishments.
----------------------------------
HCG and NRTC acknowledge that it may be mutually advantageous to allow
NRTC to distribute the DBS Distribution Services to commercial establishments
(e.g., hotels, bars, restaurants) in the RSAs ("Eligible Commercial
Establishments"), as well as to Committed Member Residences. The parties
therefore agree to negotiate in good faith to determine the terms and conditions
pursuant to which NRTC may provide DBS Distribution Services to Eligible
Commercial Establishments. HCG shall use reasonable efforts to obtain
Programming Agreements that allow the distribution of Cable Programming to
Eligible Commercial Establishments.
3. Payment Terms
-------------
The following fees shall be paid by NRTC to HCG as set forth below:
3.01 Transponder Capacity Fee. The fee for the provision of the Transponder
------------------------
Capacity (the "Transponder Capacity Fee") is equal to the product of (x) the
aggregate of the Committed Member Payments, multiplied by (y) [**]. If
----------
HCG on its own accord, and in its sole discretion, enhances the technical
quality or information capacity of a Program Channel, then NRTC shall have no
obligation to compensate HCG. HCG shall have no obligation to provide or attempt
any such enhancement, nor to provide more than twenty (20) Program Channels
(except as otherwise provided in Exhibit 19 if applicable).
3.02 TT&C Fee.
--------
(a) The fee for the provision of the TT&C Services (the "TT&C Fee")
for any given month shall be equal to the product of (x) the TT&C Base Amount,
multiplied by (y) the number of Authorized Subscribers calculated for such
- ---------- --
month. The initial "TT&C Base Amount" shall be determined on May 1, 1993 (or on
July 1, 1993 if the July Extension is applicable), and be based on the aggregate
amount of Committed Member Payments actually paid to HCG or owed to HCG as
Second Payments under Section 1.01(b)(iv) as of such date as follows:
18
<PAGE>
Information below, marked with [**], has been omitted pursuant to a request for
confidential treatment. A complete copy of this document has been supplied to
the Securities and Exchange Commission under separate cover.
<TABLE>
<CAPTION>
Committed Member Payments TT&C Base Amount
------------------------- ----------------
<S> <C>
$0 to $149,999,999.99 [**]
$150,000,000 to $199,999,999.99 [**]
$200,000,000 to $249,999,999.99 [**]
$250,000,000 [**]
</TABLE>
"Authorized Subscribers" means any and all NRTC Subscribers that are authorized
by the CAMC as of the 15th day of any given billing month to receive any or all
of the DBS Distribution Services. The TT&C Fee is subject to adjustment as the
TT&C Base Amount is adjusted under Section 3.02(b). The TT&C Fee shall be
payable within thirty (30) days following HCG's invoice; provided that such
invoice shall not be submitted to NRTC prior to the 16th day of the given
billing month. The TT&C Fee shall begin to apply on and as of the Service
Commencement Date.
(b) (i) Beginning on the tenth one-year anniversary of the Service
Commencement Date and on each subsequent yearly anniversary, the TT&C Base
Amount shall be adjusted to an amount calculated pursuant to the following
formula: the sum of (i) the then-current TT&C Base Amount plus (ii) the
----
product of (x) the then-current TT&C Base Amount multiplied by (y) the
-------------
lesser of five percent (5%) or the percentage increase in the Consumer
Price Index as of such anniversary as compared with the Consumer Price
Index as of the last such anniversary. The "Consumer Price Index" means
that certain consumer price index rate for all urban consumers U.S. City
Average published by the United States Department of Labor. If the Consumer
Price Index ceases to be published, or the basis of calculation thereof is
significantly altered, HCG and NRTC shall negotiate in good faith to
determine a mutually acceptable, and reasonable equivalent, substitute
inflation index.
(ii) At such time as the aggregate amount of the TT&C Fees paid by
NRTC to HCG meets or exceeds the "Accrued TT&C Expenses" for all program
Channels, then NRTC's payment for TT&C Services shall be converted from a
per Authorized Subscriber fee to a fixed fee (the "TT&C Fixed Fee
Conversion"). Upon the TT&C Fixed Fee Conversion, the TT&C Base Amount
shall be [**] per Program Channel per month (and may be adjusted under
Section 3.02(b)(i)), regardless of the number of Authorized Subscribers or
the number of program services distributed by Committed Members. The
"Accrued TT&C Expenses" for a given Program Channel means the product of
(x) [**], multiplied by (y) the total number of months for which TT&C
-------------
Services have been provided for such Program Channel during the period from
the Service Commencement Date to and including the month of such
calculation. HCG will provide written notice to NRTC of such TT&C Fixed Fee
Conversion and NRTC shall continue to be responsible for coordinating and
collecting Committed Members' payments of such fees.
19
<PAGE>
Information below, marked with [**], has been omitted pursuant to a request for
confidential treatment. A complete copy of this document has been supplied to
the Securities and Exchange Commission under separate cover.
(iii) If NRTC partially terminates this Agreement as to any Program
Channel under Section 10.03 prior to the TT&C Fixed Fee Conversion, then
the TT&C Base Amount shall be reduced to an amount calculated pursuant to
the following formula: the product of (x) the then-current TT&C Base
Amount, multiplied by (y) the number of Program Channels immediately
-------------
following such termination, divided by (z) the number of Program Channels
------- --
immediate preceding such termination. If NRTC partially terminates this
Agreement as to any Program Channel under Section 10.03 after the TT&C
Fixed Fee Conversion, then no TT&C Fee shall be due for the terminated
Program Channel.
3.03 Ground Services Fees. The fees for the provision of the Ground
--------------------
Services shall consist of payments for ground service equipment capital costs
(the "Ground Capital Fee") and fees for operating expenses (the "Ground Services
Fee") as set forth below.
(a) The Ground Capital Fee is equal to the product of (x) the
aggregate of the Committed Member Payments, multiplied by (y) [**].
-------------
(b) The Ground Services Fee for any given month shall be equal to
the product of (x) the Ground Services Base Amount, multiplied by (y) the number
---------- --
of Authorized Subscribers calculated for such month. The initial "Ground
Services Base Amount" shall be determined on May 1, 1993 (or on July 1, 1993 if
the July Extension is applicable), and shall be based on the aggregate amount of
Committed Member Payments actually paid to HCG or owed to HCG as Second Payments
under Section 1.01(b)(iv) as of such date as follows:
<TABLE>
<CAPTION>
Ground Services
Committed Member Payments Base Amount
------------------------- ---------------
<S> <C>
$0 to $149,999,999.99 [**]
$150,000,000 to $199,999,999.99 [**]
$200,000,000 to $249,999,999.99 [**]
$250,000,000 [**]
</TABLE>
The Ground Services Fee is subject to adjustment as the Ground Services Base
Amount is adjusted under Section 3.03(c). The Ground Services Fee shall be
payable within thirty (30) days following HCG's invoice; provided that such
invoice shall not be submitted to NRTC prior to the 16th day of the given
billing month. The Ground Services Fee shall begin to apply on and as of the
Service Commencement Date.
(c) (i) Beginning on the third one-year anniversary of the Service
Commencement Date and on each subsequent yearly anniversary thereafter, the
Ground Services Base Amount shall be adjusted to an amount calculated
pursuant to the following formula: the sum of (i) the then-current Ground
Services Base Amount plus (ii) the product of (x) the then-current Ground
----
Services Base
20
<PAGE>
Amount, multiplied by (y) the lesser of five percent (5%) or the percentage
-------------
increase in the Consumer Price Index as of such anniversary as compared
with the Consumer Price Index as of the last such anniversary (or as of the
Execution Date in the case of the first adjustment to be made).
(ii) If NRTC partially terminates this Agreement as to any
Program Channel under Section 10.03 prior to the Ground Services Fixed Fee
Conversion (if applicable and as set forth in Exhibit 19), then the Ground
Services Base Amount shall be reduced to an amount calculated pursuant to
the following formula: the product of (x) the then-current Ground Services
Base Amount, multiplied by (y) the number of Program Channels immediately
---------- --
following such termination, divided by (z) the number of Program Channels
------- --
immediately preceding such termination. If NRTC partially terminates this
Agreement as to any Program Channel under Section 10.03 after the Ground
Services Fixed Fee Conversion (if applicable), then no Ground Services Fee
shall be due for the terminated Program Channel.
(d) If the Service Equipment used to provide the Ground Services is
used to provide any satellite services over transponder capacity other than the
Transponder Capacity; then, subject to the limitations in the next sentence of
this Section 3.03(d), (i) HCG shall reduce the amount of the Ground Services Fee
to reflect, in its reasonable discretion, the shared operating expenses
attributable to such shared usage; and (ii) HCG shall reduce the amount of the
Ground Services Fee to reflect, in its reasonable discretion, the prorated,
amortized costs for the Service Equipment used by such user and shared with
NRTC. No reduction shall be made under this Section 3.03(d) with respect to any
Service Equipment that is dedicated exclusively to providing the DBS
Distribution Services or for any operating expenses that are attributable to
providing the DBS Distribution Services and not shared with other users. HCG
shall notify NRTC after any adjustment of the Ground Services Fee under this
Section 3.03(d) and shall accompany such notification with (x) a list of all
Service Equipment that is shared and with respect to which the Ground Services
Fee is to be adjusted, and (y) a written explanation of the basis for the
adjustment, certified by the Chief Financial Officer of HCG. NRTC shall have the
right to inspect any such shared Service Equipment during normal business hours
upon reasonable notice to HCG.
3.04 Security Services Fee.
---------------------
(a) The fee for the provision of the Security Services (the
"Security Services Fee") is set forth in Exhibit 3.04. HCG represents and
warrants that the Security Services Fee to be paid by NRTC to HCG for any
subscriber shall be no more than One Hundred Twenty Percent (120%) of the total
HCG Security Costs for such subscriber. The "HCG Security Costs" means, with
respect to any subscriber, the sum of (x) the fees to be paid for such
subscriber to NDSPL under the CAS Security Agreement or to any subsequent
service provider under a subsequent security service agreement (less any
royalties, discounts, payments or other consideration received by HCG from NDSPL
with respect to such subscriber), plus (y) the charges for telephone usage
----
between the
21
<PAGE>
Subscriber Terminal Equipment and the CAMC. If NRTC (or a Committed Member)
initially registers a Committed Member Residence with the CAMC (an "NRTC-
Registered Subscriber"), then, between HCG and NRTC, NRTC shall be solely
responsible for the Security Services Fee for such NRTC-Registered Subscriber.
If, on the other hand, a person or entity other than NRTC (or a Committed
Member) initially registers a subscriber with the CAMC, then, between HCG and
NRTC, such other person or entity shall be solely responsible for the Security
Services Fee for such subscriber. Finally, if a Committed Member Residence is
either (xx) initially registered by the CAMC simultaneously for both DBS
Distribution Services and DirecTv Programming services or (yy) later subscribes
to both such services by adding the other package (a "Joint Subscriber"), then
each of HCG and NRTC shall be responsible for 50% of such Security Services Fee
for such Joint Subscriber. The Security Services Fee due from NRTC to HCG in a
billing month shall be calculated by HCG using the number of NRTC-Registered
Subscribers and Joint Subscribers calculated for such month. The Security
Services Fee shall be payable within thirty (30) days following HCG's invoice;
provided that such invoice shall not be submitted to NRTC prior to the 16th day
of the given billing month. NRTC recognizes and understands that the HCG
Security Costs may be increased or decreased due to (i) HCG's renegotiation with
NDSPL pursuant to the CAS Security Agreement, (ii) HCG's use of another service
provider upon termination of the CAS Security Agreement, and/or (iii) increases
or decreases in the charges for telephone usage. As a consequence, HCG may, upon
written notice to NRTC, adjust such Security Services Fee in an amount
commensurate with any such increase or decrease in the HCG Security Cost;
provided, however, that such adjustment will not result in a Security Service
Fee of more than One Hundred Twenty percent (120%) of the total HCG Security
Costs. The Security Services Fee shall begin to apply on and as of the Service
Commencement Date.
(b) If a Security Breach (as defined in Exhibit 2.06) occurs, and
such breach has not been Cured (as defined in Exhibit 2.06) within 30 days after
the Security Breach Date (as defined in Exhibit 2.06) (the "Fee Suspension
Date"), then the Security Service Fee shall be suspended from and after the Fee
Suspension Date until the Security Breach is Cured; provided, however, that such
suspension shall not relieve NRTC of its obligation to pay to HCG the amount of
any Security Service Fee due and payable to HCG for services provided prior to
such Fee Suspension Date nor relieve NRTC of any other payment obligation
hereunder.
3.05 Programming Fees. NRTC shall pay HCG all the programming fees
----------------
required to be paid by HCG under the Programming Agreements or required to be
paid by HCG under the compulsory copyright licenses for Program Services
provided to NRTC Subscribers and/or any fees, guarantees, penalties or costs due
under the Programming Agreements that are attributable to a failure to provide a
minimum subscriber level of Committed Member Residences as provided in Section
2.07 (the "Programming Fees"). The Programming Fee shall begin to commence on
and as of the Service Commencement Date.
22
<PAGE>
Information below, marked with [**], has been omitted pursuant to a request for
confidential treatment. A complete copy of this document has been supplied to
the Securities and Exchange Commission under separate cover.
3.06 NRTC Revenue Fee.
----------------
(a) From the second anniversary of the Service Commencement Date
through the expiration, termination or cancellation of this Agreement (the "NRTC
Revenue Fee Termination Date"), NRTC will pay HCG, on or before the dates set
forth in Section 3.06(b), an "NRTC Revenue Fee" equal to [**] of Gross NRTC
Revenue. "Gross NRTC Revenue" means gross revenue due to NRTC from Members or
other persons or entities that is generated by NRTC's sale and/or provision of
the DBS Distribution Services (provided under or pursuant to this Agreement, but
exclusive of payments received for the provision of the Transponder Capacity,
the Ground Capital Fee, NRTC's provision of subscriber billing and/or
authorization services to Committed Members, or for the sale of Subscriber
Terminal Equipment) or any other services that utilize the Transponder Capacity
to NRTC Subscribers and other consumers (e.g., it shall exclude revenues from
---
intra-NRTC/Member load control services and intra-NRTC/Member Data Services),
excluding only sales taxes, gross receipt taxes and similar taxes imposed by any
Governmental Body on NRTC's sale or provision of such services. In no event
shall Gross NRTC Revenue for the relevant period be less than the aggregate
amounts paid by NRTC to HCG under this Agreement for TT&C Fees, Ground Services
Fees, Security Services Fees and Programming Fees in that same period. Services
shall be deemed to have been sold or provided by NRTC when invoiced, or if not
invoiced, when actually provided, or when paid for if paid for before the
provision of service.
(b) The NRTC Revenue Fee shall be payable annually, with the first
payment due on the third anniversary of the Service Commencement Date and each
subsequent payment due on each one-year anniversary thereafter, and, in any
event, no later than sixty (60) days after the NRTC Revenue Fee Termination
Date. On each such payment date, NRTC shall furnish to HCG: (x) a statement
certified by the Chief Financial Officer of NRTC of the amount of the Gross NRTC
Revenue during the twelve-month period ending on the close of the immediately
preceding calendar quarter with detail sufficient to permit the computation of
the NRTC Revenue Fee due for such period pursuant to Section 3.06(a), and the
amount of such NRTC Revenue Fee due (the "Yearly Statement"); and (y) payment
drawn on a United States bank in immediately available funds in the amount of
the NRTC Revenue Fee due for such period. Acceptance by HCG of any NRTC Revenue
Fee payment under this Section 3.06(b) shall not constitute acceptance of the
contents of the accompanying statement.
(c) NRTC shall provide HCG with monthly statements detailing the NRTC
Revenue Fee owing to HCG for the prior month. Such statement shall be due no
later than the tenth calendar day of the month subsequent to the month for which
information is being provided (e.g., the statement which covers NRTC's revenue
----
for the period January 1995 shall be due no later than February 10, 1995). The
statement shall contain detail sufficient to permit the computation of the NRTC
Revenue Fee for such period.
23
<PAGE>
(d) Should HCG fail to timely pay to NRTC the amount of any DirecTv
Fee as provided in Section 5.02(b), then NRTC shall have the right to offset
such amount against, and to deduct such amount from, any NRTC Revenue Fee
payable to HCG under this Section 3.06.
3.07 Place of Payment. All payments by NRTC shall be made to HCG at HCG's
----------------
principal place of business, as designated in Section 18.03, and shall be deemed
to be made only upon actual receipt by HCG. All refunds by HCG shall be made to
NRTC at NRTC's principal place of business as designated in Section 18.03, and
shall be deemed to be made only upon actual receipt by NRTC.
3.08 Letter of Credit, HCG Priority to Payment. NRTC shall deliver to HCG
-----------------------------------------
an irrevocable letter of credit, in substantially the identical form as Exhibit
3.08 (the "Letter of Credit") from CFC or a financial institution identified on
Exhibit 1.01(b)(v)-1 or such other financial institution as mutually agreed to
the reasonable satisfaction of both parties, to secure NRTC's payment
obligations hereunder. The Letter of Credit shall be delivered on or before the
Service Commencement Date and such Letter of Credit or a Replacement Letter of
Credit, as allowed below, shall remain in place until the expiration,
cancellation or termination of this Agreement. The amount of the Letter of
Credit shall equal the total amount of TT&C Fees, Ground Services Fees, Security
Service Fees, Programming Fees and NRTC Revenue Fees payable to HCG for an
immediately preceding three month period (and to determine the initial amount,
it shall be such amounts expected to be paid for the three months after the
Service Commencement Date), as calculated by HCG (the "LC Amount"). In any case,
the minimum number of NRTC Subscribers, for purposes of calculating the LC
Amount, shall be One Hundred Thousand (100,000). The Letter of Credit shall be
irrevocable, and subject only to an adjustment every six months (beginning with
the period ending six months after the Service Commencement Date) to reflect the
new LC Amount. If the Letter of Credit is not reinstated as provided in Section
4 therein, or is not renewed or is not adjusted as provided in Section 5
therein; then NRTC shall promptly deliver to HCG a replacement irrevocable
letter of credit in a form substantially identical to Exhibit 3.08 (the
"Replacement Letter of Credit," which shall be deemed the Letter of Credit for
all purposes of this Agreement); and, in any case, from and after such non-
reinstatement, non-adjustment or non-renewal, (a) HCG may retain any monies
payable to NRTC hereunder as a deposit against any non-payment under this
Agreement (a "Deposit"), up to the LC Amount, until a Replacement Letter of
Credit is properly delivered by NRTC to HCG, at which time HCG shall promptly
remit the amount of such Deposit to NRTC; and (b) HCG may draw down whatever
amount remains under the existing Letter of Credit and may hold such amount as a
Deposit until a Replacement Letter of Credit is properly delivered by NRTC to
HCG, at which time HCG shall promptly remit the amount of such Deposit to NRTC.
After the Deposit is applied to any due and unpaid obligations under this
Agreement, any unused amounts of the Deposit shall be promptly refunded by HCG
to NRTC after the expiration, cancellation or termination of this Agreement.
3.09 Prompt Repayment. All refunds provided for in this Agreement to be
----------------
made by HCG shall be made without interest within fifteen (15) business days
following
24
<PAGE>
notification to HCG of the occurrence of the event giving rise to such refund;
provided, however, that any such late payment not made within such time period
by HCG to NRTC shall bear interest calculated at the rate set forth in Section
18.01, calculated from the date payment was due until the date it is received by
NRTC.
3.10 HCG Suspension of Services.
--------------------------
(a) If NRTC receives full payment of any fees described in this
Section 3 (including any Second Payments described in Section 1.01(b)) from a
Committed Member and NRTC does not pay HCG such fees as required under this
Agreement, then HCG shall not have the right to suspend services (and/or, in the
case of a failure to make Second Payments, HCG shall not have the right to
refuse to commence services) to any such paying Committed Member but (i) shall
have any and all rights under this Agreement, and at law or in equity, to
collect such sums and any damages (as limited by Section 13), costs,
liabilities, and expenses (including without limitation, court costs and
reasonable attorney and other third party fees) (collectively, "Expenses")
associated therewith from NRTC and (ii) shall have the further right,
thereafter, to require the Committed Member to pay all such fees (including any
Second Payments) directly to HCG rather than NRTC and (iii) upon the expiration
of the relevant cure period in Section 11.02, HCG shall have the right to draw
down on the Letter of Credit pursuant to Section 3.08 in an amount equal to
(and, if applicable, use the Deposit for) all such fees.
(b) If HCG does not receive full, timely payment from NRTC of any
portion of the fees described in this Section 3 (including any Second Payments
described in Section 1.01(b)) because a Committed Member has not paid NRTC, then
(i) NRTC shall as promptly as possible and, in any case, within ten (10) days,
identify in writing to HCG any and all Committed Members that are delinquent in
paying their allocated portion of such fees and/or their Second Payments, (ii)
HCG may, at its sole discretion, after written notice to any such identified
Committed Member at an address supplied by NRTC followed by a fifteen (15) day
period to cure (it being expressly understood that a cure may consist of NRTC's
identifying facially incorrect amounts on an HCG invoice and that NRTC may cure
any such non-payment itself and if it does so, may have rights under the Member
Contract to assume all rights and obligations of such delinquent Committed
Member under such Member Contract) cease providing (and/or, in the case of a
failure to make Second Payments, HCG shall also have such right not to commence)
any or all of the DBS Distribution Services to such identified Committed Member
and/or any or all of its NRTC Subscribers and shall have the further right to
commence judicial action, at law and in equity, to collect such sums and
Expenses associated therewith from such identified Committed Member directly
(and the Member Contract shall contain provisions to this effect); and (iii)
upon the expiration of the relevant cure period in Section 11.02, HCG shall have
the right to draw down on the Letter of Credit in an amount equal to (and, if
applicable, use the Deposit for) all overdue fees owed by such delinquent
Committed Member to NRTC and all fees attributable or allocable to such
Committed Member (and, if applicable, use the Deposit for) through the 15th day
of such cure period that are not yet overdue.
25
<PAGE>
(c) If NRTC does not timely identify the Committed Members who are
not paying their fees and/or their Second Payments and NRTC does not timely pay
the fees and/or Second Payments owed by NRTC to HCG, then HCG shall have any and
all rights under this Agreement, and at law or in equity, to collect such sums
and Expenses associated therewith from NRTC, and upon the expiration of the
relevant cure period in Section 11.02, HCG shall have the right to draw down on
the Letter of Credit in an amount equal to (and, if applicable, use the Deposit
for) all such fees, and shall have the right to require all Committed Members to
pay all such fees and/or their Second Payments directly to HCG rather than NRTC.
(d) Notwithstanding anything to the contrary in this Agreement, if
(a) HCG has suspended (and/or not commenced) any DBS Distribution Services to a
Committed Member and/or its NRTC Subscribers pursuant to this Section 3.10, and
(b) NRTC is due a Complete Refund and/or Partial Refund under this Agreement;
then HCG shall have the right to offset and deduct from the amount of such
refund(s) the total or pro-rata (as appropriate) amounts due and owing as
described above, plus interest on such amounts. If the period of suspended
(and/or non-commenced) service to any Committed Member under this Section 3.10
exceeds sixty (60) days, then HCG shall have the termination rights set forth in
Section 11.02(f). If NRTC does not identify delinquent Committed Members as
contemplated by this Section 3.10 and does not timely pay any fees and/or Second
Payments owed by NRTC to HCG, or receives full payment of any fees (including
any Second Payments) from a Committed Member but does not pay HCG such fees
and/or Second Payments as required under this Agreement, then HCG shall have the
termination rights set forth under Section l1.02(e)(i), in addition to those
rights set forth above.
3.11 Late Payment and Interest. Any late payments by NRTC to HCG shall be
-------------------------
with interest calculated at the rate set forth in Section 18.01, payable with
the amount due and calculated from the date payment was due until the date it is
received by HCG. In no event shall interest paid on any Committed Member
Payment, Second Payment, and/or Escrowed Committed Member Payment be deemed part
of any such Committed Member Payment, Second Payment or Escrowed Committed
Member Payment.
3.12 Other Fees. If NRTC markets and/or sells the DBS Distribution
----------
Services to persons or entities in non-NRTC Territories, then NRTC shall
compensate HCG for the provision of such DBS Distribution Services (except only
Transponder Capacity if Exhibit 19 applies) on a per subscriber basis in amounts
equal to those provided for in this Section 3 for the provision of such services
to NRTC Territories.
4. Service Commencement, Service Term and Related Matters.
------------------------------------------------------
4.01 Service Commencement Date.
-------------------------
(a) The "Service Commencement Date" shall mean the date upon which
HCG commences the provision of the DBS Distribution Services, with all such
services having completed Acceptance pursuant to Section 4.04. The "Scheduled
Service
26
<PAGE>
Commencement Date" is April 1, 1994 and is based upon a scheduled launch date of
the Satellite in December 1993 (the "Scheduled Launch Date"). HCG has a
contract with Arianespace for the launch of the Satellite, and Arianespace has
scheduled the launch of the Satellite for December 1993. HCG shall use its
reasonable best efforts to cause the Service Commencement Date to occur no later
than 90 days after the Scheduled Launch Date. HCG shall use its reasonable best
efforts to cause the launch of the Satellite to occur on or about the Scheduled
Launch Date; provided, however, that HCG shall have the right to determine, in
its sole discretion, which launch vehicle to use, and shall have the right to
change the Scheduled Launch Date as required by the availability of launch
reservations and launch services and by such other events as HCG determines
require changes in such date, and HCG shall not be required to pay for launch
services at commercially unreasonable rates, based on prevailing launch market
rates, to obtain a particular launch date. The Scheduled Service Commencement
Date shall not change as a result of any change in the Scheduled Launch Date.
The only consequence of HCG's failure to meet the Scheduled Service Commencement
Date shall be as set forth in Sections 4.01(b), 4.02, 11.01 and 11.02. If the
Service Commencement Date does not occur on or before the Scheduled Service
Commencement Date, HCG shall use its reasonable best efforts to make the Service
Commencement Date occur as soon thereafter as possible. Notwithstanding the
above, HCG shall have the right in any case to make the Service Commencement
Date occur earlier than April 1, 1994; provided that HCG shall obtain the
consent of NRTC (which NRTC may grant or withhold) to such early Service
Commencement Date if such date is to occur before December 1, 1993.
(b) If the Transponder Capacity is not Available (as defined below),
but HCG is able to provide a portion of the twenty (20) Program Channels (a
"Partial Delivery"), then HCG shall notify NRTC of the Partial Delivery (the
"Partial Delivery Notice") and NRTC may reject such Partial Delivery by
providing written notice to HCG within ninety (90) days after receipt of the
Partial Delivery Notice. If NRTC accepts (or does not timely reject) such
Partial Delivery, then (i) this Agreement shall be terminated with respect to
any non-provided Program Channels and NRTC's obligation to pay the TT&C Fees,
Ground Services Fees, and Programming Fees associated with such non-provided
Program Channels shall terminate; (ii) NRTC shall receive a pro-rata refund of
the Committed Member Payments attributable to such non-provided Program Channels
as set forth in Section 11.01(c); (iii) the Service Commencement Date shall be
deemed to occur when all other portions of the DBS Distribution Services can be
provided and Acceptance of such other portions has been completed; (iv) NRTC
shall have no rights to any Late Commencement Fees and shall not have any other
termination rights under this Agreement with respect to such non-provided
Program Channels; and (v) HCG shall have no further obligations to provide such
non-provided Program Channels to NRTC. If NRTC timely notifies HCG that it does
not accept Partial Delivery, then the Service Commencement Date shall not be
deemed to occur unless and until HCG is able to provide all twenty (20) Program
Channels; and, if HCG is not able to do so before the Rescission Date, then NRTC
and HCG shall have the termination rights set forth in Sections 11.01 and 11.02,
respectively. Transponder Capacity is "Available" if such capacity is capable
of providing twenty (20) Program Channels that meet the Minimum
27
<PAGE>
Requirements. Except only as provided in Exhibit 19, if applicable, HCG shall
have the option, but not the obligation, to provide additional or replacement
Transponder Capacity or utilize spare equipment if Transponder Capacity is not
Available to provide all twenty (20) Program Channels.
4.02 Late Commencement Payments. If the Service Commencement Date has not
--------------------------
occurred on or before December 31, 1994, and this Agreement has not been
terminated or cancelled earlier and has not expired, then HCG shall pay to NRTC,
on a monthly basis, as a late fee (the "Late Commencement Fee") an amount equal
to product of (x) 0.009542 multiplied by (y) the aggregate amount of the
-------------
Committed Member Payments actually paid to HCG (and specifically excluding any
Second Payments owing to HCG). The first payment of the Late Commencement Fee
(if any) shall be made on March 31, 1995, with any subsequent payments made at
the end of each subsequent month thereafter. Payment of the Late Commencement
Fee shall continue until the earliest to occur of (i) the Service Commencement
Date or (ii) such time as the total Late Commencement Fee paid equals the
product of (xx) 0.343512, multiplied by (yy) the aggregate Committed Member
-------------
Payments actually paid to HCG (and specifically excluding any Second Payments
owing to HCG). Any Late Commencement Fee amount due at the end of a month in
which the Service Commencement Date occurs shall be pro-rated. No Late
Commencement Fees shall be due or payable if the failure or delay in the
performance by HCG of its obligations hereunder results from any acts or
omissions of NRTC or its Members or Affiliates.
4.03 [Intentionally Omitted.]
4.04 Acceptance. HCG shall test the performance of the Transponder
----------
Capacity, Ground System, and Security Services in accordance with an acceptance
test plan to be prepared by HCG and delivered to NRTC at least 180 days prior to
the Scheduled Service Commencement Date. NRTC shall have the right to be
present at and observe all acceptance testing and HCG shall provide NRTC with
written test results relevant to the DBS Distribution Services promptly
thereafter. A summary outline of the acceptance test plan, including a
description of the test phases and methods used to demonstrate compliance with
the Minimum Requirements set forth in Exhibit 7.01, is set forth in Exhibit
4.04. "Acceptance" of the DBS Distribution Services shall be deemed to have
occurred when (a) the DBS Distribution Services meet the Minimum Requirements
(and, in the case of Subscriber Terminal Equipment Availability, upon HCG's
representation to NRTC that TCE's production capability is in place and that TCE
is ready to commence production of Subscriber Terminal Equipment (or that
Subscriber Terminal Equipment is in production); provided, however, that the
only consequences of HCG's inability to provide such representation prior to the
Rescission Date are that, unless and until such representation is waived by NRTC
or produced by HCG, the Service Commencement Date shall not occur and Late
Commencement Fees may be payable under Section 4.02); and (b) HCG has notified
NRTC in writing that HCG is ready to commence the immediate provision of all the
DBS Distribution Services and HCG anticipates continuous service under the terms
of this Agreement.
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<PAGE>
4.05 Ownership of Service Equipment. The Transponder Capacity and all
------------------------------
other equipment and property utilized by HCG, its Affiliates and/or its
subcontractors or assignees to provide the DBS Distribution Services and other
services (if any) to NRTC hereunder (the "Service Equipment") shall remain the
sole and exclusive property of HCG, its Affiliates and/or its subcontractors or
assignees (as appropriate), and NRTC shall have no rights in or to such Service
Equipment except for (i) NRTC's contractual rights to have DBS Distribution
Services and other services (if any) provided over such equipment under this
Agreement, and (ii) any Subscriber Terminal Equipment and any other Service
Equipment not contemplated by this Agreement that NRTC or Committed Members have
independently purchased from third parties. Nothing in this Section 4.05 shall
modify HCG's obligation, under Section 3.03(d), to reduce the Ground Services
Fee in certain circumstances as set forth therein.
4.06 Service Term: Programming Renewal; Design of Satellite.
------------------------------------------------------
(a) Service Term. Except for Programming Services (as set forth below
------------
in Section 406(b)) or as such obligation may be modified by other provisions of
this Agreement, and unless this Agreement is terminated, is cancelled, or
expires earlier, HCG shall provide the DES Distribution Services until the
Satellite Expiration Date. The "Satellite Expiration Date" means the date on
which HCG, after the conditions referred to in either clause (i) or clause (ii),
below, have occurred, in its sole discretion, removes the Satellite from its
assigned orbital location. Subject to any FCC Rules which may exist, the
Satellite Expiration Date shall not occur until such time as (i) the remaining
fuel on board the Satellite is less than 6% of the initial fuel mass prior to
launch, including reasonable provision for uncertainty in estimation of fuel, or
(ii) there are fewer than eight (8) Transponders on the Satellite capable of
meeting the transponder performance specifications of the respective Users or
capable of providing Transponder Capacity that meets the Minimum Requirements.
Upon the Satellite Expiration Date, HCG will have no further obligations under
this Agreement (except any unfulfilled obligations under Section 15) and this
Agreement will terminate. HCG will, to the extent possible, provide NRTC with
ninety (90) days' notice prior to the scheduled Satellite Expiration Date.
Nothing in this Section 4.06 modifies NRTC's rights, if applicable, to terminate
this Agreement pursuant to Section 11.01(d) and obtain a Partial Refund.
(b) Programming Renewal. Unless this Agreement is terminated,
-------------------
cancelled or expires earlier, and except as such obligation may be modified by
other provisions of this Agreement, HCG shall provide each of the program
services provided under the Programming Services until the termination,
expiration or cancellation of the Programming Agreement (or, in the case of
Programming Services provided under a compulsory copyright license, until the
earlier to occur of three years or once such license is not available) pursuant
to which HCG provides such program service. On or before the 365th day prior to
the scheduled expiration of each Programming Agreement (a "Programming Renewal
Date"), after consultation with NRTC, HCG shall notify NRTC whether HCG, in its
sole discretion, will seek renewal of such Programming Agreement. If HCG
indicates that it will seek renewal of a Programming Agreement, and is able to
obtain such renewal, then HCG's provision of a program service under such
29
<PAGE>
Programming Agreement shall be extended in accordance with the provisions of the
renewal agreement. The standards set forth in Section 2.07, as then-existing at
the time of renewal, shall apply to any such renewal unless NRTC and HCG
otherwise agree in writing. If HCG elects not to seek renewal, or if HCG seeks
renewal but is unable to obtain such renewal by the 180th day following HCG's
notice to NRTC, then NRTC shall have the right to directly seek renewal rights
of such Programming Agreement. In such an event, HCG's obligations to provide
the program service provided under such Programming Agreement shall terminate
upon the relevant Programming Renewal Date. In all cases, NRTC's and/or the
Committed Member's obligations to pay for the Security Services, Ground Services
and TT&C Services under this Agreement shall continue after the Programming
Renewal Date(s) for so long as such services are provided hereunder.
(c) Satellite Design. HCG will design the Satellite so that its
----------------
propulsion tanks have the capacity to hold an amount of fuel that is sufficient,
when applying fuel usage projections for launch operations and on-station
operations established prior to launch using standard engineering practices, to
(a) launch the Satellite into its assigned orbital slot; (b) operate the
Satellite for 12 years or more; and (c) boost the Satellite out of orbit as
anticipated under Section 4.06(a). In addition, all critical electronic devices
on the Satellite shall have a design life of 12 years or more. The Satellite is
designed to provide CONUS DBS service and, subject to FCC consent, will operate
in that manner. The parties acknowledge, however, that (1) the Satellite's
design and all other decisions concerning the Satellite, including the amount of
fuel with which the Satellite is launched, will be made by HCG in its sole
discretion and (2) NRTC's sole remedies shall be as set forth in Section 10 and
Section 11.01(d), regardless of whether HCG designed the Satellite in compliance
with the provisions of this Section 4.06(c). If any decisions are made by HCG
that will have a material effect on the operational life of the Satellite, then
HCG shall promptly notify NRTC of such decisions and their effects.
5. Marketing Rights
----------------
5.01 Marketing of DBS Distribution Services in NRTC Territories.
----------------------------------------------------------
(a) HCG grants NRTC the exclusive right to market and sell the DBS
Distribution Services to Members for distribution to Committed Member Residences
or directly to Committed Member Residences; it being expressly agreed and
understood that any rights as to Programming Services shall extend only as to
the extent and for the duration as may be provided under the relevant
Programming Agreements. For purposes of Sections 5.01(a) and 5.01(b), Committed
Member Residences shall be determined based upon Member Contracts executed as of
December 11, 1992 (or May 1, 1993 or July 31, 1993, if applicable). NRTC shall
have the sole and exclusive right to determine the terms and conditions upon
which it will market the DBS Distribution Services to such Members and Committed
Member Residences, and subject to the provisions of Section 3, shall be entitled
to all revenues from such marketing.
(b) (i) Beginning on December 11, 1992 (or May 1, 1993 or July 31,
1993, if applicable), HCG shall have the exclusive right to market and sell
the
30
<PAGE>
DBS Distribution Services, and any other program services transmitted on
the Transponder Capacity for distribution to the Non-Committed Member
Residences. "Non-Committed Member Residences" means all Eligible Residences
that are not Committed Member Residences, as determined pursuant to Section
5.01(a) as of December 11, 1992 (or May 1, 1993 or July 31, 1993, if
applicable). HCG shall have the sole and exclusive right to determine the
terms and conditions upon which it will market the DBS Distribution
Services to such Non-Committed Member Residences, and shall be entitled to
all revenues from such marketing. HCG's rights under this Section 5.01(b)
shall not be adversely affected by NRTC's taking control of the Programming
Agreements under Section 4.06(b).
(ii) Prior to marketing the DBS Distribution Services to any Non-
Committed Member Residences, HCG shall provide NRTC with the one-time
opportunity to obtain from HCG (and provide to Committed Members, in NRTC's
discretion) the right to distribute DBS Distribution Services to the Non-
Committed Member Residences in RSAs that are in or immediately adjacent to
the territories any Committed Members serve (the "Expansion Opportunity").
Within sixty (60) days following HCG's notice to NRTC of the Expansion
Opportunity, NRTC may propose to HCG the terms and conditions on which, and
the specific Non-Committed Member Residences as to which, NRTC wishes to
obtain such distribution rights. For a period of sixty (60) days following
NRTC's proposal, HCG and NRTC shall negotiate in good faith to establish
mutually agreeable terms and conditions for such distribution rights. If
the parties are not able to so agree within such time period, HCG shall
have no further obligations under this Section 5.01(b)(ii).
(c) (i) If HCG enters into a definitive agreement to provide
the DBS Distribution Services to any other person or entity who desires to
provide, or if HCG itself provides, all of the Programming Services to Non-
Committed Member Residences in RSAs (a "Full Service Distributor") on
prices, terms, conditions, benefits and obligations (including, without
limitation, capital contributions, interest and other payments, volume and
amount of capacity and usage, programming and/or service commitments) that,
taken as a whole, are more favorable than those by which the DBS
Distribution Services are provided to NRTC hereunder, then HCG shall
promptly offer NRTC the opportunity to obtain such more favorable prices,
terms, conditions, benefits and obligations, taken as a whole, contained in
the agreement that HCG has entered into with such Full Service Distributor.
(ii) If HCG enters into a definitive agreement to provide the DBS
Distribution Services to any other person or entity who desires to provide,
or if HCG itself provides, some, but not all, of the Programming Services
to Non-Committed Member Residences in RSAs (a "Partial Service
Distributor") on prices, terms, conditions, benefits and obligations
(including, without limitation, capital contributions, interest and other
payments, volume and amount of capacity
31
<PAGE>
Information below, marked with [**], has been omitted pursuant to a request for
confidential treatment. A complete copy of this document has been supplied to
the Securities and Exchange Commission under separate cover.
and usage, programming and/or service commitments) that, taken as a whole,
are more favorable than those by which that same portion of the Programming
Services is provided to NRTC hereunder (on a pro-rata basis based on twenty
program services), then HCG shall promptly offer NRTC the opportunity to
obtain such Programming Services on the more favorable prices, terms,
conditions, benefits and obligations, taken as a whole, contained in the
agreement that HCG has entered into with such Partial Service Distributor;
provided, however, that no such offer shall relieve NRTC of any of its
obligations hereunder with respect to the DBS Distribution Services and all
the Programming Services provided prior to such offer, including, without
limitation, NRTC's obligations (if any) to provide minimum NRTC Subscriber
levels for a program service that is part of the Programming Services.
5.02 Marketing DirecTv Programming Services.
--------------------------------------
(a) To the fullest extent HCG may grant such right, HCG hereby grants
NRTC the non-exclusive right to market and sell "DirecTv Programming" (defined
as any video programming that HCG or its Affiliates has the right to distribute
and that is transmitted over the 101 degrees Satellite(s)) to Committed Members
for distribution to Committed Member Residences and directly to Committed Member
Residences. HCG and NRTC acknowledge and agree that HCG does not now have the
right to distribute DirecTv Programming to Eligible Residences or anywhere else
and that, although HCG intends to use reasonable efforts to obtain such rights,
HCG shall have no obligation to NRTC to obtain such rights. Nothing in this
Agreement (including, without limitation, Section 2.08) shall restrict HCG's
ability or rights to market and sell DirecTv Programming to Eligible Residences
(including Committed Member Residences and NRTC Subscribers) itself or through
other persons or entities, or to access and address the Subscriber Terminal
Equipment utilized by such Eligible Residences (including Committed Member
Residences and NRTC Subscribers) for purposes of providing such DirecTv
Programming.
(b) (i) In consideration for NRTC making available NRTC-Registered
Subscribers and/or Joint Subscribers for subscription to DirecTv
Programming, HCG shall pay NRTC an amount equal to [**] (the "DirecTv Fee")
of the gross receipts paid to HCG by any NRTC-Registered Subscribers and/or
Joint Subscribers for DirecTv Programming (excluding only any sales taxes,
gross receipt taxes or similar taxes imposed by any Governmental Body on
HCG's provision of such programming) ("DirecTv Revenue"). If NRTC collects
any fees paid by NRTC-Registered Subscribers or Joint Subscribers for
DirecTV Programming, then NRTC shall be entitled to retain [**] of such
gross receipts (excluding only any sales taxes, gross receipt taxes or
similar taxes imposed by any Governmental Body on HCG's or NRTC's provision
of such programming) in consideration for NRTC making available to HCG such
NRTC Registered Subscribers and/or Joint Subscribers for subscription to
DirecTv Programming. HCG acknowledges that NRTC will be entitled to
additional compensation for the services that it provides with respect to
32
<PAGE>
DirecTv Programming subscribers, and agrees to negotiate in good faith with
NRTC to establish the additional terms and conditions and payments by HCG
to NRTC associated with other marketing services and any billing, invoicing
and/or collecting services NRTC may provide. Such additional terms and
conditions shall be incorporated as mutually-agreed-to amendments to this
Agreement. If the parties are unable to agree upon such terms and
conditions by October 1, 1993, then either party may submit any and all
outstanding issues or conditions to arbitration pursuant to Section 18.13.
(ii) The DirecTv Fee shall be payable annually, with the first
payment due on the first anniversary of the Service Commencement Date and
each subsequent payment due on each one-year anniversary thereafter, and,
in any event, no later than sixty (60) days after the expiration,
cancellation or termination of this Agreement. On each such payment date,
HCG shall furnish to NRTC: (x) a statement certified by the Chief
Financial Officer of HCG of the amount of the DirecTv Revenue during the
twelve-month period ending on the close of the immediately preceding
calendar quarter with detail sufficient to permit the computation of the
DirecTv Fee due for such period pursuant to Section 5.02(b)(i), and the
amount of such DirecTv Fee due (the "DirecTv Yearly Statement"); and (y)
payment drawn on a United States bank in immediately available funds in the
amount of the DirecTv Fee due for such period. Acceptance by NRTC of any
NRTC Revenue Fee payment under this Section 5.02(b) (ii) shall not
constitute acceptance of the contents of the accompanying statement.
(iii) HCG shall provide NRTC with monthly statements detailing
the DirecTv Revenue Fee owing to NRTC for the prior month. Such statement
shall be due no later than the tenth calendar day of the month subsequent
to the month for which information is being provided (e.g., the statement
----
which covers HCG's DirecTv Revenue for the period January 1995 shall be due
no later than February 10, 1995). The statement shall contain detail
sufficient to permit the computation of the DirecTv Fee for such period.
(iv) Should NRTC fail to timely pay to HCG any NRTC Revenue Fee
as provided in Section 3.06, then HCG shall have the right to offset such
amount against, and deduct such amount from, any DirecTv Fee payable to
NRTC under this Section 5.02(b).
(c) If HCG enters into a definitive agreement to provide the right to
distribute DirecTv Programming to any other person or entity (including without
limitation any agent) who desires to provide such services to end users (a
"DirecTv Distributor") on prices, terms, conditions, benefits and obligations
that, taken as a whole, are more favorable than the prices, terms, conditions,
benefits and obligations by which such DirecTv Programming is provided to NRTC,
then HCG shall promptly offer NRTC such more favorable prices, terms, conditions
and benefits, taken as a whole, contained in the agreement that HCG has entered
into with such DirecTv Distributor.
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<PAGE>
5.03 Cross-Marketing and Promotions. HCG and NRTC shall reasonably
------------------------------
cooperate and coordinate their efforts with respect to consumer promotions,
marketing, media promotions, collateral materials, telephone referrals, data
processing, and other agreed-to areas of cross-marketing and general promotion
of the DBS Distribution Services, DirecTv Programming, and other proramming or
services provided by HCG/DirecTv or NRTC over the 101 degrees Satellite(s). HCG
shall, at NRTC's request, include promotional information regarding NRTC's
provision of the DBS Distribution Services to Committed Member Residences in all
channel listings, program and/or electronic guides and other materials supplied
by HCG/DirecTv to its HCG Subscribers, subject to NRTC's payment to HCG or
DirecTv of its proportionate share of the cost of such provision of materials.
"HCG Subscriber(s)" means households that subscribe through HCG and/or DirecTv
to all or any portion of DirecTv Programming. In addition, the parties shall
cooperate in the provision and distribution of any such promotional materials by
either party and if the other party's participation or promotion can be done at
no or low cost, then that party shall pass on such cost benefits. Further, the
parties shall coordinate in good faith to provide each party with any financial
or other benefits from economies of scale (e.g., discounts from national
----
programming agreements and volume purchases). HCG shall provide NRTC with a
license to use the DirecTv name and logo at no additional cost to NRTC upon such
terms and conditions as may reasonably be required by HCG.
5.04 Advertising. HCG shall have the exclusive right to market, sell and
-----------
determine the pricing and terms of any and all advertising inserted into the
Programming Services as permitted by the Programming Agreements with respect to
all programming transmitted over the Transponder Capacity (the "Advertising").
HCG shall pay for all marketing and selling expenses related thereto (the
"Marketing Expenses"). At HCG's request, NRTC shall reasonably cooperate with,
and assist HCG in, such Advertising efforts. HCG shall provide NRTC with a
prorated share (based upon the number of NRTC Subscribers) of all collected
Advertising revenues, less Marketing Expenses, all as reasonably calculated by
HCG. HCG shall provide NRTC with a monthly payment of such amount, with
documentation setting forth HCG's calculations.
5.05 Non-NRTC Territories
--------------------
(a) NRTC shall have the non-exclusive right to market and sell the
DBS Distribution Services to persons and entities who reside outside the NRTC
Territories through programming distribution rights that may be obtained
independently by NRTC. NRTC shall be entitled to all revenues from such
marketing and sale, subject to NRTC's obligation to compensate HCG as provided
in Section 3.12.
(b) HCG shall have the non-exclusive right to market and sell the DBS
Distribution Services to persons and entities who reside outside the NRTC
Territories and shall be entitled to all revenues from such marketing and sale.
34
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6. Representations and Warranties
------------------------------
HCG and NRTC each, except as expressly indicated herein, represent and
warrant to, and agree with, the other that:
6.01 Authority. It has the right, power and authority to enter into, and
---------
perform its obligations under, this Agreement. Subject to the terms and
conditions of any FCC authorizations, this Agreement is binding upon and
enforceable against it.
6.02 Corporate Action. It has taken all requisite corporate action to
----------------
approve the execution, delivery and performance of this Agreement, and this
Agreement constitutes a legal, valid and binding obligation upon itself in
accordance with its terms.
6.03 FCC and Other Authorizations.
----------------------------
(a) HCG represents to NRTC as follows: HCG has obtained from the FCC
the authority to construct, launch and operate two DBS satellites with a total
of 27 transponders among both satellites, and to sell or lease Transponders and
provide capacity on such satellites on a private, non-common carrier basis. HCG
has obtained from the FCC the authority to place these two satellites (known as
"DBS I" and "DBS II") in geostationary orbit at the 101 degrees W. L. orbital
location. HCG has been authorized by the FCC to provide full contiguous United
States ("CONUS") DBS service from these satellites, subject to modification or
rescission based on the technical showings submitted in HCG's Modification
Request (as defined below).
(b) NRTC acknowledges that HCG has filed an application for
modification of HCG's FCC authority to construct, launch and operate DBS I and
DBS II ("HCG's Modification Request"), a copy of which has been provided to
NRTC. NRTC shall support HCG's Modification Request; provided, however, that
all reasonable expenses (in excess of relatively minimal costs to NRTC) incurred
by NRTC at HCG's request shall be paid by HCG. HCG's Modification Request
includes requests for authorization (i) to construct, launch, and operate DBS I
and DBS II in the configuration described herein; (ii) in addition to existing
authorizations for transmission technologies, to utilize digital compression
transmission technology in connection with the operation of DBS I and DBS II;
and (iii) to operate DBS I and DBS II in accordance with their technical
performance specifications, including using the 120 watt power levels described
herein.
(c) HCG and NRTC acknowledge that the transactions contemplated by
this Agreement with respect to the construction, launch and operation of the
Satellite may be challenged before the FCC or a court of competent jurisdiction
or by other persons or entities not parties hereto. HCG and NRTC agree that, in
the event of a challenge to HCG's FCC authority to construct, launch and operate
the Satellite or to HCG's Modification Request, HCG and NRTC shall each use its
reasonable best efforts before the FCC and the appellate courts to support HCG's
FCC authority and/or HCG's Modification Request, and HCG and NRTC shall fully
cooperate with each other in these
35
<PAGE>
endeavors; provided, however, that all reasonable expenses (in excess of
relatively minimal costs to NRTC) incurred by NRTC at HCG's request shall be
paid by HCG.
(d) NRTC acknowledges that HCG's FCC authority to construct and
launch the Satellite as provided herein (assuming HCG's Modification Request is
granted) will expire on December 7, 1994 unless further extended. NRTC also
acknowledges that the FCC currently issues a DBS satellite license only for a
term of five (5) years and, therefore, HCG's authority to operate the Satellite
will be valid only for a term of five (5) years, unless it is extended or
renewed by the FCC. HCG shall use its reasonable best efforts before the FCC and
the appellate courts to obtain renewals or extensions of such authority that are
applicable to HCG before the Satellite Expiration Date and NRTC shall fully
cooperate with, if so required by, HCG in this endeavor; provided, however, that
all reasonable expenses (in excess of relatively minimal costs to NRTC) incurred
by NRTC at HCG's request shall be paid by HCG. Nothing in this Section 6.03(d)
modifies NRTC's right to terminate this Agreement pursuant to Section 11.01 and
obtain a Complete Refund, or a Partial Refund, as appropriate.
(e) Except as provided above with respect to FCC authorizations and
as contemplated by Sections 7.07 and 8.04, each party represents and warrants
that the execution and delivery of this Agreement and the performance by it of
its obligations hereunder and the consummation of the transactions contemplated
hereby will not result in a material violation of, or material default under, or
the occurrence of an event that with notice or lapse of time or both would
constitute a material default under, or material noncompliance with, any
applicable Law, any indenture, mortgage, deed of trust, loan agreement, purchase
agreement, option agreement or other agreement or instrument to which it is a
party or by which it or any material portion of its property is bound, its
articles of incorporation or by-laws, partnership agreement, or other charter
documents, as the case may be. Except as specifically provided elsewhere in this
Agreement, it has obtained or shall use its reasonable best efforts to obtain in
a timely manner all material necessary or appropriate public or private
consents, permissions, agreements, licenses, or authorizations to which it is
subject in connection with the transactions contemplated hereby, or which it
must obtain by virtue of its ownership or use of or operation of any
Transponder, the Transponder Capacity, or the Satellite.
6.04 Litigation. To the best of its knowledge, there is no outstanding or
----------
threatened judgment, threatened or pending litigation or proceeding, involving
or affecting the transactions provided for in, or contemplated by, this
Agreement, except as has been previously disclosed in writing by either party to
the other.
6.05 No Broker. It does not know of any broker, finder or intermediary
---------
involved in connection with the negotiations and discussions incident to the
execution of this Agreement, or of any broker, finder or intermediary who might
be entitled to a fee or commission upon the consummation of the transactions
contemplated by this Agreement.
6.06 Notification of Significant Events. NRTC and HCG shall furnish the
----------------------------------
other as soon as possible and in any event within ten (10) days after the
occurrence of each HCG
36
<PAGE>
or NRTC Event of Default (as appropriate) or each event that, after notice or
the lapse of time, or both, would constitute an HCG or NRTC Event of Default (as
appropriate), a written notice setting forth the details of such matter and the
action which is proposed to be taken by such notifying party with respect
thereto.
7. Additional Representations, Warranties and Obligations of HCG
-------------------------------------------------------------
7.01 Minimum Requirements. The DBS Distribution Services, on the Service
--------------------
Commencement Date, shall meet the "Minimum Requirements" as set forth in Exhibit
7.01. HCG's failure to obtain and/or maintain FCC consent to operate the
Satellite to provide CONUS DBS service will not adversely affect NRTC's rights
or HCG's obligations that arise from the failure of the Transponder Capacity to
meet the relevant Minimum Requirements.
7.02 [Intentionally Omitted].
7.03 Government Regulations. Except as provided in Section 6.03, HCG has
----------------------
or shall use its reasonable best efforts until the Satellite Expiration Date to
obtain and maintain, in all material respects, all applicable federal, state and
municipal authorizations or permissions to construct, launch and operate the
Satellite applicable to it; and to comply, in all material respects, with all
such government regulations regarding the construction, launch and operation of
the Satellite and the Transponders applicable to it.
7.04 Laws. HCG shall comply (and will require those persons who perform
----
uplinking on its behalf to comply), in all material respects, with all Laws
applicable to it regarding its operation or use of the Satellite or the
Transponders. Without limiting the generality of the foregoing:
(i) If any use of the Satellite or the Transponders constitutes
"Broadcasting" under the Communications Act of 1934, as amended, or the
rules, regulations, orders, or policies of the FCC (collectively, the "FCC
Rules"), then HCG shall comply with all FCC Rules applicable to it with
respect to broadcasting from a DBS satellite, including, without
limitation, all such FCC Rules related to indecency, obscenity, equal
employment opportunities, political broadcasting, children's television and
public affairs programming.
(ii) HCG shall comply with all FCC Rules applicable to it with
respect to the use of the Transponders for "non-conforming" uses of DBS
frequencies.
(iii) HCG shall comply with all copyright and other intellectual
property Laws applicable to it with respect to all Programming Services
that constitute HCG Controlled Programming and are transmitted on the
Transponder Capacity, shall obtain all necessary copyright licenses and/or
consents with respect thereto, and shall pay all required copyright
royalties and other fees with respect to such Programming Services. "HCG
Controlled Programming" means
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any and all program services that HCG has the
continued responsibility to provide to NRTC over the Transponder Capacity
and under Section 2.07 of this Agreement, and specifically excludes, any
and all program services for which HCG's obligations to provide have
terminated under Section 4.06(b) or Section 19, for which HCG has assigned
the relevant Programming Agreement to NRTC, and/or for which NRTC has
otherwise assumed the responsibility to provide.
7.05 Indemnification. HCG shall indemnify and hold NRTC and its Members
---------------
and Affiliates, and their respective directors, officers and employees (the
"Indemnified Parties"), harmless from and against any and all damages, costs,
liabilities and expenses incurred by the Indemnified Parties (including, without
limitation, (i) costs of investigation and defense, including without limitation
court costs and reasonable attorney and other third party fees and (ii) to the
extent permitted by Law, any fines, penalties, and forfeitures in connection
with any proceedings against an Indemnified Party) caused by the content of
programming or other material transmitted by HCG on the HCG Frequencies in its
capacity as a programmer for its DBS business excepting only any and all
--------- ----
Programming Services that constitute HCG Controlled Programming and/or any NRTC
Controlled Services. "NRTC Controlled Services" means any and all program
services, Data Services, and other services or material that are transmitted on
the Transponder Capacity and that are not HCG Controlled Programming.
7.06 Assurances of HCG. Upon request by NRTC, HCG will provide NRTC with
-----------------
information concerning HCG's abilities to perform its obligations hereunder.
Prior to the release or payments of any funds by NRTC to HCG hereunder
(excluding any payments into the Escrow Account), HCG shall provide NRTC with
further assurance that HCG has the ability to promptly provide NRTC with a
Complete Refund and/or a Partial Refund pursuant to the provisions of Section
11. Such assurance by HCG shall take the form of either, or a combination of
both, of the following as selected by HCG in its sole discretion: (1) HCG's
provision to NRTC of a certificate by its Chief Financial Officer, under oath or
affirmation, that HCG has obtained and shall maintain insurance sufficient to
provide, and shall use such proceeds to provide, NRTC with such a Complete
Refund; and/or (2) HCG's provision to NRTC of an unconditional parent guarantee
by Hughes Aircraft Company of HCG's obligations to provide NRTC with a Complete
Refund, in a form as reasonably agreed to by the parties.
7.07 Sale and Use of Transponders.
----------------------------
(a) If after the date hereof, and prior to the date on which this
Agreement is canceled, terminated or expires, HCG enters into an agreement to
sell or lease or otherwise conveys the right to use to any person or entity
other than NRTC (a "Restricted Entity") transponder capacity on any 101
degrees Satellite (the "Restricted Capacity"), then HCG shall provide in any
such sale, lease or use agreement (i) a provision in which such purchaser,
lessee or user shall represent that such purchaser, lessee or user shall not use
Restricted Capacity to provide any Restricted Service or Similar Restricted
Service to any of the Committed Member Residences, unless such Restricted
Service or Similar Restricted Service shall be distributed to such Committed
38
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Member Residences through NRTC (a "Use Restriction"); and (ii) either (x) a
provision giving NRTC rights to enforce such Use Restriction as a third party
beneficiary, or (y) a provision allowing HCG to deny access to any transponder
capacity that is used in violation of the Use Restriction. HCG shall itself
comply with the Use Restriction. HCG will implement adequate procedures to audit
and monitor compliance with the Use Restriction and will promptly notify NRTC of
any non-compliance it discovers. If NRTC is aware of any use of Restricted
Capacity by a Restricted Entity to provide Restricted Services or Similar
Restricted Services in violation of the Use Restriction, then NRTC will promptly
notify HCG in writing and provide evidence to HCG of such use, and if HCG has
not provided NRTC third party beneficiary rights to enforce the relevant Use
Restriction, then HCG will take such actions as are reasonably necessary to
prevent a continued violation of such Use Restriction; otherwise, it shall be
NRTC's responsibility as a third party beneficiary to enforce such Use
Restriction.
(b) The "Services Revision Date" means the earlier to occur of: (i)
the date on which HCG has obtained the rights to distribute all 20 program
services that constitute the Cable Programming; or (ii) where HCG has been
relieved by NRTC of responsibility for obtaining Programming Services pursuant
to Section 4.06(b), Section 19, or otherwise, the earlier to occur of (x) the
date on which NRTC has obtained the rights to distribute 20 program services, or
(y) the Service Commencement Date. From the Execution Date through the Services
Revision Date, "Restricted Services" means any of the program services listed on
Exhibit 7.07. After the Services Revision Date, "Restricted Services" means
only the program services listed on Exhibit 7.07 for which HCG or NRTC (as
appropriate) has obtained the distribution rights as of such date. "Similar
Restricted Services" means any program services that have the same program
content, but whose program content is presented in a different order or at
different times, as any of the Restricted Services. If NRTC is assigned or takes
control of all or some of the Programming Agreements under Section 4.06(b),
Section 19, or otherwise, then NRTC shall notify HCG of any deletions to the
list of Restricted Services that would result from the cessation of the
transmission of such Restricted Services on the Transponder Capacity within 10
days following the event giving rise to such change.
(c) If any provision of this Section 7.07 is determined by any court
of competent jurisdiction to be unenforceable for any reason whatsoever, this
Section 7.07 shall be interpreted to extend only over the maximum period of time
for which it may be enforceable, and/or over the maximum number of Restricted
Services as to which it may be enforceable, and/or over the maximum number of
Restricted Entities as to which it may be enforceable, and/or over the maximum
number of Committed Member Residences as to which it may be enforceable, and/or
over the maximum amount of transponder capacity as to which it may be
enforceable, and/or to the maximum extent in any and all other respects as to
which it may be enforceable, all as determined by such court. If HCG believes
that its compliance with any provision of this Section 7.07 could violate any
Law applicable to HCG or NRTC or the rights of any third party (the "Rights"),
then HCG shall so notify NRTC. HCG shall have the immediate right to cease
complying with this Section 7.07 to the extent, but only to the extent,
necessary and for
39
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the time necessary, as reasonably determined by HCG, to prevent such violation
of Law or Rights from continuing. If a bona fide dispute exists between NRTC and
HCG as to whether HCG's compliance could violate any such Law or Rights, HCG
shall continue to comply with this Section 7.07 unless HCG has received either
(i) notice of and delivers a copy (if the action is in written form) to NRTC of,
an indictment, summons, cease and desist order, or other similar order or filing
from any entity with jurisdiction or claiming to have jurisdiction to enforce
the Law (collectively, an "Indictment"), or a complaint or other notification of
the initiation of a legal proceeding brought by a third party (collectively, a
"Complaint") or a threat of any such Indictment or Complaint (with HCG being
obligated to confirm in writing that such threat occurred and specifying the
general details thereof), alleging or stating that HCG is violating or
threatening to violate the Law or the Rights through its compliance with this
Section 7.07, or (ii) an opinion letter to HCG from outside counsel that may be
retained by HCG stating that, in its opinion, HCG's compliance with this Section
7.07 appears to be or could be found to be in violation of any Law or Rights
that are currently being, are threatened to be, or there exists a material
likelihood will be, enforced against or with respect to HCG or NRTC or applied
to HCG or NRTC, or with respect to which relief is currently being, is
threatened to be, or there exists a material likelihood will be, sought in a
legal proceeding. Furthermore, if HCG ceases to comply with this Section 7.07,
and if a bona fide dispute exists as to whether HCG's continued compliance would
violate the Law or the Rights, then NRTC shall have the immediate right to seek
a temporary restraining order (as its sole and exclusive remedy prior to any
final judicial order), on notice of four (4) hours or more to HCG, to prevent
the continued non-compliance by HCG based on the non-existence of any such
violation of the Law or the Rights. HCG shall be entitled to oppose NRTC's
attempts to obtain any such injunctive relief, including any temporary
restraining order, but hereby agrees to the following:
(i) HCG will not contest the jurisdiction of, or the venue of, any action
brought by NRTC in a federal district court sitting in Washington,
D.C., the Central District Court of California, or the Eastern
District Court of Virginia; and
(ii) for a period of five (5) consecutive days after noncompliance by HCG
with this Section 7.07, HCG will make itself available to accept
service by telecopy or personal delivery pursuant to Section 18.03 on
a 24 hour-a-day basis; and
(iii) If NRTC is seeking a temporary restraining order, HCG will not
challenge the sufficiency of notice from NRTC of an impending hearing
if such notice is served at least four (4) hours before the scheduled
court hearing.
If, within five (5) days after HCG notifies NRTC that it intends to cease
complying with this Section 7.07, NRTC notifies HCG that it does not believe
that HCG's compliance with this Section 7.07 ("Section Compliance") violates any
Law applicable to HCG or NRTC or any Rights, then HCG must provide, in any
agreement that it enters into with a Restricted Entity for Restricted Capacity
to provide Restricted Services or Similar
40
<PAGE>
Restricted Services to Committed Member Residences (a "Restricted Agreement")
that the Restricted Agreement shall be terminated by HCG and the Restricted
Entity shall not have continuing rights thereunder (the "Termination Clause")
upon the occurrence of any of the following "Terminating Events":
(i) the obtaining of a restraining order or injunction by NRTC preventing
HCG from entering into any Restricted Agreement; with the Termination
Clause continuing in effect unless and until the restraining order or
injunction ceases to be effective; or
(ii) a decision by a court of competent jurisdiction that Section
Compliance does not violate any Law applicable to HCG or NRTC or any
Rights, with the Termination Clause continuing in effect unless and
until such court reverses its decision or a higher court reverses
such decision.
If, after a Terminating Event has occurred, HCG either continues to enter into
Restricted Agreements or fails to terminate an existing Restricted Agreement
pursuant to the provisions of the Termination Clause, then in addition of all
other equitable and other remedies it may have, NRTC shall be entitled to its
actual damages (but not including incidental or consequential damages, whether
foreseeable or not) caused by such actions or inactions of HC.
7.08 Cessation of Program Services.
-----------------------------
(a) If HCG determines that its provision of any HCG Controlled
Programming violates any Law then, following written notice to NRTC, HCG may
cease providing any program service that constitutes HCG Controlled Programming
to the extent, but only to the extent, necessary and for the time necessary, as
reasonably determined by HCG, to prevent such violation of Law from continuing.
However, if a bona fide dispute exists between NRTC and HCG as to whether a
violation of any Law has occurred, HCG shall not cease providing any program
service pursuant to this Section 7.08 unless HCG has received either (i) notice
of and delivers a copy (if the action is in written form) to NRTC of an
Indictment, or a threat of any such Indictment (with HCG being obligated to
confirm in writing that such threat occurred and specifying the general details
thereof), from any entity with jurisdiction or claiming to have jurisdiction to
enforce such Law, alleging or stating that the provision of such program service
is or would be a violation of such Law, or (ii) an opinion letter to HCG from
outside counsel that may be retained by HCG stating that, in its opinion, the
provision of such program service appears to be or could be found to be in
violation of any Law that is currently being, is threatened to be, or there
exists a material likelihood will be, enforced. Furthermore, if HCG ceases to
provide any program service to NRTC pursuant to this Section 7.08, and if a bona
fide dispute exists as to whether a violation of such Law has occurred, then
NRTC shall have the immediate right to seek a temporary restraining order (as
its sole and exclusive remedy prior to any final judicial order), on notice of
four (4) hours or more to HCG, to prevent the cessation of such program service
based on the nonexistence of any such violation of such Law. HCG shall be
entitled to oppose
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NRTC's attempts to obtain any such injunctive relief, including any temporary
restraining order, but hereby agrees to the following:
(i) HCG will not contest the jurisdiction of, or the venue of, any action
brought by NRTC in a federal district court sitting in Washington,
D.C., the Central District Court of California, or the Eastern
District Court of Virginia;
(ii) for a period of five (5) consecutive days after such cessation of
program service by HCG, HCG will make itself available to accept
service by telecopy or personal delivery pursuant to Section 18.03 on
a 24 hour-a-day basis; and
(iii) If NRTC is seeking a temporary restraining order, HCG will not
challenge the sufficiency of notice from NRTC of an impending hearing
if such notice is served at least four (4) hours before the scheduled
court hearing.
If it is determined by final judicial order that HCG wrongfully ceased providing
any program service under this Section 7.08, then NRTC's sole and exclusive
remedy shall be HCG's payment to NRTC of liquidated damages equal to the
Transponder Capacity Fee, the Ground Capital Fee, the TT&C Fee, the Ground
Services Fee, and the Programming Fee for such program service as to which
service ceased to be provided under this Section 7.08 that was actually paid by
NRTC to HCG and applicable to the period beginning on the cessation of such
program service and ending on the earliest to occur of (w) HCG's provision of an
alternate program service under Section 7.08(b), (x) the retransmission by HCG
of the ceased program service, (y) NRTC's provision of an alternate program
service under Section 7.08(b), or (z) the date of NRTC's termination of such
Program Channel under Section 7.08(b) (with the amount of the Transponder
Capacity Fee and the Ground Capital Fee being prorated over ten (10) years and
with all fees being prorated over twenty (20) Program Channels).
(b) If HCG ceases to provide any program service under this Section
7.08 because the provision of any HCG Controlled Programming violates any Law,
and HCG is able to cure such violation by obtaining any necessary copyright
licenses or consents, or paying any required copyright royalties or other fees,
then HCG shall use its reasonable best efforts to do as soon as reasonably
possible; otherwise, or after HCG has so attempted but has been unable to cure
such violation of Law within thirty (30) days after cessation of the program
service; then HCG, in its sole discretion may provide an alternate program
service from Exhibit 7.07, so long as the combination of program services
required by Section 2.07 (a) is met. If such cessation of program service
continues for a period in excess of sixty (60) days without HCG so providing an
alternate program service, then NRTC will have the option to either (i) directly
obtain such alternate program service and this Agreement shall continue
unmodified, except only that HCG's obligation to provide the terminated program
service shall terminate; or (ii) timely terminate this Agreement with respect to
the Program Channel whose program service HCG has ceased providing, by providing
written notice to HCG within five (5) days
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following such sixty (60) day period and, upon such timely termination, NRTC
will be entitled to a Partial Refund under Section 11.01(j).
7.09 Patents, Trademarks and Copyrights. HCG represents and warrants that
----------------------------------
(i) it has obtained or will obtain all necessary patents, trademarks and
copyrights required to provide the Transponder Capacity, TT&C Services, Security
Services and Ground Services (the "Intellectual Property") and/or (ii) it has
obtained or will obtain the right to use through purchase, consent, license,
making royalty payments, or otherwise the Intellectual Property. The parties
acknowledge and agree that the sole consequence of (and HCG's sole liability
regarding) HCG's breach of such representation and warranty, shall be HCG's
obligation to provide a Complete Refund or Partial Refund pursuant to and as
applicable under Section 11.01(i). The parties also acknowledge and agree that
HCG may comply with such representation and warranty by, among other things,
utilizing an alternate provider of Security Services. HCG's representation
hereunder expressly does not apply to Subscriber Terminal Equipment, it being
understood that NRTC may seek similar representation and warranty protection
directly from TCE as part of a purchase of Subscriber Terminal Equipment.
7.10 Insurance. If HCG has or obtains one or more insurance policies to
---------
cover third party personal injury and damage claims resulting from a launch
failure or other in-orbit failure of the Satellite, then HCG shall provide
insurance protection to NRTC as either a co-insured or loss payee on such
policy(ies) as determined by HCG in its sole discretion. On or before sixty
(60) days prior to the scheduled launch of the Satellite, HCG shall provide NRTC
with written notice of the amount of such coverage, if any, and other material
terms and conditions of such insurance. HCG is not obligated to obtain or
maintain any such insurance and NRTC may directly obtain such insurance coverage
itself.
8. Additional Representations, Warranties and Obligations of NRTC
--------------------------------------------------------------
8.01 Uplinking. NRTC will not transmit (or directly or indirectly cause
---------
to be transmitted) radio or other signals to the Satellite or the Transponder
Capacity other than through HCG pursuant to this Agreement.
8.02 Laws. NRTC shall comply with all FCC and all other governmental
----
(whether international, federal, state, municipal, or otherwise) statutes, laws,
rules, regulations, ordinances, codes, directives and orders, of any such
governmental agency, body, or court (including, without limitation, the FCC
Rules) (collectively, the "Laws") applicable to it regarding the operation or
use of the Transponder Capacity. Without limiting the generality of the
foregoing:
(i) If any use of the Transponder Capacity constitutes
Broadcasting, then NRTC shall comply with all FCC Rules applicable to it
with respect to broadcasting from a DBS satellite, including, without
limitation, all such FCC Rules related to indecency, obscenity, equal
employment opportunities, political broadcasting, children's television and
public affairs programming.
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(ii) NRTC shall comply with all FCC Rules applicable to it with
respect to the use of the Transponder Capacity for "non-conforming" uses of
DBS frequencies.
(iii) NRTC shall comply with all copyright and other intellectual
property Laws applicable to it with respect to all NRTC Controlled
Services, shall obtain all necessary copyright licenses and/or consents
with respect thereto, and shall pay all required copyright royalties and
other fees with respect to such NRTC Controlled Services.
8.03 Indemnification. NRTC shall indemnify and hold HCG and its
---------------
Affiliates, and their respective directors, officers and employees (the
"Indemnities"), harmless from and against any and all damages, costs,
liabilities and expenses incurred by the Indemnities (including, without
limitation, (i) costs of investigation and defense, including without limitation
court costs and reasonable attorney and other third party fees and (ii) to the
extent permitted by Law, any fines, penalties, and forfeitures in connection
with any proceedings against an Indemnitee) ("Indemnitee Costs") (x) caused by
the content of any NRTC Controlled Services and/or any HCG Controlled
Programming and/or (y) resulting or arising from HCG's ceasing (or not
commencing) the provision of DBS Distribution services to any Committed Member
(or its NRTC Subscribers) pursuant to Section 3.10(b) or damages resulting from
claims asserted by a Committed Member against HCG in connection with or arising
under the Member Contract, other than an Intentional Breach by HCG of this
Agreement.
8.04 Use of Transponder Capacity. If any NRTC Controlled Services are
---------------------------
transmitted on the Transponder Capacity, then:
(a) NRTC shall use, and shall permit other persons and entities to
use, the Transponder Capacity only for Data Services and program services listed
in Exhibit 7.07 (collectively, the "Permitted Services"). The restrictions on
Transponder Capacity use in this Section 8.04 (a) shall bind NRTC and any
successor-in-interest, and any assignee of NRTC's rights hereunder consented to
by HCG pursuant to Section 14.01.
(b) If required by any Rights Holder, HCG shall have the option,
but not the obligation, upon ten (10) business days' notice to NRTC, to Blackout
any Sports Programming that otherwise would be transmitted by a Superstation
carried on the Transponder Capacity if HCG or any other User will carry such
Sports Programming on any of the HCG Frequencies on a premium basis (e.g., pay
----
TV)simultaneously with such Superstation's planned transmission.
Notwithstanding the foregoing sentence, if the provisions of any agreement HCG
has with a Rights Holder would allow NRTC to compensate the Rights Holder, HCG,
and/or any other appropriate person or entity as determined by HCG, and thereby
avoid the need to Blackout certain Sports Programming; then HCG shall advise
NRTC of such provisions, and, to the extent permitted under such agreement(s)
and after NRTC's timely satisfaction of any
44
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requirements any Rights Holder or other person or entity may establish to waive
such Blackout requirement with respect to certain Sports Programming, HCG will
not Blackout such Sports Programming on the Transponder Capacity. In addition,
and to the extent permitted by Law, NRTC shall have the right to insert or
substitute other programming during such Blackouts. NRTC shall be responsible
for any additional costs incurred by HCG in receiving and/or transmitting such
substitute programming. NRTC shall provide to HCG on a weekly basis, and no less
than twenty (20) days in advance of any transmission of any Sports Programming
on a Superstation that is carried on the Transponder Capacity, a full
description of the content of such transmission and the planned time and date of
such transmission.
(c) If any provision of Section 8.04 (a) is determined by any court
of competent jurisdiction to be unenforceable for any reason, Section 8.04 (a)
shall be interpreted to extend only over the maximum period of time for which it
may be enforceable, and/or over the maximum number of Permitted Services as to
which it may be enforceable, and/or over the maximum amount of Transponder
Capacity as to which it may be enforceable, and/or to the maximum extent in any
and all other respects as to which it may be enforceable, all as determined by
such court. If NRTC believes that its compliance with any provision of Section
8.04 (a) could violate any Law applicable to NRTC or HCG or any Rights, then
NRTC shall so notify HCG. NRTC shall have the immediate right to cease complying
with Section 8.04(a) to the extent, but only to the extent, necessary and for
the time necessary, as reasonably determined by NRTC, to prevent such violation
of Law or Rights from continuing. If a bona fide dispute exists between NRTC and
HCG as to whether NRTC's compliance could violate any such Law or Rights, NRTC
shall continue to comply with Section 8.04(a) unless NRTC has received either
(i) notice of and delivers a copy (if the action is in written form) to HCG of
an Indictment or a Complaint or a threat of any such Indictment or a Complaint
(with NRTC being obligated to confirm in writing that such threat occurred and
specifying the general details thereof), alleging or stating that NRTC is
violating or threatening to violate the Law or the Rights through its compliance
with Section 8.04(a), or (ii) an opinion letter to NRTC from outside counsel
that may be retained by NRTC stating that, in its opinion, NRTC's compliance
with Section 8.04 (a) appears to be or could be found to be in violation of any
Law or Rights that are currently being, are threatened to be, or there exists a
material likelihood will be, enforced against or with respect to NRTC or HCG or
applied to NRTC or HCG, or with respect to which relief is currently being, is
threatened to be, or there exists a material likelihood will be, sought in a
legal proceeding. Furthermore, if NRTC ceases to comply with Section 8.04(a),
and if a bona fide dispute exists as to whether NRTC's continued compliance
would violate the Law or the Rights, then HCG shall have the immediate right to
seek a temporary restraining order (as its sole and exclusive remedy prior to
any final judicial order), on notice of four (4) hours or more to NRTC, to
prevent the continued non-compliance by NRTC based on the non-existence of any
such violation of the Law or the Rights. NRTC shall be entitled to oppose HCG's
attempts to obtain any such injunctive relief, including any temporary
restraining order, but hereby agrees to the following:
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(i) NRTC will not contest the jurisdiction of, or the venue of, any
action brought by HCG in a federal district court sitting in Washington,
D.C., the Central District Court of California or the Eastern District
Court of Virginia; and
(ii) for a period of five (5) consecutive days after non-compliance
by NRTC with this Section 8.04, NRTC will make itself available to accept
service by telecopy or personal delivery pursuant to Section 18.03 on a 24
hour-a-day basis; and
(iii) if HCG is seeking a temporary restraining order, NRTC will not
challenge the sufficiency of notice from HCG of an impending hearing if
such notice is served at least four (4) hours before the scheduled court
hearing.
If, within five (5) days after NRTC notifies HCG that it intends to cease
complying with Section 8.04(a), HCG notifies NRTC that it does not believe that
NRTC's compliance with Section 8.04 (a) ("Section 8.04(a) Compliance") violates
any Law applicable to NRTC or HCG or any Rights, then NRTC must provide, in any
agreement with respect to the use of Transponder Capacity or the programming or
services carried thereon (if NRTC has entered into such an agreement) (a
"Transponder Agreement"), a provision allowing such agreement to be terminated
by NRTC, and providing that the other party will not have any continuing rights
thereunder (a "Transponder Agreement Termination Clause") upon the occurrence of
either of the following "Termination Events":
(i) the obtaining of a restraining order or injunction by HCG
preventing NRTC from entering into any Transponder Agreement or otherwise
violating Section 8.04(a); with the Transponder Agreement Termination
Clause continuing in effect unless and until the restraining order or
injunction ceases to be effective; or
(ii) a decision by a court of competent jurisdiction that Section
8.04(a) Compliance does not violate any Law applicable to NRTC or HCG or
any Right, with the Transponder Agreement Termination Clause continuing in
effect unless and until such court reverses its decision or a higher court
reverses such decision.
If, after a Termination Event has occurred, (i) NRTC either continues to enter
into Transponder Agreements or fails to terminate an existing Transponder
Agreement pursuant to the provisions of the Transponder Agreement Termination
Clause, or (ii) if NRTC has not entered into a Transponder Agreement, but is
otherwise violating Section 8.04(a), then, in addition of all other equitable
and other remedies it may have, HCG shall be entitled to its actual damages (but
not including incidental or consequential damages, whether foreseeable or not)
caused by such actions or inactions of NRTC.
8.05 Non-Conforming Uses. NRTC acknowledges that its use of the
-------------------
Transponder Capacity for Data Services is subject to FCC Rules limiting the use
of DBS frequencies for "non-conforming" uses and agrees to abide by such use
limits with
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respect to "nonconforming uses" as HCG may establish from time to
time to fairly apportion such limits among NRTC and Users of the HCG
Frequencies.
9. Preemptive Rights to Protect Overall Satellite Performance
----------------------------------------------------------
NRTC recognizes that it may be necessary in unusual or abnormal
situations or conditions for HCG deliberately to preempt or interrupt NRTC's use
of all or a portion of the Transponder Capacity, in order to protect the overall
performance of the Satellite. HCG shall use reasonable best efforts to consult
and coordinate with NRTC in advance of any unilateral preemption or interruption
action affecting the Transponder Capacity and to use reasonable best efforts to
attempt to resolve any such problems, including routine maintenance problems,
through the joint efforts of HCG and NRTC's engineering personnel; it being
understood and agreed, however, that in emergency or other necessary situations,
as determined by HCG, it may not be possible or advisable, and HCG is not
hereunder obligated, to so consult or coordinate with NRTC. HCG shall, however,
promptly provide NRTC with a report (written or oral, as appropriate, or as
reasonably requested by NRTC) subsequent to any such unilateral preemption or
interruption. Such preemption or interruption decisions shall be made by HCG in
its sole discretion. To the extent technically feasible, HCG shall give NRTC at
least forty-eight (48) hours' notice of such preemption or interruption and HCG
shall use its reasonable best efforts to schedule and conduct its activities
during periods of such preemption or interruption so as to minimize the
disruption to the use of the Transponder Capacity. To the extent that such
preemption results in a loss to NRTC of the use of the Transponder Capacity,
then the provisions of Section 10 regarding Transmission Outages shall apply.
Consistent with the above, HCG shall not discriminate against NRTC under this
Section 9 to benefit HCG or any User.
10. Service Outages
---------------
10.01 Outage/Outage Period.
--------------------
(a) A "Transmission Outage" means the failure after the Service
Commencement Date of a Program Channel to meet the Transmission Minimum
Requirements (as set forth in Exhibit 7.01) due to a failure of a component of
the Transponder Capacity, TT&C Services, or Transmission Services. Upon the
occurrence of a Transmission Outage (and notice by NRTC to HCG if HCG is not
aware of such Transmission Outage), HCG shall use its reasonable best efforts to
restore the Program Channel such that it meets its Transmission Minimum
Requirements. Notwithstanding anything to the contrary in this Agreement (and
except only as provided pursuant to Section 19), HCG shall have the option, but
not the obligation, to provide replacement Transponder capacity or utilize spare
equipment to restore a Transmission Outage.
(b) An "Access Control Outage" means the failure after the Service
Commencement Date of a component of the Access Control Services to meet the
Access Control Minimum Requirements (as set forth in Exhibit 7.01). Upon the
occurrence of an Access Control Outage (and notice by NRTC to HCG if HCG is not
aware of such
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Access Control Outage), HCG shall use its reasonable best efforts to restore the
Access Control Services such that they meet the Access Control Minimum
Requirements.
(c) The "Outage Period" associated with a Transmission Outage or
Access Control Outage means the period of time commencing on the earlier of such
time as an operational manager of HCG becomes aware of, or NRTC notifies HCG of,
such Outage and ending at such time as the services are restored such that they
meet the relevant Minimum Requirements.
(d) A Transmission Outage or Access Control Outage shall not be
deemed to have occurred if a failure of a component of the Transponder Capacity,
TT&C Services, Transmission Services or Access Control Services (a "Component")
to meet the applicable Minimum Requirements is (i) caused by any action or
inaction of NRTC or any of NRTC's Members, Affiliates or agents, (ii) related to
any failure or misoperation of Subscriber Terminal Equipment or any component
thereof, (iii) related to any weather event or any other circumstance
(including, without limitation, sun outage effects) occurring in the
transmission path between the Satellite and reception equipment, (iv) related to
any interference generated from any sources other than the HCG Frequencies or
the Users of such frequencies, or (v) related to the quality or availability of
the C-Band downlink or other source signal for the Program Channels.
10.02 Outage Credit.
-------------
(a) If a Transmission Outage occurs and the corresponding Outage
Period exceeds thirty (30) consecutive minutes, then NRTC shall be entitled to
receive a credit for each Program Channel experiencing a Transmission Outage in
an amount equal to the product of (x) the sum of the then-current monthly Ground
Services Fee and TT&C Fee for one Program Channel (in dollars) multiplied by (y)
-------------
the Outage Period (in minutes) and divided by (z) 43,200 (i.e., the number of
---------- ----
minutes in a thirty-day month). In the case where the Ground Services Fees and
TT&C Fees are paid on a per Authorized Subscriber basis, the fees associated
with a single Program Channel shall be calculated by HCG by dividing the fee
amounts by the number of Program Channels provided immediately prior to the
outage. Such outage credit shall be applied against the Ground Services Fee and
the TT&C Fee due for the month(s) immediately following the month in which the
Transmission Outage occurs.
(b) If an Access Control Outage occurs and the corresponding Outage
Period exceeds forty-eight (48) consecutive hours, then NRTC shall be entitled
to receive a credit in an amount equal to the product of (x) the aggregate of
the then-current monthly Ground Services Fee for three Program Channels (in
dollars) multiplied by (y) the Outage Period (in minutes) and divided by (z)
------------- ----------
43,200 (i.e., the number of minutes in a thirty-day month). In the case where
----
the Ground Services Fees are paid on a per Authorized Subscriber basis, the fees
associated with a single Program Channel shall be calculated by HCG by dividing
the then-current fee amounts by the number of Program Channels provided
immediately prior to the outage. Such outage credit shall be applied
48
<PAGE>
against Ground Services Fee due for the month(s) immediately following the month
in which the Access Control Outage occurs.
(c) In no event shall any outage credits under Section 10.02(a)
and/or (b) exceed the amount of the Ground Services Fee (and/or TT&C Fee, as
appropriate) actually paid for the corresponding Outage Period.
10.03 Outage Termination Rights.
-------------------------
(a) If the Outage Period associated with a Transmission Outage
exceeds ten (10) consecutive days or, in the case of a Transmission Outage
caused by a failure of the Transponder Capacity, if twenty (20) or more Outage
Units are experienced in any consecutive thirty (30) day period, then NRTC shall
have the right to terminate this Agreement with respect to any Program Channels
experiencing such Transmission Outage by providing written notice to HCG within
fifteen (15) business days following the end of such ten or thirty consecutive
day period or such right will expire. An "Outage Unit" means a failure to meet
the Transmission Minimum Requirements due to a Transponder Capacity failure for
fifteen (15) or more minutes in any one day. Notwithstanding anything to the
contrary contained in this Agreement, NRTC shall not have the right to terminate
this Agreement with respect to any Program Channel due to any Transmission
Outage caused by a failure of the Transmission Services or TT&C Services if such
failure results from a Force Majeure Event.
(b) If the Outage Period associated with an Access Control Outage
exceeds sixty (60) consecutive days, then NRTC shall have the right to
terminate this Agreement with respect to any Program Channels directly and
adversely affected by such Access Control Outage by providing written notice to
HCG within fifteen (15) business days following the end of such sixty (60)
consecutive day period, or such right will expire. Notwithstanding anything to
the contrary contained in this Agreement, NRTC shall not have the right to
terminate this Agreement with respect to any Program Channel due to any Access
Control Outage caused by a Force Majeure Event.
(c) NRTC's failure to timely exercise its termination right(s) as to
any Program Channel under this Section 10.03 shall not preclude NRTC's exercise
of any subsequent termination right(s) that may arise due to (i) a further,
additional degradation of the Component that failed to meet the applicable
Minimum Requirements for an additional Outage Period; (ii) the failure of such
Component (after it is restored or repaired) to meet the applicable Minimum
Requirements for an additional Outage Period; or (iii) the failure of any other
Component to meet the applicable Minimum Requirements for an Outage Period.
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<PAGE>
11. Termination Rights
------------------
11.01 Termination by NRTC.
-------------------
(a) If, on December 1, 1992, (i) both of the December Conditions have
not occurred, (ii) HCG has obtained the Core Cable Rights but has not provided
NRTC with the HCG Certification, or (iii) HCG has provided the HCG Certification
but has not obtained the Core Cable Rights, then NRTC may terminate this
Agreement in whole under Section 1.04(b).
(b) If on or after the Scheduled Service Commencement Date the
Transponder Capacity is Available and any other component of the DBS
Distribution Services, (i.e., the Ground Services, the TT&C Services, the
----
Security Services, Subscriber Terminal Equipment Availability, and/or the
Programming Services) has not completed Acceptance, then HCG shall so notify
NRTC. NRTC may then terminate this Agreement in whole by providing written
notice to HCG within thirty (30) days following receipt of HCG's notice or such
right will expire. Upon such a timely termination by NRTC, HCG shall provide
NRTC with a Complete Refund. Notwithstanding the foregoing, if a Partial
Delivery of the Program Channels occurs, then NRTC's right to terminate shall be
governed by Section 11.01(c). Nothing in this Section 11.01(b) shall provide
NRTC with a termination right if HCG is unable to make the representation
regarding Subscriber Terminal Equipment production capability as set forth in
Section 4.04.
(c) If Partial Delivery of the Program Channels occurs, then NRTC
shall have the right to partially terminate this Agreement as to certain Program
Channels pursuant to and as provided in Section 4.01(b). Such Section 4.01(b)
also provides that, if NRTC timely notifies HCG that it does not accept Partial
Delivery, then the Service Commencement Date shall not be deemed to occur unless
and until HCG is able to provide all twenty (20) Program Channels; and, if HCG
is not able to do so before the Rescission Date, then NRTC and HCG shall have
the termination rights set forth in Sections 11.01 and 11.02, respectively.
Upon such partial termination, NRTC shall be entitled to a Partial Refund (as
defined in Section 11.01(h)) for each such terminated Program Channel and the
refund period used in calculating such Partial Refund shall be 3,650 days.
(d) If an Outage Period associated with a Transmission Outage exceeds
ten (10) consecutive days or twenty (20) Outage Units occur in any consecutive
thirty (30) day period, or if the Outage Period associated with an Access
Control Outage exceeds sixty (60) consecutive days, then NRTC shall have the
right to partially terminate this Agreement pursuant to and as provided in
Section 10.03. If such termination occurs on or before the tenth anniversary of
the Service Commencement Date, NRTC shall be entitled to a Partial Refund for
each terminated Program Channel and the refund period used in calculating such
Partial Refund shall equal the number of days from the first day of the Outage
Period or the first Outage Unit (that has given rise to the termination right)
until the tenth anniversary of the Service Commencement Date. In no event shall
more
50
<PAGE>
than a Partial Refund, in the aggregate, be due for a Program Channel that
is terminated for more than one reason under Section 10.03. Upon such partial
termination, NRTC's obligations to pay the TT&C Fee, Ground Services Fee and
Programming Fee for each terminated Program Channel shall terminate; provided,
however, that such termination shall not relieve NRTC of its obligations to pay
to HCG the amounts of any such fees due and payable to HCG for any services
provided prior to commencement of the Outage Period or first Outage Unit that
has given rise to the termination right.
(e) If the Service Commencement Date does not occur on or before
December 31, 1997 (the "Rescission Date"), then NRTC may terminate this
Agreement in whole by providing written notice to HCG within thirty (30) days
following the Rescission Date or such right will expire. Upon such timely
termination by NRTC, HCG shall provide NRTC with a Complete Refund.
Notwithstanding the foregoing, NRTC shall not have the right to exercise this
termination option if the failure of the Service Commencement Date to occur by
December 31, 1997 is attributable to any failure of performance under this
Agreement by NRTC.
(f) If after the Scheduled Service Commencement Date, the Service
Commencement Date has not occurred and HCG has determined, based on demonstrable
facts, that events have occurred that make it impossible for HCG to cause the
Service Commencement Date to occur by the Rescission Date (the "Determination")
then HCG shall notify NRTC. If HCG makes the Determination or HCG has made the
Required Delivery Attempt (as defined below), then HCG may, at its option,
provide notice to NRTC of NRTC's rescission option under this Section 11.01(f)
(the "Rescission Option"). "Required Delivery Attempt" shall mean the Launch
Attempt of the Satellite. "Launch Attempt" means the actual lift off of the
launch vehicle. NRTC shall notify HCG of its termination of its obligations
within ninety (90) days following HCG's notice, or such Rescission Option shall
expire. If NRTC timely notifies HCG of its termination under this Section
11.01(f), then HCG shall provide NRTC with a Complete Refund.
(g) "Complete Refund" means HCG's refund to NRTC of all Committed
Member Payments actually paid to HCG, and not previously refunded to NRTC, with
no right to set-off except only to deduct any payments owing to HCG under other
provisions of this Agreement specifically creating such payment obligations and
as provided in Section 3.10(d). Any Complete Refund owed by HCG to NRTC shall
be paid within fifteen (15) business days following the date on which the right
to a Complete Refund arises. Upon HCG's provision of a Complete Refund, any and
all Committed Member obligations to make Second Payments automatically shall be
extinguished.
(h) "Partial Refund" means HCG's refund to NRTC of an amount equal to
the product of (x) a fraction whose numerator is the refund period (as provided
in Section 11.01(c), (d), (i), or (j), as applicable) and whose denominator is
3,650 days, multiplied by (y) a fraction whose numerator is the aggregate of the
-------------
Committed Member Payments actually paid to HCG and whose denominator is 20,
multiplied by (z) the number of Program Channels for which a Partial Refund is
- -------------
due. HCG shall have no right to set-off such Partial Refund except only to
deduct any payments owing to HCG under
51
<PAGE>
other provisions of this Agreement specifically creating such payment
obligations and as provided in Section 3.10(d). Any Partial Refund owed by HCG
to NRTC shall be paid within fifteen (15) business days following the date on
which the right to a Partial Refund arises.
(i) Upon the occurrence of any HCG Event of Default (as defined
below), and only after written notice from NRTC to HCG followed by the
expiration of any relevant cure period, NRTC may, for so long as such HCG Event
of Default shall continue, declare this Agreement to be in default (provided,
however, that this Agreement shall be deemed to be in default immediately upon
the occurrence and during the continuation of any HCG Event of Default under
Section 11.01(i)(z)), and at any time thereafter, NRTC may, in its sole and
absolute discretion, cancel this Agreement and exercise any other right or
remedy that is provided for in this Agreement. A cancellation hereunder shall
occur only upon written notice from NRTC to HCG within thirty (30) days
following the HCG Event of Default stating that such cancellation is made. No
remedy referred to in this Section 11.01(i) is intended to be exclusive, but
each remedy shall be cumulative and in addition to any other remedy referred to
above. NRTC shall mitigate its damages in the event of an HCG Event of Default
as so required under the California Uniform Commercial Code. NRTC's failure in
any case to exercise its rights under this Section 11.01(i) shall not constitute
a waiver of any breach or HCG Event of Default or a continuing waiver of similar
or other breaches or HCG Events of Default. Each of the following events shall
constitute an "HCG Event of Default" (whether any such event shall arise as the
result of the voluntary or involuntary action or inaction of HCG or come about
or be effected by operation of, or pursuant to or in compliance with, any Law):
(x) HCG shall fail to perform or observe in any material respect any
material covenant, condition or agreement to be performed or observed by it
under this Agreement and such failure shall continue unremedied for a period of
thirty (30) days following written notice from NRTC (except, however, where this
Agreement specifically provides additional time and/or other options or remedies
for any such failure; or, with respect to an obligation that is susceptible of
cure within a reasonable time period (other than one for payment) so long as HCG
is using its best efforts to promptly cure); or
(y) Any representation or warranty made by HCG in this Agreement or in
any statement furnished by HCG in connection herewith shall have been incorrect
in any material respect at the time made but only if such incorrect
representation or warranty shall have a material adverse effect on NRTC or its
rights or obligations hereunder and shall continue unremedied for a period of
thirty (30) days after NRTC has given written notice to HCG of such incorrect
representation or warranty (except, however, where this Agreement specifically
provides additional time and/or other options or remedies for any such failure;
or, with respect to an obligation that is susceptible of cure within a
reasonable time period (other than one for payment) so long as HCG is using its
best efforts to promptly cure); or
52
<PAGE>
(z) HCG shall consent to the appointment of, or taking possession by,
a receiver, trustee, custodian or liquidator or a substantial part of its
assets, file a bankruptcy petition in any bankruptcy proceeding or answer,
consent or seek relief under any bankruptcy or similar Law or fail to obtain a
dismissal of an involuntary petition with sixty (60) days of filing.
If an HCG Event of Default occurs prior to the Service Commencement Date and
NRTC timely exercises its cancellation right under this Section 11.01(i), then
NRTC shall be entitled to a Complete Refund. If an HCG Event of Default occurs
on or after the Service Commencement Date and NRTC timely exercises its
cancellation right under this Section 11.01(i), then NRTC shall be entitled to a
Partial Refund and the refund period used in calculating such Partial Refund
shall equal the number of days from HCG's receipt of notice of such HCG Event of
Default until the tenth anniversary of the Service Commencement Date.
Notwithstanding anything to the contrary in this Agreement, (1) the only
consequence of the existence of any Security Breach or the failure of HCG to
provide Security Services after the Service Commencement Date shall be as
provided in Section 3.04(b) and no such existence or failure shall constitute an
HCG Event of Default, and (2) the only HCG Events of Default that may arise from
any matter whatsoever with respect to the Subscriber Terminal Equipment are a
breach of HCG's representation in Section 2.04, and the failure of HCG to
provide by the Rescission Date (or the breach of) the HCG representation
regarding the Subscriber Terminal Equipment as set forth in Section 4.04.
(j) If HCG ceases to provide any program service that is HCG
Controlled Programming under Section 7.08 and NRTC terminates this Agreement as
to the Program Channel on which such program service was transmitted pursuant to
and as provided in Section 7.08(b), then NRTC shall be entitled to a Partial
Refund, and the refund period used in calculating such Partial Refund shall
equal the number of days from the date of such termination until the tenth
anniversary of the Service Commencement Date. After such termination, NRTC shall
have no further obligations with respect to such Program Channels other than for
any fees due and payable to HCG for the period prior to such termination and HCG
shall have no further obligation to deliver or provide such Program Channels.
11.02 Termination by HCG.
------------------
(a) [Intentionally Omitted]
(b) If, on December 1, 1992, both of the December Conditions have not
occurred, or HCG has not provided NRTC with the HCG Certification, then HCG may
terminate this Agreement in whole under Section 1.04(b).
(c) If the Service Commencement Date does not occur on or before the
Rescission Date, then, on or after the Rescission Date, HCG may terminate this
Agreement in whole by providing written notice to NRTC and providing NRTC with a
Complete Refund.
53
<PAGE>
(d) If NRTC does not timely exercise its Rescission Option under
Section 11.01(f), then HCG shall have the right to terminate this Agreement by
providing NRTC with ten (10) days' written notice and a Complete Refund. Upon
payment to NRTC of a Complete Refund as provided under this Agreement, complete
performance of all of HCG's obligations under this Agreement shall be deemed to
have occurred, except for any unfulfilled obligations of HCG to make any Late
Commencement Fee payments to NRTC under Section 4.02.
(e) Upon the occurrence of any NRTC Event of Default (as defined
below) and only after written notice from HCG to NRTC followed by the expiration
of any relevant cure period, HCG may, for so long as such NRTC Event of Default
shall continue, declare this Agreement to be in default (provided, however, that
this Agreement shall be deemed to be in default immediately upon the occurrence
and during the continuation of any NRTC Event of Default under Section
11.02(e)(iv)). At any time thereafter, HCG may, in its sole and absolute
discretion, declare immediately due and payable all Committed Member Payments
(whether in the Escrow Account, committed as Second Payments, or otherwise) the
TT&C Fee and the Ground Services Fee for the expected life of the Satellite,
based on the actual number of NRTC Subscribers as of such Event of Default (but
in no event fewer than 100,000 NRTC Subscribers), cancel this Agreement as to
NRTC, obtain damages without canceling this Agreement, and exercise any other
right or remedy that is provided for in this Agreement or that may be available
under the California Uniform Commercial Code or other applicable Law. A
cancellation hereunder shall occur only upon written notice from HCG to NRTC
within thirty (30) days following the NRTC Event of Default stating that such
cancellation is made. In the event of such cancellation, HCG shall continue to
provide DBS Distribution Services to Committed Members, at HCG's sole option,
either (i) pursuant to the Member Contracts (which shall have a provision
allowing HCG to assume such contracts upon NRTC's breach of this Agreement and
HCG's cancellation as to NRTC) or (ii) on substantially the same terms or on
terms no less favorable than those provided under this Agreement. In either
case, the Committed Member obligations shall be directly to HCG and not to NRTC
and the Member Contracts shall contain provisions to this effect. No remedy
referred to in this Section 11.02(e) is intended to be exclusive, but each
remedy shall be cumulative and in addition to any other remedy referred to above
or otherwise available to HCG at law or in equity. HCG shall mitigate its
damages should it elect to seek from NRTC the Committed Member Payments, the
TT&C Fee, and the Ground Service Fee due hereunder (as specified above) in the
event of an NRTC Event of Default as so required under the California Uniform
Commercial Code. HCG's failure in any case to exercise its rights under this
Section 11.02(e) shall not constitute a waiver of any breach or NRTC Event of
Default or a continuing waiver of similar or other breaches or NRTC Events of
Default. Each of the following events shall constitute an "NRTC Event of
Default" (whether any such event shall arise as the result of the voluntary or
involuntary
54
<PAGE>
action or inaction of NRTC or come about or be effected by operation of, or
pursuant to or in compliance with, any Law):
(i) NRTC shall fail to make any payment due hereunder when due and
shall fail to identify to HCG the delinquent Member responsible to NRTC for
such unmade payment (if any) under Section 3.10, and each of such failures
(where appropriate) shall continue unremedied for a period of thirty (30)
days after HCG has given NRTC written notice thereof;
(ii) NRTC shall fail to perform or observe in any material respect
any material covenant, condition or agreement to be performed or observed
by it under this Agreement (other than as specified in clause (i) above)
and such failure shall continue unremedied for a period of thirty (30) days
following written notice from HCG; provided; however, nothing in this
Section 11.02(e) (ii) shall restrict HCG's right to deny NRTC access
pursuant to Section 11.04 hereof (except, however, where this Agreement
specifically provides additional time and/or other options or remedies for
any such failure; or, with respect to an obligation that is susceptible of
cure within a reasonable time period (other than one for payment) so long
as NRTC is using its best efforts to promptly cure); or
(iii) Any representation or warranty made by NRTC in this Agreement
or in any statement furnished by NRTC in connection herewith shall have
been incorrect in any material respect at the time made but only if such
incorrect representation or warranty shall have a material adverse effect
on HCG or its rights or obligations hereunder and shall continue unremedied
for a period of thirty (30) days after HCG has given written notice to NRTC
of such incorrect representation or warranty (except, however, where this
Agreement specifically provides additional time and/or other options or
remedies for any such failure; or, with respect to an obligation that is
susceptible of cure within a reasonable time period (other than one for
payment) so long as NRTC is using its best efforts to promptly cure); or
(iv) NRTC shall consent to the appointment of, or taking possession
by, a receiver, trustee, custodian or liquidator or a substantial part of
its assets, file a bankruptcy petition in any bankruptcy proceeding or
answer, consent or seek relief under any bankruptcy or similar Law or fail
to obtain a dismissal of an involuntary petition with sixty (60) days of
filing.
(f) If a Committed Member does not pay NRTC (or HCG, if applicable)
all delinquent payments as required under Section 3 and/or under the Member
Contract (a "Delinquent Member"), such failure is not cured as provided in
Section 3.10, and HCG suspends service to such Committed Member for sixty (60)
or more days as provided in Section 3.10, then HCG may immediately require NRTC
to (and NRTC shall) terminate such Delinquent Member's Member Contract, bring an
action for sums due and Expenses associated with such failure to make payment,
and HCG shall no longer be responsible or liable to provide any DBS Distribution
Services to such
55
<PAGE>
Delinquent Member and its NRTC Subscribers, and HCG shall not be required to
provide such Delinquent Member or NRTC with any refund of monies paid by such
Delinquent Member, except as specifically provided in Section 3.10 in the case
of a Partial or Complete Refund.
11.03 Automatic Termination.
---------------------
(a) If, on December 11, 1992 the December Conditions have occurred
but the aggregate Escrowed Committed Member Payments are less than $100 million,
then this Agreement shall automatically terminate ten (10) days later pursuant
to Section 1.04(a) unless HCG, in its sole discretion, grants to NRTC the July
Extension by such date.
(b) If HCG has provided the HCG Certification, but has not obtained
the Core Cable Rights, NRTC has not exercised its termination right under
Section 1.04(b)(ii), and NRTC does not deliver to HCG the Relief Notice by March
1, 1993, then this Agreement automatically shall terminate as of March 1, 1993
pursuant to Section 1.04(b)(ii).
11.04 HCG's Right to Deny Access. If NRTC violates the provisions of
--------------------------
Sections 8.01 or 8.02 (which includes, without limiting the generality of
Section 8.02, NRTC's obligation not to use any of the Transponder Capacity to
transmit any programming or other material that violates any Law) and, following
notice from HCG, continues to violate any such provision, then HCG shall have,
in addition to all other rights hereunder, the immediate right to prevent NRTC
from accessing the Transponder Capacity to the extent, but only to the extent,
necessary and for the time necessary, as reasonably determined by HCG, to
prevent such breach from continuing. HCG shall not enforce such provisions
against Users of the Satellite who execute definitive agreements with HCG on or
after the Execution Date less stringently than it enforces such provisions
against NRTC; nor shall HCG enforce these provisions against NRTC more
stringently than it enforces such provisions against such Users. In addition,
however, if a bona fide dispute exists between NRTC and HCG as to whether a
violation of any Law has occurred, HCG shall not deny access pursuant to this
Section 11.04 unless HCG has received either (i) notice of and delivers a copy
(if the action is in written form) to NRTC of an Indictment, or a threat of any
such Indictment (with HCG being obligated to confirm in writing that such threat
occurred and specifying the general details thereof), from any entity with
jurisdiction or claiming to have jurisdiction to enforce such Law, alleging or
stating that NRTC is violating or threatening to violate such Law, or (ii) an
opinion letter to HCG from outside counsel that may be retained by HCG stating
that, in its opinion, certain conduct or threatened conduct of NRTC (to be
specified in such letter) appears to be or could be found to be in violation of
any Law that is currently being, is threatened to be, or there exists a material
likelihood will be, enforced. Furthermore, if HCG denies access to NRTC
pursuant to the provisions of this Section 11.04 and/or the provisions of
Sections 8.01 or 8.02, and if a bona fide dispute exists as to whether a
violation of such Law has occurred, then NRTC shall have the immediate right to
seek a temporary restraining order (as its sole and exclusive remedy prior to
any final judicial
56
<PAGE>
order), on notice of four (4) hours or more to HCG, to prevent the continued
denial of such access by HCG based on the non-existence of any such violation of
such Law. HCG shall be entitled to oppose NRTC's attempts to obtain any such
injunctive relief, including any temporary restraining order, but hereby agrees
to the following:
(i) HCG will not contest the jurisdiction of, or the venue of, any
action brought by NRTC in a federal district court sitting in Washington,
D.C., the Central District Court of California or the Eastern District
Court of Virginia;
(ii) for a period of five (5) consecutive days after such access
denial by HCG, HCG will make itself available to accept service by telecopy
or personal delivery pursuant to Section 18.03 on a 24 hour-a-day basis;
and
(iii) If NRTC is seeking a temporary restraining order, HCG will not
challenge the sufficiency of notice from NRTC of an impending hearing if
such notice is served at least four (4) hours before the scheduled court
hearing.
If it is determined by final judicial order that HCG wrongfully prevented NRTC
from accessing all or part of the Transponder Capacity under this Section 11.04,
then NRTC's sole and exclusive remedy shall be HCG's payment to NRTC of
liquidated damages equal to the Transponder Capacity Fee, the TT&C Fee, the
Ground Capital Fee, the Ground Services Fee, and the Programming Fee for such
Programming Service(s) as to which access is being denied actually paid by NRTC
to HCG and applicable to the period of loss of use of such Transponder Capacity
(with the amount of the Transponder Capacity Fee and the Ground Capital Fee
being prorated over ten (10) years and with all fees being prorated over twenty
(20) Program Channels).
11.05 Right to Use Service Equipment. Upon the expiration, termination or
------------------------------
cancellation of this Agreement for any reason whatsoever, NRTC shall have no
further rights whatsoever with respect to the Service Equipment (except for any
Subscriber Terminal Equipment, and any other Service Equipment not contemplated
by this Agreement that NRTC or Committed Members have independently purchased
from third parties) and HCG may utilize such Service Equipment in any manner HCG
desires.
12. Force Majeure
-------------
12.01 Failure to Deliver. Any failure or delay in the performance by HCG
------------------
of its obligations to commence providing the DBS Distribution Services shall not
be a breach of this Agreement if such failure or delay results from any acts of
God, governmental action or Law (whether in its sovereign or contractual
capacity) or any other circumstances reasonably beyond the control of HCG,
including, but not limited to, earth station sun outage, weather or acts or
omissions of NRTC (or its Affiliates, Members or agents) or any third parties
(excluding Hughes Aircraft Company ("HAC") and all of its direct and indirect
subsidiaries and any other Affiliates of HCG, HAC or any other person or entity
with whom HCG or HAC contracts for any components of the DBS Distribution
Services) (a "Force Majeure Event"). Nothing in this Section 12.01,
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however, shall be deemed to alter NRTC's absolute rights to terminate this
Agreement as set forth in Section 11.01 and obtain, if applicable, a Complete
Refund thereunder, or to receive Late Commencement Fees under Section 4.02 in
certain circumstances.
12.02 Failure of Performance. Any failure in the performance of the DBS
----------------------
Distribution Services after the Service Commencement Date shall not be a breach
of this Agreement if such failure results from a Force Majeure Event. Nothing
in this Section 12.02, however, shall alter NRTC's rights to receive an Outage
Credit as set forth in Section 10.02 or to terminate this Agreement as provided
in Section 10.03.
13. Limitation of Liability
-----------------------
(a) ANY AND ALL EXPRESS AND IMPLIED WARRANTIES, INCLUDING, BUT NOT
LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PURPOSE OR USE, ARE
EXPRESSLY EXCLUDED AND DISCLAIMED EXCEPT TO THE EXTENT SPECIFICALLY AND
EXPRESSLY PROVIDED FOR IN SECTIONS 6 AND 7, ABOVE. IT EXPRESSLY IS AGREED THAT
HCG'S SOLE OBLIGATIONS AND LIABILITIES RESULTING FROM A BREACH OF THIS AGREEMENT
AND NRTC'S EXCLUSIVE REMEDIES FOR ANY CAUSE WHATSOEVER (INCLUDING, WITHOUT
LIMITATION, LIABILITY ARISING FROM NEGLIGENCE) ARISING OUT OF OR RELATING TO
THIS AGREEMENT AND/OR THE TRANSACTIONS CONTEMPLATED HEREBY ARE LIMITED TO THOSE
SET FORTH IN SECTIONS 7.05, 7.07, 7.08, 10, 11, AND 13(b) HEREOF, AND ALL OTHER
REMEDIES OF ANY KIND ARE EXPRESSLY EXCLUDED.
(b) IN NO EVENT SHALL HCG BE LIABLE FOR ANY INCIDENTAL OR
CONSEQUENTIAL DAMAGES, WHETHER FORESEEABLE OR NOT, OCCASIONED BY ANY DEFECT IN
THE DBS DISTRIBUTION SERVICES, DELAY IN PROVISION OF THE DBS DISTRIBUTION
SERVICES, FAILURE OF THE DBS DISTRIBUTION SERVICES (OR ANY COMPONENT THEREOF),
THE TRANSPONDERS OR THE SUBSCRIBER TERMINAL EQUIPMENT TO PERFORM OR ANY OTHER
CAUSE WHATSOEVER. IN NO EVENT SHALL NRTC BE LIABLE FOR ANY INCIDENTAL OR
CONSEQUENTIAL DAMAGES, WHETHER FORESEEABLE OR NOT, IN CONNECTION WITH ANY
DAMAGES CAUSED BY NRTC, EXCEPT THAT NOTHING SHALL RELIEVE NRTC OF ITS OBLIGATION
TO PAY HCG (1) THE AGGREGATE AMOUNT OF ALL COMMITTED MEMBER PAYMENTS (WHETHER IN
THE ESCROW ACCOUNT, COMMITTED AS SECOND PAYMENTS, OR OTHERWISE) PLUS (2) THE
TT&C FEE AND THE GROUND SERVICES FEE FOR THE EXPECTED LIFE OF THE SATELLITE,
BASED ON THE ACTUAL NUMBER OF NRTC SUBSCRIBERS AS OF NRTC'S BREACH, BUT IN NO
EVENT ON FEWER THAN 100,000 NRTC SUBSCRIBERS, LESS ANY AMOUNTS REASONABLY
MITIGATED BY HCG AS REQUIRED UNDER THE CALIFORNIA UNIFORM COMMERCIAL CODE, IF
NRTC BREACHES ITS OBLIGATIONS UNDER THIS AGREEMENT. HCG MAKES NO WARRANTY,
EXPRESS OR IMPLIED, TO ANY OTHER PERSON OR ENTITY
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CONCERNING THE DBS DISTRIBUTION SERVICES AND NRTC SHALL DEFEND license, lease,
sublease or otherwise convey, directly or indirectly, in whole or in part.
14. Limitations on Transfer
-----------------------
14.01 Transfers. EXCEPT AS SPECIFICALLY PROVIDED ELSEWHERE IN THIS
---------
AGREEMENT, NEITHER PARTY SHALL TRANSFER (DEFINED BELOW) ANY OF ITS RIGHTS OR
OBLIGATIONS UNDER THIS AGREEMENT WITHOUT THE PRIOR WRITTEN CONSENT OF THE OTHER
PARTY, WHICH CONSENT MAY BE GIVEN OR WITHHELD IN ITS SOLE AND ABSOLUTE
DISCRETION; EXCEPT ONLY THAT (1) EITHER PARTY MAY TRANSFER THIS AGREEMENT IN
WHOLE TO A SUCCESSOR OF ALL OR SUBSTANTIALLY ALL OF ITS ASSETS UPON WRITTEN
NOTICE TO THE OTHER PARTY, AND (2) HCG MAY TRANSFER SOME OR ALL OF ITS RIGHTS
AND OBLIGATIONS UNDER THIS AGREEMENT TO AN AFFILIATE. IN THE EVENT OF ANY SUCH
TRANSFER, SUCH TRANSFERRING PARTY SHALL REMAIN FULLY LIABLE ALONG WITH ITS
TRANSFEREE FOR ALL ITS OBLIGATIONS UNDER THIS AGREEMENT. "Transfer" shall mean
to grant, sell, assign, encumber, permit the utilization of, license, lease,
sublease or otherwise convey, directly or indirectly, in whole or in part.
14.02 Financing Transaction. If (a) HCG uses the Satellite or any portion
---------------------
thereof and/or (b) NRTC uses its Transponder Capacity (if it has title to such
Transponders pursuant to Exhibit 19 at paragraph (9), if applicable) for, as
part of, or in connection with, any financing transaction, including but not
limited to a "sale-leaseback" financing or a financing using, in the case of
HCG, the Satellite or any HCG-owned Transponders (or, in the case of NRTC, the
Transponders providing its Transponder Capacity) as collateral (a "Financing
Transaction"), then the non-financing party shall use its reasonable best
efforts (so long as any associated costs are $1,000 or less or so long as the
financing party agrees to reimburse the non-financing party for such costs in
excess of such amount) to cooperate with the financing party in connection with
such Financing Transaction. In neither case shall a financing transaction
adversely affect the rights of the other party under this Agreement.
14.03 Affiliate(s). As used in this Agreement, "Affiliate(s)" means any
------------
person, corporation or other entity controlling or controlled by or under common
control with NRTC or HCG, or another person, corporation or other entity, as the
case may be.
15. NRTC's Right of First Refusal: Successor Satellites.
---------------------------------------------------
15.01 Right of First Refusal. HCG has advised NRTC that it may launch
----------------------
"Successor Satellite(s)" to the Satellite(s). If (1) HCG enters into an
agreement to construct and launch a Successor Satellite to the Satellite; and
(2) NRTC is in compliance with all material terms hereunder; then NRTC shall
have a right of first refusal (the "Successor ROFR") to have HCG provide DBS
Distribution Services (excluding Programming Services) in substantially the same
form as they are provided hereunder.
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HCG shall not be obligated to launch any such Successor Satellite(s); and if HCG
decides to do so, HCG shall determine in its sole discretion when and under what
conditions a Successor Satellite will be launched.
15.02 Terms of Successor ROFR. If the conditions in Section 15.01 above
-----------------------
are met, then HCG shall notify NRTC in writing, no less than eighteen (18)
months prior to the scheduled launch of such Successor Satellite(s) or at such
time as HCG contractually commits to a launch of such Successor Satellite(s), if
earlier, of the Successor ROFR (the "Successor Notice"). The Successor Notice
shall provide NRTC the right to have HCG provide all of the DBS Distribution
Services (excluding Programming Services) upon the same basic terms of price and
payment pursuant to which HCG markets such equivalent DBS Distribution Services
to third parties. The parties acknowledge that HCG is and/or may be providing
different products or services to third parties (e.g., HCG may be providing only
----
satellite or transponder capacity and ground services) and, therefore, that such
equivalency of price and terms may take into account such differences. Within
sixty (60) days of NRTC's request, HCG will also provide either a proposed
definitive purchase or lease agreement to NRTC, as determined by HCG, which
agreement shall contain HCG's then-standard terms and conditions for the
purchase or lease of transponder capacity, and such other terms and conditions
with respect to such DBS Distribution Services as HCG in its sole discretion
deems desirable or appropriate (the "Definitive Agreement"). If NRTC does not
execute a Definitive Agreement with HCG within one-hundred twenty (120) days
after HCG's delivery to NRTC of such proposed Definitive Agreement, the
Successor Notice and NRTC's Successor ROFR shall expire; provided, however, that
NRTC shall not be required to execute such Definitive Agreement earlier than one
year prior to the scheduled launch date of the first of any such Successor
Satellite(s). The price and terms shall be determined by HCG in its sole
discretion but any provision for an NRTC Revenue Fee shall not exceed the price
provided in Section 3.06.
15.03 Successor Satellite Defined. The term "Successor Satellite(s)"
---------------------------
shall mean any replacement satellite(s) for the Satellite that HCG proposes to
operate in the presently assigned position of the Satellite (after the end of
life of such Satellite(s)) or such other orbital position to which the FCC may
order the Satellite moved or the Successor Satellite(s) positioned if HCG
proposes to launch such a replacement.
16. Progress Reports, Inspections and Access to Work in Progress
------------------------------------------------------------
16.01 Progress Reports. Within forty-five (45) days after the Execution
----------------
Date, HCG shall meet with NRTC's designated technical consultants to discuss and
review the various components of the DBS Distribution Services (excluding the
Programming Services). NRTC shall provide a written summary of NRTC's technical
concerns and requirements (including requests for documentation and additional
details on equipment and system specifications) within thirty (30) days after
such initial review, and HCG shall monitor the development of the DBS
Distribution Services with respect to such concerns and requirements and provide
status information and documentation reasonably requested by NRTC (which
documentation has been or will be developed by HCG or its sub-
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contractors as part of the on-going development of the DBS Distribution
Services) in each subsequent quarterly progress report. Commencing ninety (90)
days after the Execution Date and continuing until the Service Commencement
Date, HCG shall furnish to the NRTC on a quarterly basis a written progress
report on the status of the construction of the Satellite, HCG's preparations to
provide the other components of the DBS Distribution Service to NRTC, and a
statement containing an explanation of material details, including HCG's
projected Scheduled Launch Date and projected Service Commencement Date,
variances from performance specifications and any remedial actions taken. In any
case, HCG shall notify NRTC promptly in writing of any event of which HCG is
aware and which in HCG's reasonable opinion adversely and materially threatens
HCG's ability to make the Scheduled Service Commencement Date. HCG and NRTC each
shall take reasonable steps to keep the other informed periodically of
communications to or from the FCC or any other governmental authority that
materially affect NRTC, HCG, the Satellite, the Transponder Capacity or its use,
and shall promptly deliver copies to the other of any such written
communications.
16.02 Inspection Rights of NRTC. NRTC's independent satellite consultants
-------------------------
and personnel will have the right, on a non-interference basis and upon
reasonable notice to HCG, to review the performance and launch specifications of
the Satellite and to review the design, preparation and implementation of the
other elements of the DBS Distribution System, subject to the confidentiality
provisions governing such information. Such inspection rights shall also
include NRTC's review of antenna EIRP contour measurements obtained during
ground testing for the purpose of establishing expected Satellite performance.
16.03 After Delivery Reports. After the Service Commencement Date, NRTC
----------------------
shall receive monthly operational reports on the overall performance of the DBS
Distribution Services.
17. Confidentiality and Press Releases.
----------------------------------
17.01 Confidentiality. HCG and NRTC shall hold in confidence this
---------------
Agreement, including the financial terms and provisions hereof, and all
information provided by either party to the other, and NRTC and HCG each hereby
acknowledge and agree that all information received in connection with or
otherwise related to this Agreement, not otherwise known to the public, is
confidential and proprietary (the "Confidential Information") and is not to be
disclosed to third persons (other than to Affiliates, officers, directors,
employees and agents of HCG and NRTC, each of whom is bound by this Section 17)
without the prior written consent of both HCG and NRTC, except as follows and
except as explicitly provided in Section 2.07:
(a) to the extent necessary to comply with applicable Law and/or to
the extent necessary or appropriate to respond to any governmental inquiry,
provided, that the party making such disclosure shall request confidential
treatment of such information;
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(b) as part of its normal reporting or review procedure to regulatory
agencies, its parent company, its auditors and its attorneys, provided, the
party making such disclosure shall seek confidential treatment of such
information with any such regulatory agencies and provided that any other third
party to whom disclosure is made agrees to the confidential treatment of such
information, provided, that HCG shall be permitted to make disclosures as a part
of and regarding FCC filings without any requirement to seek confidential
treatment (except as to information about the fee and payment terms specified in
Sections 1 and 3, as to which confidentiality shall be sought);
(c) in order to enforce its rights and/or perform its obligations
pursuant to this Agreement;
(d) to the extent necessary to obtain appropriate insurance, to its
insurance agent, provided, that such agent agrees to the confidential treatment
of such information;
(e) to the extent necessary to satisfy its obligations to Users of
the Transponders on the Satellite or to negotiate clauses that will be common to
other satellite and/or transponder sale or lease agreements;
(f) to the extent necessary to obtain financing, provided, that any
person or entity providing such financing shall agree in advance, in writing
reasonably acceptable to the other party, to the confidential treatment of such
information; or
(g) to the extent necessary to obtain Programming Services or to
provide other services to be provided by HCG under this Agreement; or
(h) to the extent necessary to obtain and/or promote execution by
potential Committed Members of Member Contracts or other involvement with the
DBS Distribution Services as anticipated under this Agreement, either party may
provide such Member (and its officers, full-time employees and attorneys) with a
"Contract Summary," or other marketing-related materials, which shall initially
be drafted by NRTC before May 1, 1992 and agreed to by the parties in their sole
discretion.
17.02 Subscriber Information. NRTC (and/or the respective Committed
----------------------
Member) and HCG (and/or DirecTv) shall each own the lists and information
(including compilations thereof) regarding respectively, the NRTC Subscribers
and the HCG Subscribers, including the rights to (a) information about such
subscribers' names and addresses, (b) any benefits related to the possession of
such subscriber information or to the provision of services to such subscriber,
and (c) any related commercial or other directories. Both parties shall have
such rights with respect to a Joint Subscriber. Each party agrees that all
information concerning the other's subscribers is proprietary to the other
party, except to the extent that such information is jointly owned, mutually
developed, or otherwise known to the public. Each party acknowledges that the
other party has substantial proprietary interests and rights to all such
subscriber information whether obtained from the other party or any other source
and agrees to maintain all such
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subscriber information on a strictly confidential basis. Each party further
covenants that under no circumstances will it use or allow others to use the
other party's subscriber information for any reason other than to verify amounts
due to such party under the terms of this Agreement and for such purposes as are
approved in advance and in writing by such other party.
17.03 Press Releases. NRTC and HCG shall commence immediately after the
--------------
Execution Date to agree upon a mutually acceptable press release with respect to
the general business relationship under this Agreement, and such press release
will be jointly issued and released by the parties on such date as to which the
parties may mutually agree.
17.04 Confidentiality Survival. Notwithstanding anything to the contrary
------------------------
contained herein, this Section 17 shall survive the termination or expiration of
this Agreement for a period of five (5) years in the event of a termination
under Section 11.01(a), Section 11.02(a) or Section 11.02(b), or if the
condition precedent to the effectiveness of this Agreement as specified in
Section 1.05 is not timely met.
18. Miscellaneous
-------------
18.01 Interest. Except as otherwise specifically set forth in this
--------
Agreement or in any Exhibit or Attachment hereto, the rate of interest referred
to herein shall be 12% per annum, or the highest legally permissible rate of
interest, whichever is lower, and all interest or discounting shall be
compounded on a yearly basis. Except as otherwise expressly indicated herein,
"pro-rata" and "prorated" means an allocation on a straight line basis based on
number of days. All present value analyses shall use a 12% annual discount
rate. The parties each acknowledge and agree that liquidated damages provision
specifically set forth in this Agreement addresses a circumstance where the
damaged party would suffer direct and substantial damages, that such damages
cannot be determined within reasonable certainty, and that such liquidated
damages amounts represent, the parties' reasonable estimate of actual damages
and do not constitute penalties.
18.02 Applicable Law; Entire Agreement; Modification. The existence,
----------------------------------------------
validity, construction, operation and effect of this Agreement and the Exhibits
and Attachments hereto, shall be determined in accordance with and be governed
by the laws of the State of California. This Agreement and the Exhibits and
Attachments hereto, constitute the entire agreement between the parties, and
supersede all previous understandings, commitments and representations
concerning the subject matter. Each party acknowledges that the other party has
not made any representations other than those that are contained herein. This
Agreement may not be amended or modified in any way, and none of its provisions
may be waived, except by a writing signed by an authorized officer of the party
against whom the amendment, modification or waiver is sought to be enforced.
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18.03 Notices.
-------
(a) Except as provided in Section 18.03(b), all notices and other
communications from either party to the other hereunder shall be in writing and
shall be deemed received upon actual receipt when personally delivered, upon
acknowledgment of receipt if sent by facsimile, or upon the expiration of the
third business day after being deposited in the United States mails, postage
prepaid, certified or registered mail, addressed to the other party as follows:
TO HCG:
If by mail: Hughes Communications Galaxy, Inc.
P.O. Box 92424
Los Angeles, CA 90009
Attention: James B. Ramo
cc: Vice President & Legal Counsel
If by Telephone: (310) 535-5003
Attention: James B. Ramo
If by FAX: (310) 535-5223
Attention: James B. Ramo
cc: Vice President & Legal Counsel
(310) 607-4256
If by personal delivery Hughes Communications Galaxy, Inc.
to its principal 2230 East Imperial Highway
place of business at: Building R8, Mail Station 5351
El Segundo, California 90245
Attention: James B. Ramo
cc: Vice President & Legal Counsel
Hughes Communications Galaxy, Inc.
1990 Grand Avenue
El Segundo, California 90245
TO NRTC:
If by mail: National Rural Telecommunications
Cooperative
Woodland Park
2201 Cooperative Way, Suite 400
Herndon, VA 22071
Attention: B.R. Phillips III
64
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cc: William J. Dorran
If by Telephone: (703) 787-0874
Attention: B.R. Phillips III
If by FAX: (703) 787-3355
Attention: B.R. Phillips III
cc: William J. Dorran
If by personal delivery National Rural Telecommunications
to its principal place Cooperative
of business at: Woodland Park
2201 Cooperative Way, Suite 400
Herndon, VA 22071
Attention: B.R. Phillips III
cc: William J. Dorran
Each party hereto may change its addresses or payment instructions by giving the
other party notice thereof in conformity with this Section 18.03(a).
(b) All payments made to HCG shall be transferred electronically or
by mail as follows:
- --------------------------------------------------------------------------------
By electronic funds transfer Bank of America NT&SA
Corporate Services
1850 Gateway Boulevard
Concord, California
ABA #121000358
Attention: Ms. Mandy Sneary
Senior Account Administrator
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Account Name: Hughes Communications
Galaxy, Inc.
Account #: 06008-00840
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
By mail: Hughes Communications Galaxy, Inc.
P.O. Box 92424
Los Angeles, California 90009
Attention: Accounts Receivable
- --------------------------------------------------------------------------------
65
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18.04 Severability. Nothing contained in this Agreement shall be construed
------------
so as to require the commission of any act contrary to Law, and wherever there
is any conflict between any provision of this Agreement and any Law, such Law
shall prevail; provided, however, that in such event the provisions of this
Agreement so affected shall be curtailed and limited only to the extent
necessary to permit compliance with the minimum legal requirement, and no other
provisions of this Agreement shall be affected thereby and all such other
provisions shall continue in full force and effect.
18.05 Taxes. NRTC shall not be responsible for, and HCG shall pay, all
-----
applicable property, sales, use or similar taxes imposed by any local, state,
national or international, public or quasi-public governmental entity (a
"Governmental Body") and incurred by HCG prior to the Service Commencement Date
in respect of the DBS Distribution Services and/or the Transponder Capacity. If
any such property, sales, use or similar taxes are incurred by HCG after, or as
a result of, the commencement of DBS Distribution Services in respect of the DBS
Distribution Services, the Transponder Capacity, or the provision thereof to
NRTC, NRTC shall be solely responsible for such taxes. If any taxes, fees,
charges, user fees, spectrum fees or other levies are asserted, either before or
after the Service Commencement Date, by reason of HCG's use of the point in
space or the frequency spectrum at that point in space in which the Satellite is
located, or the use or ownership of such Satellite (excluding only any FCC
filing fee imposed on HCG's application(s) to construct, launch and operate the
Satellite, which filing fee shall be paid by HCG), then HCG, NRTC and the Users
of such Transponders shall each pay a proportionate amount of such taxes, fees,
charges, user fees, spectrum fees and other levies based on the number of
Transponders (or amount of Transponder capacity) each of them owns, leases or
uses. Each of NRTC, HCG and Users shall have the right, as between each of them
and any licensee or assignee hereunder, to consent to allocate responsibilities
for such tax, fee, charge and/or levy payments hereunder. No such arrangement
between them shall affect NRTC's or HCG's obligations hereunder or a User's
obligations under a similar provision.
18.06 Successors, Assignment. Subject to the limitations and exceptions on
----------------------
Transfer set forth in Section 14, this Agreement shall be binding on and shall
inure to the benefit of any and all successors and assigns of the parties;
provided that no assignment of this Agreement shall relieve either party hereto
of its obligations to the other party. Any purported assignment by either party
not in compliance with the provisions of this Agreement shall be null and void
and of no force and effect.
18.07 Headings. The descriptive headings of the several sections and
--------
paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
18.08 Survival of Representations and Warranties. All representations and
------------------------------------------
warranties contained herein or made by HCG or NRTC in connection herewith shall
survive any independent investigation made by HCG or NRTC.
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18.09 No Third-Party Beneficiary. The provisions of this Agreement are
--------------------------
for the benefit only of the parties hereto, and no third party may seek to
enforce, or benefit from, these Provisions, except that both parties acknowledge
and agree that the provisions of Sections 8.01, 8.02 and 9 are also intended for
the benefit of both HCG and all Users. Both parties agree that any such User
shall have the right to enforce, as a third-party beneficiary, the provisions of
such Sections, against NRTC directly, in an action brought solely by such User,
or may join with HCG or any User, in bringing an action against NRTC for
violation thereof.
18.10 Non-Waiver of Breach. Either party hereto may specifically waive
--------------------
any breach of this Agreement by the other party, provided that no such waiver
shall be binding or effective unless in writing and no such waiver shall
constitute a continuing waiver of similar or other breaches. A waiving party,
at any time, and upon notice given in writing to the breaching party, may direct
future compliance with the waived term or terms of this Agreement, in which
event the breaching party shall comply as directed from such time forward.
18.11 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed an original, and all such
counterparts together shall constitute but one and the same instrument.
18.12 Documents. Each party hereto agrees to execute and, if necessary,
---------
to file with the appropriate governmental entities, such documents as the other
party hereto shall reasonably request in order to carry out the purposes of this
Agreement.
18.13 Arbitration. Prior to submitting to arbitration any matter that
-----------
Section 5.02(b) or Section 20.04 (if Exhibit 19 applies) of this Agreement
requires be arbitrated, the parties (at a Vice-President or similar or higher
level) shall meet to discuss and resolve such matter. If such matter cannot be
resolved within thirty (30) days following the initiation or attempted
initiation of such discussions by either party, then such matter shall be
arbitrated using three arbitrators (the "Arbitrators") under the rules of the
American Arbitration Association ("AAA"). The AAA shall be instructed to
appoint the Arbitrators within thirty (30) days of receiving notice from either
HCG or NRTC that HCG and NRTC would like to submit this dispute to arbitration.
Each of HCG and NRTC shall submit to the Arbitrators its proposed resolution of
each issue to be arbitrated, and the Arbitrators shall select either NRTC's or
HCG's proposal for each issue to resolve the dispute, using the standard (if
any) for their decisions specifically set forth elsewhere in this Agreement. If
no standard is set forth, the Arbitrators may apply their own judgment in making
such decisions. The Arbitrators shall be instructed to use their best efforts
to conclude the arbitration within thirty (30) days of their appointment. The
arbitration shall take place in Washington, D.C. The award of the Arbitrators
shall not be appealable to any court or other entity and shall be final, non-
appealable and binding on each party. The "non-prevailing party"/1/ in any
arbitration conducted under this Section 18.13 (as determined by the
Arbitrators) shall pay all the costs and expenses incurred by the "prevailing
party" in preparing for and conducting the arbitration. The
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parties acknowledge that this Agreement may allow for dual proceedings to occur
both in the courts and pursuant to arbitration and agree that neither shall
attempt to consolidate into a matter before any court any matter that this
Agreement requires be arbitrated.
18.14 DBS Transponder Capacity. HCG shall be solely responsible for
------------------------
fulfilling any obligations imposed by Law and applicable to HCG as the FCC
licensee of the Satellite regarding the provision to third parties of DBS
transponder capacity for the delivery of non-commercial, public, or educational
programming.
18.15 Rescission Option. Either party may rescind this Agreement by
-----------------
providing the other party with written notice thereof received before 5:00 p.m.
Eastern Time, April 15, 1992; otherwise, this Agreement shall continue in full
force and effect.
19. Modifications of Agreement in Certain Circumstances
---------------------------------------------------
(a) If NRTC pays to HCG (and/or Committed Members commit to pay HCG
as Second Payments), in the aggregate, the sum of $250,000,000 in Committed
Member Payments by December 11, 1992 (or by May 1, 1993 and/or July 31, 1993, if
the May Extension and/or the July Extension apply) (the "Agreement Modification
Date"), then the provisions set forth on Exhibit 19 shall apply automatically
and, as indicated therein, modify this Agreement and shall take precedence over
and supersede any conflicting provisions contained in this Agreement.
Notwithstanding the foregoing, if the provisions of Exhibit 19 so apply, but HCG
has actually not received $250 million in aggregate Committed Member Payments at
the time of Acceptance because one or more Second Payments has not been paid to
HCG, and such non-payment is not cured within the time period provided in
Section 3.10, then this Agreement automatically shall be revised as if Exhibit
19 did not apply and the "Committed Member Residences" shall be reestablished as
of the date of delivery to HCG of the Member Contract that allowed NRTC
initially to meet the $250 million Committed Member Payment target.
(b) Within thirty (30) days following the Agreement Modification
Date, NRTC may deliver to HCG a notice in substantially the identical form
attached as Exhibit 19-A (the "Relief Notice") and thereby relieve HCG of any
and all responsibilities under Section 2.07 and elsewhere in this Agreement to
provide Programming Services. Within thirty (30) days following the Relief
Notice, HCG shall assign to NRTC all of HCG's rights under, and NRTC shall
assume all of HCG's obligations under, any and all Programming Agreements. Upon
such assignment by HCG (the "Relief Notice Assignment"), Sections 2.07(a), (c)
and (d) automatically shall be deleted in their entirety, all HCG's obligations
to provide Programming Services and all of NRTC's obligations to pay HCG for
such Programming Services, shall cease, and all references in this Agreement to
such obligations automatically shall be deleted.
(c) If NRTC does not deliver the Relief Notice, then HCG shall
continue to fulfill its obligations under Sections 2.07(a), (c) and (d).
Promptly after obtaining the rights to distribute Cable Programming to Eligible
Residences as provided in Section 2.07 (subject to any limitations or
restrictions contained in the Programming
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Agreements), HCG shall assign to NRTC all HCG's rights under, and NRTC shall
assume all of HCG's obligations under, all the Programming Agreements. Upon such
assignment by HCG (the "Fulfillment Assignment"), Sections 2.07(a), (c) and (d)
automatically shall be deleted in their entirety, all HCG's obligations to
provide Programming Services shall cease, and all references in this Agreement
to such obligations automatically shall be deleted.
(d) The Relief Notice Assignment or the Fulfillment Assignment shall
be evidenced by an agreement in substantially the identical form attached as
Exhibit 19-B. After either such assignment, NRTC shall have sole responsibility
for acquiring and maintaining the rights to provide program services to Eligible
Residences. Upon either such assignment, HCG shall have no further obligations
for the assigned Programming Agreements or the consequences of such assignment.
Neither the Relief Notice Assignment nor the Fulfillment Assignment shall
transfer any rights HCG may have to distribute Cable Programming and/or any
other program service to non-NRTC Territories.
WHEREOF, each of the parties hereto has duly executed and delivered
this Agreement as of the day and year first written above.
HUGHES COMMUNICATIONS GALAXY, INC. NATIONAL RURAL TELECOMMUNICATIONS
COOPERATIVE
By: /s/ By:
--------------------------------- -------------------------------------
Attest: /s/ Attest:
----------------------------- ---------------------------------
69
<PAGE>
EXHIBIT 10.6
ADDENDUM I
Definitions
-----------
Capitalized definitions contained in this Agreement are defined at the
referenced sections below:
"AAA" at Section 18.13.
"Acceptance" at Section 4.04.
"Access Control Outage" at Section 10.01(b).
"Access Control Services" at Section 2.03(a).
"Accrued Ground Services Base Amount" at Exhibit 19, Section 3.03(e).
"Accrued Ground Services Expenses" at Exhibit 19, Section 3.03(e).
"Accrued TT&C Expenses" at Section 3.02(b)(ii).
"Added Capacity" at Exhibit 19, Section 20.01.
"Added Capacity Delivery" at Exhibit 19, Section 20.01.
"Added Capacity Fee" at Exhibit 19, Section 20.02(b).
"Added Capacity Notice" at Exhibit 19, Section 20.02.
"Additional Capacity" at Exhibit 19, Section 2.01(c).
"Advertising" at Section 5.04 (also at Exhibit 19, Section 5.04).
"Affiliate(s)" at Section 14.03.
"Agreement" at the Preamble.
"Agreement Modification Date" at Section 19(a).
"Allocated Fees" at Exhibit 19, Section 3.03(e).
"Arbitrators" at Section 18.13.
"Authorized Subscribers" at Section 3.02(a).
"Available" at Section 4.01(b).
A-1
<PAGE>
"Bill of Sale" at Exhibit 19, Section 7.02.
"Blackout" at Section 2.07(c).
"Broadcasting" at Section 7.04(i).
"Cable Programming" at Section 2.07(a).
"Cable Service(s)" at Exhibit 19, Section 8.04(a).
"CAMC" at the Recitals.
"CAM" at the Recitals.
"CAS" at the Recitals.
"CAS Security Agreement" at the Recitals.
"CFC" at Section 1.01(b)(i).
"Committed Member" at Section 1.01(b).
"Committed Member Payment" at Section 1.01(b)(i).
"Committed Member Residences" at Section 1.01(b)(iii)(1) and Exhibit 19, Section
1.01(b)(iii)(1).
"Complaint" at Section 7.07(c).
"Complete Refund" at Section 11.01(g).
"Conditional Access Management Center Services Agreement" at the Recitals.
"Component" at Section 10.01(d).
"Conditional Access Segment Developer Agreement" at the Recitals.
"Confidential Information" at Section 17.01.
"Confirmed Failure" at Exhibit 19, Section 10.07.
"Contract Summary" at Section 17.01(h).
"CONUS" at Section 6.03(a).
A-2
<PAGE>
"Consumer Price Index" at Section 3.03(b).
"Core Cable Programming" at Section 1.04(a).
"Core Cable Rights" at Section 1.04(a).
"Data Services" at Section 2.03(b).
"DBS" at the Recitals.
"DBS Distribution Services" at Section 2.
"DBS I" at Section 6.03(a) (also at Exhibit 19, Section 2.01(a)).
"DBS I Delivery" at Exhibit 19, Section 4.07(a).
"DBS II" at Section 6.03(a) (also at Exhibit 19, Section 2.01(a)).
"December Conditions" at Section 1.04(a).
"Definitive Agreement" at Section 15.02.
"Delinquent Member" at Section 11.02(f).
"Deliver(s)," "Delivered" and "Delivery" at Exhibit 19, Sections 4.07(a) and
4.07(b).
"Delivery Date" at Exhibit 19, Section 4.07(b).
"Deposit" at Section 3.08.
"Determination" at Section 11.01(f).
"DirecTv Distributor" at Section 5.02(c).
"DirecTv Fee" at Section 5.02(b)(i).
"DirecTv Programming" at Section 5.02 (a) (also at Exhibit 19, Section 5.02(a)).
"DirecTv Revenue" at Section 5.02(b)(i).
"DirecTv Yearly Statement" at Section 5.02(b)(ii).
"Eligible Commercial Establishments" at Section 2.09.
"Eligible Residences" at Section 1.01(b)(iii)(2).
A-3
<PAGE>
"Escrow Account" at Section 1.01(b)(v).
"Escrow Agent" at Section 1.01(b)(v).
"Escrow Agreement" at Section 1.01(b)(v).
"Escrowed Committed Member Payments" at Section 1.01(b)(v).
"Execution Date" at the Preamble.
"Expansion Opportunity" at Section 5.01(b)(ii).
"Expenses" at Section 3.10(a)(i).
"FCC" at the Recitals.
"FCC Rules" at Section 7.04(i).
"Fee Suspension Date" at Section 3.04(b).
"Financing Transaction" at Section 14.02.
"Force Majeure Event" at Section 12.01.
"Fulfillment Assignment" at Section 19(c).
"Full Service Distributor" at Section 5.01(c) (i).
"Governmental Body" at Section 18.05.
"Gross NRTC Revenue" at Section 3.06(a).
"Ground Capital Fee" at Section 3.03.
"Ground Services" at Section 2.03.
"Ground Services Base Amount" at Section 3.03(b).
"Ground Services Fee" at Section 3.03.
"Ground Services Fixed Fee Conversion" at Exhibit 19, Section 3.03(e).
"Ground System" at Section 2.05.
"HAC" at Section 12.01.
A-4
<PAGE>
"HCG" at the Preamble.
"HCG Certification" at Section 1.04(a).
"HCG Controlled Programming" at Section 7.04(iii).
"HCG Event of Default" at Section 11.01(i).
"HCG Frequencies" at the Recitals.
"HCG Security Costs" at Section 3.04(a).
"HCG Subscriber(s)" at Section 5.03.
"HCG's Modification Request" at Section 6.03(b).
"HCSS" at the Recitals.
"HPO Notice" at Exhibit 19, Section 20.02.
"HPO Option" at Exhibit 19, Section 20.01.
"Indemnified Parties" at Section 7.05.
"Indemnitee Costs" at Section 8.03.
"Indemnitees" at Section 8.03.
"Indictment" at Section 7.07(c).
"Intellectual Property" at Section 7.09.
"Intentional Breach" at Section 13 (d).
"Joint Subscriber" at Section 3.04(a).
"July Extension" at Section 1.03(c).
"Late Commencement Fee" at Section 4.02.
"Launch Attempt" at Section 11.01(f).
"Laws" at Section 8.02.
"LC Amount" at Section 3.08.
A-5
<PAGE>
"Letter of Credit" at Section 3.08.
"Marketing Expenses" at Section 5.04 (also at Exhibit 19, Section 5.04).
"May Extension" at Section 1.03(b).
"Members" at Section 1.01(a).
"Member Contract" at Section 1.01(b).
"Minimum Requirements" at Section 7.01.
"MSA(s)" at Section 1.01(b)(iii)(5).
"MSA Non-Cabled Territory Option" at Section 1.01(b)(ii)(2).
"MSA Residences Option" at Section 1.01(b)(ii)(1).
"MSA Parts" at Section 1.01(b)(iii)(4).
"NDI" at the Recitals.
"NDSPL" at the Recitals.
"Non-Cabled Eligible Residences" at Section 1.01(b)(iii)(3)
"Non-Committed Member Residences" at Section 5.01(b)(i).
"Non-NRTC Subscriber" at Exhibit 19, Section 5.06(b).
"Non-Prevailing Party" at Section 18.03.
"NRTC" at the Preamble.
"NRTC Controlled Services" at Section 7.05.
"NRTC Event of Default" at Section 11.02(e).
"NRTC-Registered Subscriber" at Section 3.04(a).
"NRTC Revenue Fee" at Section 3.06(a).
"NRTC Revenue Fee Termination Date" at Section 3.06(a).
"NRTC Subscriber(s)" at Section 1.01(b)(xi).
A-6
<PAGE>
"NRTC Territory(ies)" at Section 1.01(b)(iii)(4).
"NRTC Transponders" at Exhibit 19, Section 2.01(c).
"Operating Transponder(s)" at Exhibit 19, Section 4.07(a).
"Outage Period" at Section 10.01(c).
"Outage Unit" at Section 10.03(a).
"Partial Delivery" at Section 4.01(b).
"Partial Delivery Notice" at Section 4.01(b).
"Partial Refund" at Section 11.01(h).
"Partial Service Distributor" at Section 5.01(c)(ii).
"Permitted Services" at Section 8.04(a) (also at Exhibit 19, Section 8.04(a)).
"Prevailing Party" at Section 18.13.
"Priority 1" at Section 1.04.
"Priority 2" at Section 1.04.
"Priority 3" at Section 1.04.
"Program Channel" at Section 2.01 (also at Exhibit 19, Section 2.01(c)).
"Programming Agreements" at Section 2.07(a).
"Programming Fees" at Section 3.05.
"Programming Renewal Date" at Section 4.06(b).
"Programming Service(s)" at Section 2.07(a).
"Pro-rata" at Section 18.01.
"Prorated" at Section 18.01.
"Relief Notice" at Section 19(b).
"Relief Notice Assignment" at Section 19(b).
A-7
<PAGE>
"Replacement Letter of Credit" at Section 3.08.
"Required Delivery Attempt" at Section 11.01(f).
"Rescission Date" at Section 11.01(e).
"Rescission Option" at Section 11.01(f).
"Restricted Agreement" at Section 7.07(c).
"Restricted Capacity" at Section 7.07(a).
"Restricted Entity" at Section 7.07(a).
"Restricted Services" at Section 7.07(b).
"Revised Ground Services Base Amount" at Exhibit 19, Section 3.03(e).
"Rights" at Section 7.07(c).
"Rights Holder" at Section 2.07(c).
"RSA(s)" at Section 1.01(b)(i).
"RSA Non-Cabled Territory Option" at Section 1.01(b)(i)(3).
"RSA Territory Option" at Section 1.01(b)(i)(2).
"RSA Residences Option" at Section l.01(b)(i)(1).
"Satellite" at Section 2.01 (also at Exhibit 19, Section 2.01(a)).
"Satellites" at Exhibit 19, Section 2.01(a).
"Satellite Delivery Failure" at Exhibit 19, Section 4.08(a).
"Satellite Expiration Date" at Section 4.06(a).
"Satellite Feed" at Exhibit 19, Section 5.06(a).
"Satellite Feed Fee" at Exhibit 19, Section 5.06(c).
"Scheduled Launch Date" at Section 4.01(a).
"Scheduled Service Commencement Date" at Section 4.01(a).
A-8
<PAGE>
"Second Payment" at Section 1.01(b)(vii).
"Section Compliance" at Section 7.07(c).
"Section 8.04(a) Compliance" at Section 8.04(c).
"Security Services" at Section 2.06.
"Security Services Fee" at Section 3.04(a).
"Service Commencement Date" at Section 4.01(a).
"Services Revision Date" at Section 7.07(b).
"Service Equipment" at Section 4.05 (also at Exhibit 19, Section 4.05).
"Similar Restricted Services" at Section 7.07(b).
"Simultaneously" at Exhibit 19, Section 10.05.
"Sports Programming" at Section 2.07(c).
"SPS Developer Agreement" at the Recitals.
"Subscriber Terminal Equipment" at the Recitals.
"Subscriber Terminal Equipment Availability" at Section 2.04.
"Successor Notice" at Section 15.02.
"Successor ROFR" at Section 15.01.
"Successor Satellite(s)" at Section 15.03.
"Superstation" at Section 2.07(c).
"TCE" at the Recitals.
"Terminating Events" at Section 7.07(c).
"Termination Clause" at Section 7.07(c).
"Termination Events" at Section 8.04(c).
"Transfer" at Section 14.01.
A-9
<PAGE>
"Transmission Outage" at Section 10.01(a).
"Transmission Services" at Section 2.03(b).
"Transponder" at Section 2.01 (also at Exhibit 19, Section 2.01(b)).
"Transponder Agreement" at Section 8.04(c).
"Transponder Agreement Termination Clause" at Section 8.04(c).
"Transponder Capacity" at Section 2.01 (also at Exhibit 19, Section 2.01(c)).
"Transponder Capacity Fee" at Section 3.01.
"Transponder Capacity Base Amount" at Exhibit 19, Section 5.06(c).
"Transponder Outage Unit" at Exhibit 19, Section 10.07.
"Transponder Performance Specifications" at Exhibit 19, Section 10.08.
"Transponder Spare(s)" at Exhibit 19, Section 10.04.
"TT&C Base Amount" at Section 3.02(a).
"TT&C Fee" at Section 3.02.
"TT&C Fixed Fee Conversion" at Section 3.02(b)(ii).
"TT&C Services" at Section 2.02.
"Unserved Households" at Section 2.07(d).
"User" at Section 2.07(c).
"Use Restriction" at Section 7.07(a).
"User Agreement" at Exhibit 19, Section 10.04.
"USSB" at Recitals.
"Yearly Statement" at Section 3.06(b).
"101 degrees Satellite(s)" at the Recitals.
A-10
<PAGE>
EXHIBIT 10.7
AMENDMENT
---------
In accordance with Section 18.02 of the DBS Distribution Agreement
("Agreement") between Hughes Communications Galaxy, Inc. ("HCG") and the
National Rural Telecommunications Cooperative ("NRTC"), dated April 10, 1992 and
for good and valuable consideration, receipt of which is hereby acknowledged,
the Agreement is amended as follows:
(1) Section 1.01(b)(iii)(3) is hereby deleted in
-----------------------
its entirety and replaced with the following new
Section 101(b)(iii)(3) "(3) "Non-Cabled Eligible
Residences" means only those Eligible Residences within
specified county(ies) (or zip code(s) in the case of
MSA Parts) that do not have available cable television
service (i.e., are not "passed" by cable television
----
service). The number of Non-Cabled Eligible Residences
as to any county (or zip code) as to which payment
shall be made under the RSA Non-Cabled Territory Option
and/or the MSA Non-Cable Territory Option shall be
based upon Neilsen Media Research (January 1, 1992)
figures for such country or zip code and identified in
an exhibit to the Member Contract."
(2) Section 1.05 is hereby amended by inserting
------------
the following phrase after "May 11, 1992" and before
the immediately following semicolon in the third
sentence: "(or, in the case of the second condition
precedent identified at Section 1.05(b), below, on or
before May 26, 1992)".
This Amendment may be executed in counterparts pursuant to Section 18.11 of
the Agreement and delivered via telecopier.
WHEREOF each of the parties hereto has duly executed and delivered this
Amendment as of the date indicated below.
HUGHES COMMUNICATIONS NATIONAL RURAL
GALAXY, INC. TELECOMMUNICATIONS
COOPERATIVE
By: /s/ By: /s/
-------------------------------- --------------------------------
Date: 5/11/92 Date: 5/11/92
------------------------------ ------------------------------
Attest: /s/ Attest: /s/
---------------------------- ----------------------------
Date: 5/11/92 Date: 5/11/92
------------------------------ ------------------------------
<PAGE>
EXHIBIT 10.8
AMENDMENT
---------
In accordance with Section 18.02 of the DBS Distribution Agreement
("Agreement") between Hughes Communications Galaxy, Inc. ("HCG") and the
National Rural Telecommunications Cooperative ("NRTC"), dated April 10, 1992,
and for good and valuable consideration, receipt of which is hereby
acknowledged, the Agreement as amended on May 11, 1992, is amended as follows:
Section 1.05 is hereby amended by deleting
------------
the date "May 26, 1992" and substituting in its
place the date "May 31, 1992".
This Amendment may be executed in counterparts pursuant to Section 18.11 of
the Agreement and delivered via telecopier.
WHEREOF each of the parties hereto has duly executed and delivered this
Amendment as of the date indicated below.
HUGHES COMMUNICATIONS NATIONAL RURAL
GALAXY, INC. TELECOMMUNICATIONS
COOPERATIVE
By: /s/ By: /s/
-------------------------- --------------------------
Date: 5/26/92 Date: 5/26/92
------------------------ ------------------------
Attest: /s/ Attest: /s/
---------------------- ----------------------
Date: 5/26/92 Date: 5/26/92
------------------------ ------------------------
<PAGE>
EXHIBIT 10.9
Mr. B. R. Phillips III May 29 1992
National Rural Telecommunications Cooperative
2201 Cooperative Way
Suite 400
Herndon, VA 22701
Reference: DBS Distribution Agreement Dated April 10, 1992 Between Hughes
Communications Galaxy, Inc. (HCG) and the National Rural
Telecommunications Cooperative (NRTC), as amended (the "Agreement")
Dear Bob,
In accordance with Section 1.05 (b) of the Agreement, HCG hereby approves as
final, the form of Exhibit 1.01(b) (iii) (4) provided with your letter dated May
26, 1992 (the "Exhibit") subject to the following:
(1) Subject to reinstatement by later amendment of the Exhibit as
described below, any zip codes listed in the Exhibit for which the
number of Eligible Residences is left blank shall be removed from the
Exhibit at this time.
(2) Subject to reinstatement by later amendment of the Exhibit as
described below, any zip codes listed in the Exhibit which lie within
the 200 most populous MSA counties (as listed in Attachment 1 of this
letter) shall be removed from the Exhibit at this time.
It is understood that in accordance with Section 1.01(b) (iii) (4) of the
Agreement, the identification of zip codes in the Exhibit may be amended by NRTC
to correct omissions of any zip codes in which electric or telephone utility
service is provided by a Member as of the Execution Date of the Agreement; it
being further understood that all amendments shall be considered to be
consistent with the numeric and geographic limitations (by zip code) set forth
in the Exhibit. In addition, HCG and NRTC agree that Section 1.01(b) (iii) (4)
of the Agreement shall be amended such that NRTC may correct such omissions
within one hundred fifty (150) days from the Execution Date (i.e., September 7,
1992) rather than one hundred twenty (120) days as stated in the Agreement.
NRTC shall provide HCG with no less than 3 days prior written notice of any
amendments to the Exhibit.
<PAGE>
If you are in agreement with the conditions set forth above, please so
acknowledge by signing below and returning a signed copy of this letter to me.
We will consider the condition precedent set forth in Section 1.03(b) of the
Agreement to be satisfied upon receipt of a signed copy of this letter.
Sincerely,
/s/ James Ramo
James Ramo
Acknowledged and agreed to:
_________________________ Date:__________
By:
Title:
2
<PAGE>
EXHIBIT 10.10
FOURTH AMENDMENT
----------------
In accordance with Section 18.02 of the DBS Distribution Agreement
("Agreement") between Hughes Communications Galaxy, Inc. ("HGC"), and the
National Rural Telecommunications Cooperative ("NRTC"), dated April 10, 1992, as
previously amended, and for good and valuable consideration, receipt of which is
hereby acknowledged, the Agreement, is amended as follows:
(1) Section 1.01. The references to "December 1, 1992," are
------------
hereby replaced with "December 11, 1992" as follows: (a) in the second
line of Section 1.01(b)(v), and (b) in the second line of Section
1.01(b)(vi).
(2) Section 1.03. The references to "December 11, 1992," are
hereby replaced with "December 21, 1992" as follows: (a) in the first
line of Section 1.03, (b) in the first line of Section 1.03(a), (c) in
the first line of Section 1.03(b), and (d) in the first line of
Section 1.03(e).
(3) Section 1.04.
(a) The references to "December 1, 1992," are hereby
replaced with "December 11, 1992" as follows: (i) in the first and
seventh lines of Section 1.04(a), (ii) in the first line of Section
1.04(b)(i), (iii) in the first line of Section 1.04(b)(ii), and (iv)
in the second line of Section 1.04(b)(iii).
(b) The references to "December 11, 1992," are hereby
replaced with "December 21, 1992" as follows: (i) in the tenth and
fourteenth lines of Section 1.04(a), (ii) in the fourth line of
Section 1.04(b)(i), (iii) in the fourth line of Section 1.04(b)(ii),
and (iv) in the fourth line of Section 1.04(b)(iii).
(4) Section 5.01. The references to "December 11, 1992" are
hereby replaced with "December 21, 1992" as follows: (a) in the tenth
line of Section 5.01(a), and (b) in the first and ninth lines of
Section 5.01(b)(i).
(5) Section 11.
(a) The references to "December 1, 1992" are hereby
replaced with "December 11, 1992" as
<PAGE>
follows: (i) in the first line of Section 11.01(a), and (ii) in the
first line of Section 11.02(b).
(b) The reference to "December 11, 1992" is hereby replaced
with "December 21, 1992" in the first line of Section 11.03(a).
(6) Section 19(a). The reference to "December 11, 1992" in the
third line of Section 19(a) is hereby replaced with "December 21,
1992."
This Fourth Amendment may be executed in counterparts pursuant to Section
18.11 of the Agreement and delivered via telecopier. All other terms and
conditions of the Agreement shall remain unmodified and in full force.
WHEREOF each of the parties hereto has duly executed and delivered this
Fourth Amendment as of the date indicated below.
HUGHES COMMUNICATIONS NATIONAL RURAL
GALAXY, INC. TELECOMMUNICAITONS
COOPERATIVE
By: /s/ By: /s/
------------------- -------------------
Date: 12/1/92 Date: 12/1/92
----------------- -----------------
Attest: /s/ Attest: /s/
--------------- ---------------
Date: 12/1/92 Date: 12/1/92
----------------- -----------------
2
<PAGE>
Exhibit 10.11
FIFTH AMENDMENT
---------------
In accordance with Section 18.02 of the DBS Distribution Agreement
between Hughes Communications Galaxy, Inc. ("HCG") and the National Rural
Telecommunications Cooperative ("NRTC"), dated April 10, 1992, as amended (the
"Agreement"), and for good and valuable consideration, receipt of which is
hereby acknowledged, the Agreement is hereby amended, effective December 11,
1992, as follows:
(1) The Agreement is hereby modified as set forth on Exhibit A
hereto, which Exhibit A sets forth certain, identified provisions of the
Agreement whereby (a) those portions which have been stricken-through are
hereby deleted from the Agreement, and (b) those portions which are
highlighted and double-underlined are hereby added to the Agreement; and
(2) All other terms and conditions of the Agreement, shall
continue in full force and effect without modification.
This Fifth Amendment may be executed in counterparts pursuant to
Section 18.11 of the Agreement and delivered via telecopier.
WHEREOF each of the parties hereto has duly executed and delivered
this Amendment as of the date indicated below.
HUGHES COMMUNICATIONS NATIONAL RURAL
GALAXY, INC. TELECOMMUNICATIONS
COOPERATIVE
By: /s/ By: /s/
------------------------- -------------------
Date: 15 December 1992 Date: 16 December 1992
--- ---
Attest: /s/ Attest: /s/
--------------------- ---------------
Date: 15 December 1992 Date: 16 December 1992
--- ---
1
<PAGE>
EXHIBIT A
---------
* * * * *
Section 1.01(b):
- ---------------
* * * * *
(v) All Committed Member Payments paid to NRTC before
December 23, 1992, shall be promptly deposited into an interest-bearing
escrow account (the "Escrow Account") with any one of the financial
institutions selected by NRTC from the list contained in Exhibit 1.01(b)
(v)-1 (the "Escrow Agent"), pursuant to an escrow agreement in
substantially the same form as Exhibit 1.01(b)(v)-2 (the "Escrow
Agreement"). Promptly upon receipt of such escrowed Committed Member
Payments, the Escrow Agent shall notify HCG in writing and such Committed
Member Payments (excluding any interest accrued thereof) shall thereafter
be deemed "Escrowed Committed Member Payments." NRTC shall be responsible
for the payment of all costs and fees required by the Escrow Agent.
(vi) All Committed Member Payments paid to NRTC on or after
December 23, 1992, shall promptly be remitted in full by NRTC to HCG;
except only as set forth in Section 1.04(a).
* * * * *
1.03 Contract Decision Process. On December 23, 1992, and again on July 31,
-------------------------
1993 (if the July Extension applies), decisions will be made regarding (a) the
termination of this Agreement; (b) the unmodified continuation of this
Agreement; and/or (c) the modification of this Agreement as set forth below in
Section 19.
(a) If, on or before December 23, 1992, NRTC has paid HCG $250
million in aggregate Committed Member Payments pursuant to Section 1.01(b), then
this Agreement shall be modified as set forth in Section 19.
(b) If, on December 23, 1992, NRTC has paid HCG less than $250
million, in aggregate Committed Member Payments, then NRTC shall automatically
be granted an extension until July 31, 1993 to pay HCG (and/or have Committed
Members commit to pay HCG, as applicable, in Second Payments) $250 million in
aggregate Committed Member Payments (the "July Extension").
2
<PAGE>
(c) If the July Extension has been granted and if on or before July
31, 1993, NRTC has paid HCG (and/or Committed Members have committed to pay HCG,
as applicable, in Second Payments) $250 million in aggregate Committed Member
Payments, then this Agreement shall be modified as set forth in Section 19;
otherwise this Agreement shall continue unmodified by Exhibit 19.
(d) NRTC may make payments to HCG and/or the Escrow Agent (if still
applicable) for HCG's benefit to meet the $250 million target, as apropriate and
as specified in this Section 1.03 in excess of aggregate Committed Member
Payments actually paid or owed to HCG as Second Payments, where applicable, by
Committed Members and any and all such amounts shall be deemed part of the
Committed Member Payments for all purposes of this Agreement.
1.04 Progress Certification and Core Cable Programming.
-------------------------------------------------
(a) If, on or before December 22, 1992, the December Conditions (as
defined below) have occurred , then HCG may instruct the Escrow Agent pursuant
to the Escrow Agreement (and HCG and NRTC shall, on or prior to 12:00 p.m.
Eastern Time on the next business day after HCG's certfication (in a form agreed
to by the parties) of its meeting of the December Conditions, concurrently
provide the Joint Instruction, as defined below) to release all Escrowed
Committed Member Payments, including any accrued interest thereon, to HCG.
3
<PAGE>
The "December Conditions" mean (a) HCG having obtained the contract rights to
distribute the Core Cable Programming to Eligible Residences (specifically
excluding, unless applicable in the relevant Programming Agreement, households
that have available cable television service as of the execution date of the
relevant Programming Agreement, (the "Core Cable Rights"), and (b) HCG having
provided NRTC with a certification by the Chief Executive Officer of HCG, under
oath or affirmation, stating that, based on then-existing facts, the Transponder
Capacity, TT&C Services, Ground Services, Security Services and Subscriber
Terminal Equipment Availability development process is proceeding in a manner
that, in HCG's reasonable judgment, will allow the provision of the Transponder
Capacity and such services no later than ninety (90) days following the
Scheduled Service Commencement Date (the "HCG Certification"). Such HCG
Certification shall be accompanied by a status report on work completed and a
schedule of remaining projects. "Core Cable Programming" means four program
services from different program categories that are identified as "Priority 1"
in Exhibit 7.07. "Priority 2" and "Priority 3" program services are also
identified on Exhibit 7.07. The "Joint Instruction" means a joint instruction to
the Escrow Agent under the Escrow Agreement (and/or an amendment to the Escrow
Agreement, as required) instructing and requiring the Escrow Agent to
immediately release, as of the date of such instruction, the Escrowed Committed
Member Payments (including any accrued interest thereon) to HCG, and in any case
no later than on the next business day following the receipt of such instruction
only if the Escrow Agent cannot complete such release and transfer on the same
day.
(b) (i) If, on December 22, 1992, HCG has obtained the Core Cable
Rights, but has not provided NRTC with the HCG Certification, then each of
NRTC and HCG shall have the right to terminate this Agreement on or before
December 31, 1992 by providing written notice to the other, or such right
will expire. Upon such timely termination NRTC may instruct the Escrow
Agent pursuant to the Escrow Agreement to release all Escrowed Committed
Member Payments, including any interest thereon, to NRTC.
(ii) If, on December 22, 1992, HCG has provided the HCG Certification,
but has not obtained the Core Cable Rights, then NRTC shall have the right
to terminate this Agreement by providing written notice to HCG by December
31, 1992, or such right will expire. If NRTC so terminates this Agreement,
then NRTC may instruct the Escrow Agent pursuant to the Escrow
4
<PAGE>
Agreement to release all Escrowed Committed Member Payment, including any
interest thereon, to NRTC. If NRTC does not so termiante this Agreement,
then NRTC shall have the right, on or before March 1, 1993, to deliver to
HCG the Relief Notice (as defined in Section 19(b)) and HCG shall have the
right, after delivery of the Relief Notice, to instruct the Escrow Agent
pursuant to the Escrow Agreement to release all Escrowed Committed Member
Payments, including any interest thereon, to HCG. If NRTC delivers the
Relief Notice by March 1, 1993, then this Agreement shall continue; if not,
this Agreement automatically shall terminate as of March 1, 1993 and NRTC
may instruct the Escrow Agent pursuant to the Escrow Agreement to release
all Escrowed Committed Member Payments including any interest thereon, to
NRTC.
(iii) If both of the December Conditions have not occurred on
December 22, 1992, then each of NRTC and HCG shall have the right to
terminate this Agreement on or before December 31, 1992 by providing
written notice to the other, or such right will expire. Upon such timely
termination, NRTC may instruct the Escrow Agent pursuant to the Escrow
Agreement to release all Escrowed Committed Member Payments, including any
interest thereon, to NRTC.
* * * * *
3.02 TT&C Fee.
--------
(a) The fee for the provision of the TT&C Services (the "TT&C Fees")
for any given month shall be equal to the product of (x) the TT&C Base Amount,
multiplied by (y) the number of Authorized Subscribers calculated for such
- -------------
month. The initial "TT&C Base Amount" shall be determined on July 31, 1993, and
be based on the aggregate amont of Committed Member Payments actually paid to
HCG or owed to HCG as Second Payments under Section 1.01(b)(iv) as of such date
as follows: * * * * *
* * * * *
3.03 Ground Services Fees. * * * * *
--------------------
(b) The Ground Services Fee for any given month shall be equal to the
product of (x) the Ground Services Base Amount, multiplied by (y) the number of
-------------
Authorized Subscribers calculated for such month. The initial "Ground Services
Base Amount" shall be determined on July 31, 1993, and shall be based on the
aggregate amount of Committed Member Payments actually paid to HCG or owed to
HCG as Second Payments under Section 1.01(b)(iv) as of such date as follows: * *
* * *
5
<PAGE>
* * * * *
5.01 Marketing of DBS Distribution Services in NRTC Territories.
----------------------------------------------------------
(a) HCG grants NRTC the exclusive right to market and sell the DBS
Distribution Services to Members for distribution to Committed Member Residences
or directly to Committed Member Residences; it being expressly agreed and
understood that any rights as to Programming Services shall extend only as to
the extent and for the duration as may be provided under the relevant
Programming Agreements. For purposes of Sections 5.01(a) and 5.01(b), Committed
Member Residences shall be determined based upon Member Contracts executed as of
December 23, 1992 (or July 31, 1993, if applicable). NRTC shall have the sole
and exclusive right to determine the terms and conditions upon which it will
market the DBS Distribution Services to such Members and Committed Member
Residences, and subject to the provisions of Section 3, shall be entitled to all
revenues form such marketing.
(b) (i) Beginning on December 23, 1992 (or July 31, 1993, if
applicable), HCG shall have the exclusive right to market and sell the DBS
Distribution Services, and any other program services transmitted on the
Transponder Capacity for distribution to the Non-Committed Member Residences.
"Non-Committed Member Residences" means all Eligible Residences that are not
Committed Member Residences, as determined pursuant to Section 5.01(a) as of
December 23, 1992 (or July 31, 1993, if applicable). HCG shall have the sole and
exclusive right to determine the terms and conditions upon which it will market
the DBS Distribution Services to such Non-Committed Member Residences, and shall
be entitled to all revenues from such marketing. HCG's rights under this Section
5.01(b) shall not be adversely affected by NRTC's taking control of the
Programming Agreements under Section 4.06(b).
* * * * *
11. Termination Rights
------------------
11.01 Termination by NRTC.
-------------------
(a) If, on December 22, 1992, (i) both of the December Conditions
have not occurred, (ii) HCG has obtained the Core Cable Rights but has not
provided NRTC with the HCG Certification, or (iii) HCG has provided the HCG
Certification but has not obtained the Core Cable Rights, then NRTC may
terminate this Agreement in whole under Section 1.04(b).
* * * * *
11.02 Terminaiton by HCG.
------------------
(a) [Intentionally Omitted]
6
<PAGE>
(b) If, on December 22, 1992, both of the December Conditions have
not occurred, or HCG has not provided NRTC with the HCG Certification, then HCG
may terminate this Agreement in whole under Section 1.04(b).
* * * * *
11.03 Automatic Termination.
---------------------
(a) [Intentionally Deleted]
(b) If HCG has provided the HCG Certification, but has not obtained
the Core Cable Rights, NRTC has not exercised its termination right under
Section 1.04(b)(ii), and NRTC does not deliver to HCG the Relief Notice by March
1, 1993, then this Agreement automatically shall terminate as of March 1, 1993
pursuant to Section 1.04(b)(ii).
* * * * *
19. Modifications of Agreement In Certain Circumstances
---------------------------------------------------
(a) If NRTC pays to HCG (and/or Committed Members commit to pay HCG
as Second Payments), in the aggregate, the sum of $250,000,000 in Committed
Member Payments by December 23, 1992 (or by July 31, 1993, as applicable) (the
"Agreement Modification Date"), then the provisions set forth on Exhibit 19
shall apply automatically and, as indicated therein, modify this Agreement and
shall take precedence over and supersede any conflicting provisions contained in
this Agreement. Notwithstanding the foregoing, if the provisions of Exhibit 19
so apply, but HCG has actually not received $250 million in aggregate Committed
Member Payments at the time of Acceptance because one or more Second Payments
has not been paid to HCG, and such non-payment is not cured within the time
period provided in Section 3.10, then this Agreement automatically shall be
revised as if Exhibit 19 did not apply and the "Committed Member Residences"
shall be re-established as of the date of delivery to HCG of the Member Contract
that allowed NRTC initially to meet the $250 million Committed Member Payment
target.
7
<PAGE>
EXHIBIT 10.12
SIXTH AMENDMENT
---------------
In accordance with Section 18.02 of the DBS Distribution Agreement between
Hughes Communications Galaxy, Inc. ("HCG") and the National Rural
Telecommunications Cooperative ("NRTC"), dated April 10, 1992, as amended (the
"Agreement"), and for good and valuable consideration, receipt of which is
hereby acknowledged, the Agreement is hereby amended, effective December 23,
1992, as follows:
(1) The Agreement is hereby modified as set forth on Exhibit A hereto,
which Exhibit A sets forth certain, identified provisions of the Agreement
whereby (a) those portions which have been stricken-through are hereby deleted
from the Agreement, and (b) those portions which are highlighted and double-
underlined are hereby added to the Agreement; and
(2) All other terms and conditions of the Agreement, shall continue in
fu1l force and effect without modification.
This Sixth Amendment does not amend or alter the terms of the December 21,
1992 letter from Eddie Hartenstein to B.R. Phillips, III, attached as Exhibit B
hereto, or the December 22, 1992 letter from B.R. Phillips, III, to James B.
Ramo, attached as Exhibit C hereto, which continue in full force and effect
without modification.
This Sixth Amendment may be executed in counterparts pursuant to Section
18.11 of the Agreement delivered via telecopier.
WHEREOF each of the parties hereto has duly executed and delivered this
Amendment as of the date indicated below.
HUGHES COMMUNICATIONS NATIONAL RURAL
GALAXY, INC. TELECOMMUNICATIONS
COOPERATIVE
By: /s/ By: /s/
-------------------------------- --------------------------------
Date: 12-23-92 Date: 12-23-92
------------------------------ ------------------------------
Attest: Attest:
/s/ /s/
- ----------------------------------- -----------------------------------
Date: 12-23-92 Date: 12-23-92
------------------------------ ------------------------------
<PAGE>
EXHIBIT A
- ---------
* * * * *
Section 1.01(b):
- ---------------
* * * * *
(vi) Notwithstanding any other provision to the contrary, all
Committed Member Payments and any payments made for marketing and other
requirements (mentioned in Section 1.01(b)(viii), hereafter "Marketing and
Development Fee") made on or after December 23, 1992 (such Committed Member
Payments and Marketing and Development Fee are collectively "Payments")
shall be made directly to an interest-bearing escrow account ("Dec. 23rd
Escrow Account") pursuant to an escrow agreement in substantially the same
form as Exhibit 1.01(b)(v)-2 ("Dec. 23rd Escrow Agreement"). Promptly upon
receipt of such Payments, the Dec. 23rd Escrow Agent shall notify HCG and
NRTC in writing. Notwithstanding any other provision to the contrary, all
Payments will be distributed to HCG or NRTC from the Dec. 23rd Escrow
Account in accordance with the terms of the Dec. 23rd Escrow Agreement.
NRTC shall be responsible for the payment of all costs and fees required by
the Dec 23rd Escrow Agent. NRTC shall use its best efforts to amend, as
necessary, all Member Contracts executed on or before December 23, 1992 in
accordance with this Section.
(vii) The Member Contract shall provide the Committed Member with the
option, with respect to Member Contracts executed after December 11, 1992,
to either (xx) pay the full Committed Member Payment to HCG through
December 23rd Escrow Account upon execution of the Member Contract, or (yy)
pay 50% of the Committed Member Payment to HCG through December 23rd Escrow
Account upon execution of the Member Contract, and commit to pay to HCG
through December 23rd Escrow Account upon Acceptance, the remaining 50% of
such Committed Member Payment (the "Second Payment") as well as commit to
pay interest on such Section Payment, at the rate set forth in Section
18.01, from the date of the Member Contract until the date of Acceptance,
as set forth in Section 4.04. In all cases as provided above, any and all
such payments to December 23rd Escrow Account (and any applicable interest
thereon) shall be promptly paid to HCG. If any Second Payment (plus
interest) is not timely paid to December 23rd Escrow Account (by the
Committed Member) or to HCG (by December 23rd Escrow Account), then the
provisions of Section 3.10 shall apply. In addition, if any Second Payment
is not timely made by a Committed Member (or by NRTC as provided in Section
3.10(b)) and the fifteen (15) day cure period has expired
<PAGE>
without a cure, then (A) HCG shall have the right and option to require
NRTC to (and NRTC shall) terminate the Member Contract, and if the Member
Contract is so terminated, the Committed Member shall have no further
rights thereunder, and (B) regardless of whether the Member Contract is so
terminated and, in addition to having the right to collect the full amount
of the Second Payment (less any amounts reasonably mitigated by HCG under
California Uniform Commercial Code) and Expenses associated therewith, HCG
shall be entitled to retain (as liquidated damages) the 50% of the
Committed Member Payment already paid to HCG, and unless and until the
provisions of Exhibit 19 apply, NRTC shall have no rights whatsoever to
market and sell the DBS Distribution Services to the Committed Member
Residences associated with such Committed Member.
* * * * *
(xvi) The Member Contract shall be executed by the Committed
Member and NRTC; and HCG shall be an intended third-party beneficiary
thereto. An original copy of each such executed Member Contract shall be
provided to HCG concurrently with delivery to HCG, or the deposit of such
monies into the Escrow Account, or the Dec. 23rd Escrow Account, as
appropriate, of the Committed Member Payment. In addition, in cases where
the RSA Residences Option and/or the MSA Residences Option is exercised,
the executed Member Contract shall be accompanied by a list (in electronic
media form (based on industry standard and compatible with the requirements
of the HCG billing system and the CAMC databases)) of all Committed Member
Residences, as set forth above in Section 1.01(b) (ix). HCG shall not be
obligated in any way to provide any DBS Distribution Services to a Member
or its NRTC Subscribers until and unless the full Committed Member Payment
(including the Second Payment owed by such Committed Member), the
electronic media list described above, and an executed Member Contract are
received by HCG.
* * * * *
Section 1.01:
- ------------
(c) Member Administration. NRTC shall administer the Member
---------------------
Contracts as follows: NRTC shall (1) use its reasonable best efforts to collect
any and all monies owed by Committed Members under the Member Contracts and
shall deposit such monies with the Escrow Agent or Dec. 23rd Escrow Agent (as
appropriate) or pay to HCG the payments contemplated by Section 1.01(b); and (2)
provide all accounting services relative to such collection process. NRTC shall
keep records with respect to such accounting.
Section 1.03:
- ------------
ii
<PAGE>
(d) NRTC may make payments to HCG, the Escrow Agent (if still
applicable) or the Dec. 23rd Escrow Agent for HCG's benefit to meet the $250
million target, as appropriate and as specified in this Section 1.03 in excess
of aggregate Committed Member Payments actually paid or owed to HCG as Second
Payments, where applicable, by Committed Members and any and all such amounts
shall be deemed part of the Committed Member Payments for all purposes of this
Agreement.
* * * * *
Section 11.02:
- -------------
(e) Upon the occurrence of any NRTC Event of Default (as defined
below) and only after written notice from HCG to NRTC followed by the expiration
of any relevant cure period, HCG may, for so long as such NRTC Event of Default
shall continue, declare this Agreement to be in default provided, however, that
this Agreement shall be deemed to be in default immediately upon the occurrence
and during the continuation of any NRTC Event of Default under Section 11.02(e)
(iv)). At any time thereafter, HCG may, in its sole and absolute discretion,
declare immediately due and payable all Committed Member Payments (whether in
the Escrow Account, Dec. 23rd Escrow Account, committed as Second Payments, or
otherwise) the TT&C Fee and the Ground Services Fee for the expected life of the
Satellite, based on the actual number of NRTC Subscribers as of such Event of
Default (but in no event fewer than 100,000 NRTC Subscribers), cancel this
Agreement as to NRTC, obtain damages without cancelling this Agreement, and
exercise any other right or remedy that is provided for in this Agreement or
that may be available under the California Uniform Commercial Code or other
applicable Law. A cancellation hereunder shall occur only upon written notice
from HCG to NRTC within (30) days following the NRTC Event of Default stating
that such cancellation is made. In the event of such cancellation, HCG shall
continue to provide DBS Distribution Services to Committed Members, at HCG's
sole option, either (i) pursuant to the Member Contracts (which shall have a
provision allowing HCG to assume such contracts upon NRTC's breach of this
Agreement and HCG's cancellation as to NRTC) or (ii) on substantially the same
terms or on terms no less favorable than those provided under this Agreement. In
either case, the Committed Member obligations shall be directly to HCG and not
NRTC and the member Contracts shall contain provisions to this effect. No remedy
referred to in this Section 11.02(e) is intended to be exclusive, but each
remedy shall be cumulative and in addition to any other remedy referred to above
or otherwise available to HCG at law or in equity. HCG shall mitigate its
damages should it elect to seek from NRTC the Committed Member Payments, the
TT&C Fee, and the Ground Service Fee due hereunder (as specified above) in the
event of an NRTC Event of Default as so required under the California Uniform
Commercial Code. HCG's failure in any case to exercise its rights under this
Section 11.02(e) shall not constitute a waiver of any breach or NRTC Event of
Default or a continuing waiver of similar or other breaches or NRTC Events of
Default. Each of the following events shall constitute an "NRTC Event of
Default" (whether any such event shall arise as the
iii
<PAGE>
result of the voluntary or involuntary action or inaction of NRTC or come about
or be effected by operation of, or pursuant to or in compliance with, any Law).
* * * * *
Section 13:
- ----------
(b) IN NO EVENT SHALL HCG BE LIABLE FOR ANY INCIDENTAL OR
CONSEQUENTIAL DAMAGES, WHETHER FORESEEABLE OR NOT, OCCASIONED BY ANY DEFECT IN
THE DBS DISTRIBUTION SERVICES, DELAY IN PROVISION OF THE DBS DISTRIBUTION
SERVICES, FAILURE OF THE DBS DISTRIBUTION SERVICES (OR ANY COMPONENT THEREOF),
THE TRANSPONDERS OR THE SUBSCRIBER TERMINAL EQUIPMENT TO PERFORM OR ANY OTHER
CAUSE WHATSOEVER. IN NO EVENT SHALL NRTC BE LIABLE FOR ANY INCIDENTAL OR
CONSEQUENTIAL DAMAGES, WHETHER FORESEEABLE OR NOT, IN CONNECTION WITH ANY
DAMAGES CAUSED BY NRTC, EXCEPT THAT NOTHING SHALL RELIEVE NRTC OF ITS OBLIGATION
TO PAY HCG (1) THE AGGREGATE AMOUNT OF ALL COMMITTED MEMBER PAYMENTS (WHETHER IN
THE ESCROW ACCOUNT, DECEMBER 23RD ESCROW ACCOUNT, COMMITTED AS SECOND PAYMENTS,
OR OTHERWISE) PLUS (2) THE TT&C FEE AND THE GROUND SERVICES FEE FOR THE EXPECTED
LIFE OF THE SATELLITE, BASED ON THE ACTUAL NUMBER OF NRTC SUBSCRIBERS AS OF
NRTC'S BREACH, BUT IN NO EVENT ON FEWER THAN 100,000 NRTC SUBSCRIBERS, LESS ANY
AMOUNTS REASONABLY MITIGATED BY HCG AS REQUIRED UNDER THE CALIFORNIA UNIFORM
COMMERCIAL CODE, IF NRTC BREACHES ITS OBLIGATIONS UNDER THIS AGREEMENT. HCG
MAKES NO WARRANTY, EXPRESS OR IMPLIED, TO ANY OTHER PERSON OR ENTITY CONCERNING
THE DBS DISTRIBUTION SERVICES AND NRTC SHALL DEFEND AND INDEMNIFY HCG FROM ANY
CLAIMS MADE UNDER ANY WARRANTY OR REPRESENTATION BY NRTC TO ANY THIRD PARTY.
NRTC MAKES NO WARRANTY, EXPRESS OR IMPLIED, TO ANY OTHER PERSON OR ENTITY
CONCERNING NRTC'S PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT, AND HCG
SHALL DEFEND AND INDEMNIFY NRTC FROM ANY CLAIMS MADE UNDER ANY WARRANTY OR
REPRESENTATION BY HCG TO ANY THIRD PARTY. THE LIMITATIONS OF LIABILITY SET FORTH
HEREIN SHALL ALSO APPLY TO HAC (THE MANUFACTURER OF THE SATELLITE AND THE
TRANSPONDERS) AND ALL AFFILIATES THEREOF.
* * * * *
iv
<PAGE>
EXHIBIT 10.13
DirecTv
JAMES B. RAMO
SENIOR VICE PRESIDENT
July 9, 1993
Mr. B. R. Phillips III
National Rural Telecommunications Cooperative
Woodland Park
2201 Cooperative Way, Suite 400
Herndon, Virginia 22701
Reference: DBS Distribution Agreement Dated April 10, 1992 between
Hughes Communications Galaxy, Inc. (HCG) and the
National Rural Telecommunications Cooperative (NRTC),
as amended (the "Agreement")
Dear Bob:
The following sets forth the changes to the Agreement and the primary terms of
the Joint Marketing Agreement as agreed to during our meeting on July 6, 1993.
A. Extension of Deadlines. The parties agree to extend the deadlines
contained in the Agreement as follows:
(1) Except as described in (2) below, the final deadline for executing or
amending a Member Contract shall be July 31, 1993.
(2) Existing Committed Members as of July 31, 1993 shall have the right to
amend their Member Agreements to include Cabled Eligible Residences
until August 31, 1993.
(3) Payment for any Committed Member Residences (Cabled or Non-Cabled)
shall be paid to HCG on or before August 31, 1993.
(4) The above process shall fulfill HCG's obligations under Section
5.01(b)(ii) of the Agreement (i. e., the "Expansion Opportunity").
(5) If NRTC pays to HCG $60M during the period of June 21, 1993 through
August 31, 1993, then NRTC will be granted an extension until
<PAGE>
November 15, 1993 to reach the $250M benchmark. NRTC shall have the
right to pay HCG up to $15M of the additional $60M in the form of
irrevocable commitments payable on November 15, 1993. If the November
extension is granted and NRTC does not reach the full $250M benchmark,
then the NRTC Territory shall be defined as those territories acquired
as of August 31, 1993, including those acquired through the
irrevocable commitments, and HCG shall control all other territories.
B. Cabled Eligible Residences. Until August 31, 1993, NRTC shall have the
right to offer Cabled Eligible Residences at discounted rates as follows:
(1) New and existing Committed Members shall have the option to acquire
Cabled Eligible Residences (defined as all Eligible Residences within
a RSA or MSA Part other than Non-Cabled Eligible Residences) for $5
per residence. This option may be exercised only by those Committed
Members who elect to participate in the NRTC/DirecTv Joint Marketing
Program as described in Section D below. The Cabled Eligible
Residences must be within counties (in the case of RSA's) or zip codes
(in the case of MSA Parts) already or concurrently acquired under the
RSA or MSA Non-Cabled Territory Options.
(2) The Cabled Eligible Residence option may be exercised only with
respect to all of the Cabled Eligible Residences within a particular
---
RSA county or MSA zip code.
(3) Those Member/Affiliates who have acquired residences under the RSA
Territory Option shall be entitled to a refund equal to $26.50 per
Cabled Eligible Residence for each Cabled Eligible Residence within
their acquired counties. HCG agrees that NRTC shall provide such
refund from funds generated by new Committed Member Payments, and that
HCG shall honor the residences acquired with such new Committed Member
Payments as if they were paid directly to HCG.
C. Definition of NRTC/Newco Territories. If the $250M benchmark is reached,
the territories controlled by NRTC/Newco shall be defined as follows:
(1) All Cabled and Non-Cabled RSA residences other than those acquired
prior to September 1, 1993.
(2) All Non-Cabled residences within all MSA Parts (i.e., the entire MSA
---
Parts list) other than those acquired prior to September 1, 1993.
(3) Those residences acquired prior to September 1, 1993 by
Member/Affiliates, who have established a business relationship with
NRTC/Newco.
2
<PAGE>
D. NRTC/DirecTv Joint Marketing Program. The parties will establish a joint
marketing program incorporating the following key terms:
(1) National Package
(a) DirecTv shall establish and price, after consultation with NRTC,
a set of cable programming packages, which shall include Best of
Cable programming (the "National Package(s)") to be made
available for sale on an agency basis by retailers, TVRO dealers
and sales marketing agents (SMA's).
(b) When a National Package is sold by any DirecTv authorized agent
----------------------------
to a NRTC/Newco Territory resident, then the package (including
price) shall be honored by NRTC/Newco for a minimum 12 month
period.
(c) When a National Package is sold by a national DSS hardware
---------------------
retailer (e.g., Sears, Circuit City) to a Committed Member
--------
Territory resident, then the package (including price) shall be
honored by the Committed Member for a minimum 12 month period.
The Committed Member shall have the right to specify the price of
Best of Cable portion of the National Package(s) for sale within
the Committed Member's territory by non-national entities (e.g.,
---------------------
SMA's and/or TVRO dealers).
(d) In all cases where a National Package is sold by a DirecTv
authorized agent to a Committed Member Territory or NRTC/Newco
Territory resident, such resident shall become a subscriber of
the Committed Member or NRTC/Newco, and the Committed Member or
NRTC/Newco shall be responsible for paying the agent's
commission, which shall not exceed 10% of the purchase price, on
the Best of Cable portion of the package.
(e) If the National Package is sold or renewed by a national retailer
to an NRTC Territory Resident at a price which is less than 85%
of the local price set by NRTC/Newco or a Committed Member, then
DirecTv shall pay to NRTC the difference between such national
package price and 85% of the local price during the period in
which such national package price is applicable.
(f) If the National Package is sold or renewed by a local DirecTv
authorized agent to a NRTC/Newco Territory Resident at a price
which is less than 85% of the local price set by NRTC/Newco, then
DirecTv shall pay to NRTC the difference between such national
package price and 85% of the NRTC/Newco price during the period
in which such national package price is applicable.
3
<PAGE>
(2) Commissions on DirecTv Programming
(a) Definitions
(i) "Dealer Programming" is the set of DirecTv programming that
DirecTv authorizes for sale by dealers.
(ii) "Non-Dealer Programming" is all DirecTv programming other
than Dealer Programming.
(b) For Committed Member Territory residences as of August 31, 1993:
(i) Per the Distribution Agreement, NRTC will be paid 5% of
total DirecTv programming revenues on an annual basis (both
Dealer Programming and Non-Dealer Programming) from each NRTC-
Registered Subscriber and Joint Subscriber within the
territories. (This is paid regardless of whether NRTC/Member is
responsible for DirecTv programming sale).
(ii) NRTC will be paid an additional 5% commission on Dealer
Programming sales made by NRTC and the Committed Members. Such
commission shall be paid to NRTC on the same terms as DirecTv's
other SMAs. This commission is paid only with respect to sales
made by Committed Members participating in the joint marketing
program and is contingent on NRTC and the Committed Member
performing their respective SMA/agent responsibilities.
(iii) If NRTC fails to pay DirecTv an additional $60M by August
31, 1993, then the 5% commission specified in clause (ii) above
shall be reduced to 2%.
(c) For NRTC/Newco Territory Residences:
(i) NRTC/Newco will be designated as the DirecTv SMA for co-ops
and will be paid 10% of revenues from Dealer Programming sold by
NRTC/Newco agents (provided NRTC/Newco performs all required SMA
functions and responsibilities).
(ii) NRTC/Newco will be paid 5% of Non-Dealer Programming
revenues from each NRTC-Registered Subscriber and Joint
Subscriber within NRTC/Newco Territories.
(d) Non-NRTC Territory Residences
(i) DirecTv will authorize co-ops as DirecTv agents on a case-
by-case basis either directly or through third party SMA's or
4
<PAGE>
through NRTC, at DirecTv's sole discretion. Commissions will be
based on DirecTv / SMA standard policies.
(3) Miscellaneous
(a) The parties agree to negotiate in good faith concerning the
establishment of a joint marketing fund.
(b) NRTC shall ensure a sufficient level of Committed Member
participation in the Joint Marketing Agreement such that no less
than 90% of the aggregate Committed Member Residences in all
acquired territories are represented by participating Members.
If the 90% level is not attained prior to November 15, 1993, HCG
shall have the option to terminate or renegotiate the terms and
conditions of the Joint Marketing Agreement. The termination or
renegotiation of the Joint Marketing Agreement shall not
otherwise effect:
(i) Committed Member rights under the Agreement to serve
Committed Member Residences previously acquired by Committed
Members.
(ii) NRTC/Newco participation in the Joint Marketing Agreement.
(c) The Joint Marketing Agreement shall commence at its execution and
continue until December 31, 1995.
The terms and conditions contained in this letter shall be subsequently
formalized in both an amendment to the Agreement and a fully executed Joint
Marketing Agreement. Per your request, we have attached a draft of our SMA
Agreement and a listing of the territories in which the SMA's will be
authorized.
Regards,
James B. Ramo
HCG
Acknowledged and Agreed To:
B. R. Phillips III
NRTC
5
<PAGE>
EXHIBIT 10.14
Confidential Information
========================
This document is the subject of a confidentiality agreement. Do not disclose any
of the contents without ascertaining that disclosure is in full compliance with
Hughes obligations.
February 14, 1994
Mr. B.R. Phillips III
National Rural Telecommunications Cooperative
Woodland Park
2201 Cooperative Way, Suite 400
Herndon, Virginia 22701
Reference: DBS Distribution Agreement dated April 10, 1992 between Hughes
Communications Galaxy, Inc. ("HCG") and the National Rural Telecommunications
Cooperative ("NRTC"), as amended (the "Agreement")
Dear Bob:
The following sets forth the terms and conditions of the revised business
relationship between NRTC and HCG. Capitalized terms not defined herein have
the meanings given them in the Agreement.
1. Programming Services. The Programming Services defined in Section 2.07 of
the Agreement shall become the twenty-two (22) channels of programming services
listed on Exhibit A hereto, and all obligations and requirements with respect to
Acceptance of the Programming Services are deemed satisfied. If HCG acquires
the rights, in its sole discretion, to distribute HBO, Showtime, The Movie
Channel or Cinemax, NRTC shall have the option, in its sole discretion, to
substitute such programming for any one of the services listed on Exhibit A on a
service by service basis. In the event any of the Programming Agreements
terminate, expire, or are canceled, then the provisions of Section 4.06(b) of
the Agreement regarding programming renewal shall apply, except that in the
event any of the Programming Services are not renewed, NRTC may substitute
similar (i.e., cable for cable) Available Programming Services for such non-
renewed Programming Services, as mutually agreed upon by HCG and NRTC; provided,
however, that such substitution shall not require more channel capacity than
required for the non-renewed Programming Service. "Available Programming
Services" are defined as then existing NRTC Programming Services or programming
services for which NRTC is able to obtain distribution rights. Once
substituted, such Available Programming Services shall be deemed to be
Programming Services.
2. Exclusive Distributor.
(a) NRTC shall become the exclusive direct-to-home distributor (or agent
if distribution rights are not available or in the case of Non-Select Services)
to the Committed Member Residences of, and shall retain all subscriber revenues
("NRTC Revenues") from: All
<PAGE>
video, audio, data packages, "a la carte" programming services and other
services which are transmitted over the HCG Frequencies for which HCG has the
distribution and/or transmittal rights in non-NRTC Territories and to Non-
Committed Member Residences ("HCG Programming Services"), excluding the Non-
Select Services defined in Section 3II (b) of this letter, and to the extent HCG
has such rights to distribute and/or transmit to Committed Member Residences
(collectively "NRTC Programming Services"). In addition, to the extent HCG has
obtained such rights, NRTC shall have the right to provide and retain as NRTC
Revenues all revenues from the provision of the NRTC Programming Services to
commercial establishments in NRTC Territories (such as hotels and bars but
excluding other distributors such as cable system operators), provided, however,
that such commercial establishments are receiving NRTC Programming Services from
locations within counties or zip codes for which Committed Members have
exercised Member Contract Options C-2, C-6, C-7, C-8, or C-9 ("NRTC Commercial
Establishments"). HCG shall determine, in its sole discretion, the services and
packages which constitute the HCG Programming Services, subject to the
provisions of Section 2(b) of this letter. NRTC Revenues shall not include TT&C
Fees, Ground Services Fees, Security Services Fees, or taxes imposed on NRTC's
provision of any service, or authorization fees, late fees, or other similar
fees not attributable to the NRTC Programming Services, but shall include
revenues from intra NRTC/Member load control services and inter NRTC/Member data
services which are directly attributable to Committed Member Residences and NRTC
Commercial Establishments. NRTC Revenues shall also include revenue paid to HCG
by "secondary distributors" (e.g., cable system operators), provided that such
secondary distributor is utilizing the DSS system in its subscriber residences
and HCG is utilizing the CAMC to authorize and deauthorize subscribers located
in such secondary distributor's system.
(b) NRTC shall market the NRTC Programming Services to Committed Member
Residences, provided that NRTC shall also have the right to establish, market,
distribute and price smaller package(s) of basic programming similar to the 17
channel Best of Cable package, consisting of the Programming Services;
specifically subject to any and all Programming Agreement restrictions and
obligations, including those restrictions and obligations applicable in NRTC and
non-NRTC Territories. The number and content of such package(s) shall be
determined by NRTC and reasonably approved by HCG. NRTC shall establish the
suggested retail price of such package(s) with input from HCG. NRTC shall
reasonably consult with HCG prior to implementing any material changes in
pricing or packaging related to such similar package(s).
(c) The Programming Services shall be deemed Restricted Services for
purposes of Section 7.07 of the Agreement, and the Use Restriction shall only
apply to such Programming Services, as then defined at the time of such sale or
lease.
(d) HCG shall use its best reasonable efforts to provide NRTC, subject to
confidentiality and other applicable restrictions, with copies of all applicable
agreements executed prior to the effective date of this letter, or redacted
copies if necessary, between HCG and any service or rights provider of NRTC
Programming Services. With respect to those agreements executed after the
effective date of this letter, HCG shall provide NRTC with copies of such
agreements or redacted copies, if such redactions are necessary due to their
inapplicability to the provision and cost of NRTC Programming Services, between
HCG and any service or rights provider of NRTC Programming Services. NRTC shall
treat such agreements
2
<PAGE>
Information below, marked with [**], has been omitted pursuant to a request for
confidential treatment. A complete copy of this document has been supplied to
the Securities and Exchange Commission under separate cover.
as Confidential Information, and shall not disclose such information to any
other party, including Committed Members. NRTC shall execute non-disclosure and
other related agreements when and as required by the service or rights provider.
(e) HCG shall reasonably consult with NRTC prior to implementing any
material changes in pricing or packaging affecting NRTC Programming Services.
3. NRTC Programming Services Cost.
I. Standard Services.
(a) "Standard Services" shall mean HCG Programming Services other than
those services in which the service or rights provider requires a minimum
subscriber guarantee, advance payments to acquire such rights, or other such
similar commitments. NRTC Members have the right to set the retail price of such
services to Committed Member Residences and NRTC Commercial Establishments
subject to any and all programming agreement restrictions and obligations,
provided, that HCG will establish the national suggested retail price of such
services, and subject to the applicable programming agreements.
(b) With respect to the Standard Services, NRTC shall also be entitled to
retain as NRTC Revenue its proportionate share of other revenue directly
attributable to Committed Member Residences or NRTC Commercial Establishments,
as applicable (i.e., based upon the number of Committed Member Residences or
purchases by Committed Member Residences).
(c) With respect to the Standard Services, NRTC shall pay to HCG, the NRTC
Revenue Fee described in Section 3.06 of this Agreement, provided that the NRTC
Revenue Fee shall (1) be increased from [**] (2) become payable, monthly,
-------
beginning at the Service Commencement Date, and (3) be calculated on billed NRTC
Revenues.
II. Non Standard Services.
(a) "Non Standard Services" shall mean HCG Programming Services in which
the serv11144r rights provider requires a minimum subscriber guarantee, advance
payments to acquire such rights, or other such similar commitments.
(b) Upon procurement of any rights to Non Standard Services by HCG, NRTC
and HCG shall negotiate in good faith NRTC's pro rata payment share for such
services (whereas, NRTC's pro rata share of revenue from Non Standard Services
shall be based upon NRTC's pro rata share of any subscriber guarantees, advance
payments or other similar commitments). If the parties agree to NRTC's payment
of such share, then such Non Standard Services shall become NRTC Programming
Services and the NRTC Revenue Fee shall be payable to HCG in accordance with
Section 3.I(c) of this letter. If the parties are unable to reach agreement on
NRTC's payment of such share, then HCG shall become the exclusive distributor of
such Non Standard Services ("Non Select Services") to Committed Member
Residences and NRTC Commercial Establishments. NRTC shall bill Committed Member
Residences and NRTC Commercial Establishments for Non Select Services and pay to
HCG the collected amounts. NRTC shall be entitled to [**] of the gross revenue
collected for the Non Select Services.
3
<PAGE>
Information below, marked with [**], has been omitted pursuant to a request for
confidential treatment. A complete copy of this document has been supplied to
the Securities and Exchange Commission under separate cover.
III. General Cost Matters.
(a) HCG shall not be required to pay (1) the [**] DirecTv Fee specified in
Section 5.02(b) of the Agreement, or (2) the shared cost of security fees,
authorization fees, billing fees and remittance processing fees. The Joint
Billing Agreement shall be either terminated or amended, in the context of this
letter, as reasonably agreed to by the parties.
(b) The use of the centralized billing and authorization system for retail
billing shall become mandatory for all Committed Members to the extent such use
is provided for in the Direct Broadcast Service Billing System Management,
Development and Services Agreement dated April 16, 1993 between NRTC and HCG.
(c) NRTC shall receive its proportional share of all reduced costs caused
by payment for common use services by USSB or other users of the Satellite
capacity as reasonably determined by HCG.
(d) Neither the Standard Services nor the Non Standard Services will
require any additional Committed Member Payment or other similar investment by
NRTC, unless required in order to secure Non Standard Services rights pursuant
to Section 3.II.(b) of this letter.
(e) NRTC shall incur no additional charges should HCG exercise the High
Power Option described in Exhibit 19, Section 20 of this Agreement.
(f) HCG shall provide NRTC with its proportional share of any and all
discounts and volume price breaks directly attributable to Committed Member
Residences or NRTC Commercial Establishments, as applicable, contained in the
NRTC Programming Services agreements, subject to any and all programming
agreement restrictions and obligations, as reasonably determined by HCG.
(g) NRTC shall be responsible for all programming costs directly
attributable to Committed Member Residences or NRTC Commercial Establishments,
as applicable, excluding those directly related to the Non Select Services, as
reasonably determined by HCG.
4. Sale of Satellite Capacity.
(a) NRTC shall be entitled to receive [**] of the net proceeds from any
sale or lease by HCG of any Satellite channel or Transponder on either of the
initial two DBS Satellites, in which HCG and NRTC no longer retain the
distribution rights to the programming services transmitted over the capacity in
question ("HCG Sale"), which shall specifically exclude any proceeds from sale-
leasebacks (or the like), public offerings or stock offerings or inter-Affiliate
transfers or restructures. Net proceeds shall be net of all expenses associated
with such sale or lease.
(b) In connection with a HCG Sale, HCG shall (1) provide notice to and
consult with NRTC prior to completion of an HCG Sale which shall be completed in
HCG's sole discretion and (2) provide or cause to be provided continuation of
the Programming Services to NRTC.
4
<PAGE>
5. Support Services. To the extent technically feasible and to the extent HCG
can reasonably obtain access to NRTC's billing system database, HCG shall
provide backup telephone customer service support seven days a week during the
hours of 4:30 p.m. to 8:00 a.m. in each applicable time zone ("Backup") to NRTC
Committed Members which will include subscriber authorizations, deauthorizations
and subscriber service changes; provided that NRTC and as applicable, the
Committed Members are providing a primary telephone customer service to
Committed Member Residences which shall forward calls from Committed Member
Residences to an HCG provided phone number only during the Backup hours set
forth above (NRTC shall be responsible for all costs related to calls from
Committed Member Residences during non-Backup hours). Such backup support shall
include order ahead pay per view at a charge of $1.00 (or the actual cost for
such service, if such cost can be reasonably and accurately determined) for each
such placed order, but shall not include service of billing related issues. HCG
shall provide the Backup support through the end of 1994, at which time HCG and
NRTC shall negotiate in good faith the terms and conditions upon which HCG shall
continue to provide such Backup support. In no event shall NRTC and the
Committed Members promote the use of a DirecTv phone number (including "l-800-
DirecTv") without the prior written approval of HCG. HCG makes no warranties and
shall have no liability regarding the performance of such Backup support.
6. Member Execution. On or before March 31, 1994, NRTC must execute amendments
(representative of this new relationship) to the Member Contract with NRTC
Committed Members which represent ninety-five percent (95%) or more of the total
Committed Member Payments. If NRTC is successful in reaching this 95% goal or if
HCG is willing to accept less than 95%, then the NRTC Committed Members who did
not execute such amendments shall be refunded their respective Committed Member
Payments. If NRTC is unsuccessful in reaching this 95% goal, and if HCG is not
willing to accept less than 95%, then this letter shall be null and void in its
entirety, and the Agreement shall continue in full force and effect unmodified
by the terms and conditions of this letter.
5
<PAGE>
The terms and conditions contained in this letter shall be subsequently
formalized in an amendment to the Agreement. Such amendment may include other
changes, to be negotiated in good faith, not addressed by this letter, but which
are necessary due to the terms and conditions agreed upon in this letter.
Please acknowledge by signing below and returning this letter to me by Tuesday,
February 15, 1994.
Regards,
James B. Ramo
HCG
Acknowledged and Agreed To:
B. R. Phillips III
NRTC
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<PAGE>
Exhibit 10.15
2201 Cooperative Way
Suite 400
Herndon, Virginia 22071
Tel: (703) 787-0874
Fax: (703) 787-3355
B.R. Phillips III
Chief Executive Officer
June 22, 1994
Mr. James B. Ramo
Senior Vice President
DIRECTV
2230 East Imperial Hwy
El Segundo, CA 90245
RE: DBS Distribution Agreement dated April 10, 1992, between Hughes
Communications Galaxy, Inc. ("HCG") and the National Rural
Telecommunications Cooperative ("NRTC"), as amended (the "Agreement")
Dear Jim,
The letter agreement ("Letter Agreement") sets forth the terms and conditions to
the amendment of Section 3.08 of the Agreement, and the delivery of the Letter
of Credit by NRTC to HCG pursuant to Exhibit 3.08 of the Agreement. Capitalized
terms not defined herein have the meanings given them in the Agreement.
1. In General. The Letter of Credit (and any Replacement Letter of Credit)
shall be irrevocable and shall have a stated expiration date of six (6) months
from the date it is issued ("LOC Expiration Date").
2. Delivery. NRTC shall deliver the Letter of Credit to HCG as soon as
practicable following HCG's execution of this Letter Agreement.
3. HCG Draw Down on the Letter of Credit. If HCG shall draw down any of the LC
Amount under the Letter of Credit, NRTC shall replenish the Letter of Credit to
the LC Amount within 30 days of the date payment is made by the financial
institution to HCG.
4. Nonpayment Breach. If HCG shall draw down any of the LC Amount under the
Letter of Credit because NRTC shall have failed to fulfill any payment
obligation it has to HCG, NRTC shall replenish the Letter of Credit to the LC
Amount within 30 days of the date payment is made by the financial institution
to HCG.
5. Replacement Letter of Credit. NRTC shall replace the Letter of Credit with
a Replacement Letter of Credit no later than 30 days ("30 Day Expiration Date")
prior to the LOC
<PAGE>
Mr. J. Ramo
June 22, 1994
Expiration Date. If NRTC has not secured a Replacement Letter of Credit by the
30 Day Expiration Date, then NRTC shall be deemed in breach of Section 3.08 of
the Agreement, and, if NRTC is unable to secure a Replacement Letter of Credit
on or before the LOC Expiration Date ("Replacement Period"), HCG shall have the
right to terminate the Agreement. HCG shall have no right to draw down any of
the LC Amount of the Letter of Credit during the Replacement Period other than
in the event of nonpayment by NRTC.
6. Formal Amendment. The terms and conditions contained in this Letter
Agreement shall be formalized in an amendment to Section 3.08 of the Agreement
("Formal Amendment"), together with the formalization of all other outstanding
amendments to the Agreement, prior to the first 30 Day Expiration Date
("Formalization Period"). Such Formal Amendment may include other changes, to be
negotiated in good faith, not addressed by this Letter Agreement, but which are
necessary due to the terms and conditions agreed upon in this Letter Agreement.
7. Right to Renegotiate. During the Formalization Period, the parties shall
discuss and negotiate, in good faith, a further amendment to the Agreement to
reduce the LC Amount or to eliminate entirely Section 3.08 and NRTC's obligation
to provide a Letter of Credit. The parties shall use their reasonable best
efforts to develop and agree upon acceptable financial criteria which
demonstrates, to HCG's commercially reasonable satisfaction, that NRTC has the
ability to fulfill its payment obligations to HCG under the Agreement.
*****
Please acknowledge your agreement to the terms and conditions set forth in this
Letter Agreement by executing a counterpart hereof and returning the same to me.
Cordially yours,
B.R. Phillips, III
Chief Executive Officer
2
<PAGE>
Mr. J. Ramo
June 22, 1994
AGREED AND ACCEPTED THIS
_____ DAY OF __________, 1994
Hughes Communications Galaxy, Inc.
By: ____________________________________
James B. Ramo
Its: ____________________________________
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