UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report January 13, 2000
----------------
(Date of earliest event reported)
HUGHES ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 0-26035 52-1106564
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
200 North Sepulveda Boulevard
El Segundo, California 90245
(310) 662-9688
(Address, including zip code, and telephone number,
including area code, of registrants' principal executive office)
<PAGE>
HUGHES ELECTRONICS CORPORATION
ITEM 5. OTHER EVENTS
On January 13, 2000, Hughes Electronics Corporation (Hughes) issued a press
release which announced that The Boeing Company will acquire the Hughes
satellite systems businesses. Hughes' press release is included as Exhibit 99.1.
Hughes' third quarter 1999 financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations, which were included
as items 1 and 2 to the Hughes Electronics Corporation Quarterly Report on Form
10-Q for the quarter ended September 30, 1999, have been restated to reflect the
satellite systems businesses as discontinued operations and are included as
Exhibit 99.2 to this Form 8-K.
Exhibit 99.1 Hughes' press release dated January 13, 2000
Exhibit 99.2 Hughes' third quarter 1999 financial statements and
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Exhibit 27 Financial Data Schedule (for SEC information only)
* * * * * *
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HUGHES ELECTRONICS CORPORATION
------------------------------
(Registrant)
Date February 18, 2000
-----------------
By
/s/ Roxanne S. Austin
------------------------------
(Roxanne S. Austin,
Chief Financial Officer)
Exhibit 99.1
HUGHES ANNOUNCES ACTIONS TO FOCUS COMPANY ON HIGH-GROWTH SERVICE
BUSINESSES
Satellite Systems Operations Will Be Sold to Boeing in All Cash Transaction of
$3.75 Billion
Company to Refocus Wireless Manufacturing Operations to Concentrate on Broadband
Opportunities Expects $275 Million Charge to 4th Quarter 1999Earnings
Remaining Operations to be Structured in Two New Sectors Focused on Consumer
Entertainment and Enterprise Communications
EL SEGUNDO, Calif., Jan. 13, 2000 - Hughes Electronics Corporation today
announced major changes in its corporate structure and business mix that are
designed to sharply focus the company's resources and management attention on
its high-growth entertainment, information and business communications services
businesses. Included in the actions are the sale of Hughes' satellite systems
operations, a strategy to discontinue certain wireless manufacturing activities
and focus on wireless broadband opportunities, and the appointment of two
top-level executives to concentrate the company's service operations on two
distinct customer groups - individual consumers, and business-to-business
"enterprise" customers.
"These strategic moves accelerate the transformation of Hughes into a highly
focused entertainment and data information services and distribution company,"
said Michael T. Smith, chairman and CEO of Hughes. "We will now be in a stronger
position to fuel the growth of our high-growth service businesses, focus more
intensely on customer needs, and devote resources to the integration of new
broadband and interactive services."
Boeing to Acquire Satellite Systems Operations
In the first of the actions, Hughes and The Boeing Company today announced that
Boeing will acquire the Hughes satellite systems businesses in an all-cash
transaction of $3.75 billion.
Included in the acquisition is Hughes Space and Communications Company, the
world leader in communications satellites; Hughes Electron Dynamics, a leading
supplier of electronic components for satellites; and Spectrolab, a premier
provider of solar cells and panels for satellites. The units have a combined
workforce of about 9,000employees, primarily in the Los Angeles area. The
operations are expected to have 1999 revenues of $2.3 billion, and currently
have a backlog of more than 36 satellites valued at more than $4 billion.
The transaction is subject to regulatory and government review, and is expected
to close by mid-year.
This acquisition will allow Boeing to take a significant step forward in
executing its strategic vision of becoming an industry leader in integrated
space and airborne information systems. The Hughes satellite business, coupled
with Boeing's already strong large-scale systems integration capabilities, will
enable Boeing to offer unparalleled integrated space, air and terrestrial
information and communications systems to its customers. Boeing anticipates
substantial growth in these large, complex systems that are often referred to as
"systems of systems" in both the commercial and government markets.
"Vast talent and expertise resides within the Hughes satellite manufacturing
companies, and this move significantly strengthens the position of both the
Boeing and Hughes space businesses, which are highly complementary," Smith said.
Also as a result of the transaction, Hughes will become one of Boeing's largest
customers, with contracts in place for five HS 601 HP satellites for PanAmSat
and DIRECTV(R), and five HS 702 satellites for PanAmSat and the new Hughes
SpacewayTM broadband system.
Wireless Manufacturing Reduced; Investment Shifted to Broadband
At the same time, Hughes announced plans to narrow the focus of its wireless
business at Hughes Network Systems (HNS), located in Germantown, Maryland. As a
result of this decision, HNS' wireless business will focus on its leading
broadband point-to-multipoint product line and discontinue its mobile cellular
and narrow band local loop product lines. HNS will fulfill its outstanding
contractual obligations for these discontinued product lines. Resulting from
these actions, Hughes will record a fourth quarter pre-tax charge of
approximately $275 million.
Operations Consolidated to Focus on Customers
<PAGE>
Additionally, Smith announced the promotion of two executives who will help
consolidate all operations of the company in alignment with their customer focus
- -individual consumers and enterprise customers.
Eddy W. Hartenstein, Corporate Senior Vice President of Hughes and President,
DIRECTV, is promoted to Corporate Senior Executive Vice President of the Hughes
Consumer Sector, which will include DIRECTV, Galaxy Latin AmericaTM, DIRECTV
Japan, and the consumer marketing applications of DirecPC(R) and SpacewayTM. He
will be headquartered at the corporate offices in El Segundo, California.
Jack A. Shaw, Corporate Executive Vice President of Hughes and Chairman and CEO
of Hughes Network Systems, is promoted to Corporate Senior Executive Vice
President of the Hughes Enterprise Sector, which will include Hughes Network
Systems, PanAmSat, and the enterprise applications of DirecPC and Spaceway. He
will also be headquartered at the corporate offices. Shaw will be succeeded by
Pradman Kaul, who is promoted to Chairman and CEO of Hughes Network Systems.
1999 Earnings Guidance Offered to Reflect Wireless Charge
Hughes expects the impact to fourth quarter 1999 earnings per share (EPS) from
the one-time HNS Wireless charge to be a loss of approximately $0.40 per share.
As a result, Hughes anticipates reporting a loss per share of $0.58 to $0.60 for
the quarter. Excluding the charge, Hughes expects its fourth quarter 1999 EPS to
exceed the analysts' consensus, due to the company's strong EBITDA1 performance.
The analysts' consensus anticipates a loss per share of $0.28.
Hughes: A World Leader in Communications Services
Hughes is a world leader in the communications services industry, with each of
its units - DIRECTV, PanAmSat and Hughes Network Systems - commanding a
leadership position in the market that it serves.
DIRECTV is the world's largest direct-to-home provider of digital entertainment
programming, with more than 9 million subscribers worldwide. DIRECTV has more
than 8 million subscribers in the United States, including customers of
PRIMESTAR by DIRECTV, and in 1999 acquired a record 1.6 million net new
subscribers, a 39percent increase over the previous record year of 1998. In
1999, DIRECTV began offering local channels and this year will roll out new
interactive and enhanced television services through alliances with companies
including America Online (AOL), Wink, TiVo and others. With more than 800,000
subscribers, Galaxy Latin America, a 78-percent Hughes-owned partnership with
the Cisneros Group of Companies of Venezuela, is the leading provider of
direct-to-home television in Latin America, having posted three successive
record months of new subscriber growth.
PanAmSat Corporation, which is 81-percent owned by Hughes, is the world's
largest commercial operator of communications satellites and has a customer base
that includes the world's premier entertainment, communications and Internet
companies. PanAmSat recently expanded its capacity with the December 21, 1999
launch of a Hughes 702 satellite, and plans further expansion by launching six
additional satellites by early 2001.
Hughes Network Systems is the world's leading provider of enterprise
satellite-based private communications networks, with a broad, internationally
based range of customers including major oil companies, retailers and
manufacturers. Its DirecPC business, offering high-speed broadband Internet
service, will launch a joint service with AOL later this year to provide premier
"AOL Plus Via DirecPC" to Internet users. Hughes Network Systems will also
launch Spaceway, a two-way, interactive broadband service offering high-speed
data communications, beginning in 2002.
The earnings of Hughes Electronics, a unit of General Motors Corporation, are
used to calculate the earnings per share attributable to the General Motors
Class H common stock (NYSE:GMH). Visit Hughes on the World Wide Web at
www.hughes.com.
<PAGE>
NOTE: Hughes Electronics Corporation believes that certain statements in this
press release may constitute forward-looking statements within the meaning of
The Private Securities Litigation Reform Act of 1995. When used in this press
release, the words "estimate," "plan," "project," "anticipate," "expect,"
"intend," "outlook," "believe," and other similar expressions are intended to
identify forward-looking statements and information. Actual results of Hughes
may differ materially from anticipated results as a result of certain risks and
uncertainties, which include but are not limited to those associated with:
economic conditions; demand for products and services, and market acceptance;
government action; local political or economic developments in or affecting
countries where we have international operations; our ability to obtain export
licenses; competition; our ability to achieve cost reductions; technological
risks; our ability to address the year 2000 issue; interruptions to production
attributable to causes outside our control; limitations on access to
distribution channels; the success and timelines of satellite launches; the
in-orbit performance of satellites; the ability of our customers to obtain
financing; and our ability to access capital to maintain our financial
flexibility. Hughes cautions that these important factors are not exclusive.
1 EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is the
sum of operating profit (loss) and depreciation and amortization.
Exhibit 99.2
<PAGE>
HUGHES ELECTRONICS CORPORATION
FINANCIAL STATEMENTS
STATEMENTS OF INCOME (LOSS) AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1999 1998 1999 1998
------ ------ ------ ------
(Dollars in Millions Except Per Share Amounts)
Revenues
Direct broadcast, leasing and
other services $1,294.4 $640.5 $3,095.2 $1,845.8
Product sales 333.4 214.7 767.1 529.6
------- ------- -------- --------
Total Revenues 1,627.8 855.2 3,862.3 2,375.4
------- ------- ------- -------
Operating Costs and Expenses
Cost of products sold 295.8 120.0 662.2 356.4
Broadcast programming and
other costs 573.8 284.2 1,343.8 799.8
Selling, general and
administrative expenses 573.0 355.1 1,459.2 946.7
Depreciation and amortization 201.5 98.4 457.9 274.1
Amortization of GM purchase
accounting adjustments 0.9 0.9 2.5 2.5
------- ----- ------- -------
Total Operating Costs and Expenses 1,645.0 858.6 3,925.6 2,379.5
------- ----- ------- -------
Operating Loss (17.2) (3.4) (63.3) (4.1)
Interest income 2.6 20.5 20.8 88.6
Interest expense (51.7) (3.6) (71.0) (9.5)
Other, net (21.1) (33.3) (75.7) (101.2)
------- ----- ------- -------
Loss from Continuing Operations
before Income Taxes, Minority
Interests and Cumulative
Effect of Accounting Change (87.4) (19.8) (189.2) (26.2)
Income tax provision (benefit) (36.8) (3.7) (59.7) 0.7
Minority interests in net losses
of subsidiaries 8.8 9.3 22.1 19.2
------- ----- ------- ------
Loss from continuing operations
before cumulative effect of
accounting change (41.8) (6.8) (107.4) (7.7)
Income from discontinued
operations, net of taxes 6.9 44.4 47.9 144.5
--- ---- ---- -----
Income (Loss) before cumulative
effect of accounting change (34.9) 37.6 (59.5) 136.8
Cumulative effect of accounting
change, net of taxes - - - (9.2)
--- ---- ---- -----
Net Income (Loss) (34.9) 37.6 (59.5) 127.6
Adjustments to exclude the effect of
GM purchase accounting adjustments 5.3 5.3 15.9 15.9
----- ----- ----- -----
Earnings (Loss) excluding the
effect of GM purchase
accounting adjustments (29.6) 42.9 (43.6) 143.5
Preferred stock dividends (24.7) - (26.3) -
----- ----- ----- -----
Earnings (Loss) Used for
Computation of Available
Separate Consolidated Net
Income (Loss) $(54.3) $42.9 $(69.9) $143.5
===== ==== ===== =====
Available Separate Consolidated
Net Income (Loss)
Average number of shares of
General Motors Class H
Common Stock outstanding
(in millions) (Numerator) 135.1 105.7 120.8 105.0
Average Class H dividend base
(in millions)(Denominator) 428.9 399.9 414.7 399.9
Available Separate Consolidated
Net Income (Loss) $(17.1) $11.4 $(20.4) $37.6
====== ==== ====== ====
Earnings (Loss) Attributable to
General Motors Class H Common
Stock on a Per Share Basis
Loss from continuing operations
before cumulative effect of
accounting change $(0.15) $(0.01) $(0.32) $(0.01)
Discontinued operations 0.02 0.12 0.15 0.39
Cumulative effect of
accounting change - - - (0.02)
------ ------ ----- -----
Earnings (Loss) Attributable
to General Motors
Class H Common Stock
on a Per Share
Basis - Basic and Diluted $(0.13) $0.11 $(0.17) $0.36
==== ==== ==== ====
Reference should be made to the Notes to Financial Statements.
<PAGE>
HUGHES ELECTRONICS CORPORATION
BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 1999 1998
---- ----
(Dollars in Millions)
Current Assets
Cash and cash equivalents $158.2 $1,342.0
Accounts and notes receivable (less allowances) 1,191.8 764.6
Contracts in process 187.0 179.0
Inventories 318.1 286.6
Net assets of discontinued operations 1,231.6 1,005.8
Prepaid expenses and other, including deferred
income taxes of $321.2 and $209.7 927.4 497.2
-------- --------
Total Current Assets 4,014.1 4,075.2
Satellites, net 3,690.6 3,197.5
Property, net 917.6 683.0
Net Investment in Sales-type Leases 155.9 173.4
Intangible Assets, net of accumulated amortization
of $288.8 and $153.3 7,428.4 3,185.9
Investments and Other Assets 1,948.6 1,302.4
--------- ---------
Total Assets $18,155.2 $12,617.4
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $930.7 $691.8
Advances on contracts 11.8 20.1
Deferred revenues 194.9 43.8
Current portion of long-term debt 298.1 156.1
Accrued liabilities 660.3 434.2
-------- --------
Total Current Liabilities 2,095.8 1,346.0
Long-Term Debt 1,929.2 778.7
Postretirement Benefits Other Than Pensions 20.4 20.4
Other Liabilities and Deferred Credits 1,618.3 937.3
Deferred Income Taxes 432.3 641.1
Commitments and Contingencies
Minority Interests 530.0 481.7
Stockholder's Equity
Capital stock and additional paid-in capital 9,710.7 8,146.1
Preferred stock 1,486.3 -
Net income retained for use in the business 172.0 257.8
-------- -------
Subtotal Stockholder's Equity 11,369.0 8,403.9
-------- -------
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment (6.8) (6.8)
Accumulated unrealized gains on securities 154.8 16.1
Accumulated foreign currency translation
adjustments 12.2 (1.0)
-------- -------
Accumulated other comprehensive income 160.2 8.3
-------- -------
Total Stockholder's Equity 11,529.2 8,412.2
-------- -------
Total Liabilities and Stockholder's Equity $18,155.2 $12,617.4
======== ========
Reference should be made to the Notes to Financial Statements.
<PAGE>
HUGHES ELECTRONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------------
1999 1998
---- ----
(Dollars in Millions)
Cash Flows from Operating Activities
Net Cash Provided by (Used in) Operating Activities $(66.5) $332.8
------- ------
Cash Flows from Investing Activities
Investment in companies, net of cash acquired (2,318.4) (950.9)
Investment in convertible bonds (238.1) -
Expenditures for property (259.6) (152.7)
Increase in satellites (551.9) (526.7)
Early buy-out of satellite under sale and leaseback (245.4) (155.5)
Proceeds from disposals of property 5.1 17.6
Proceeds from disposal of investments - 12.4
Proceeds from insurance claims 10.7 231.2
-------- --------
Net Cash Used in Investing Activities (3,597.6) (1,524.6)
-------- --------
Cash Flows from Financing Activities
Net increase in notes and loans payable 85.7 60.0
Long-term debt borrowings 5,221.6 875.3
Repayment of long-term debt (4,171.0) (734.2)
Net proceeds from issuance of preferred stock 1,485.0 -
Stock options exercised 47.3 -
Purchase and retirement of GM Class H common stock (8.9) -
Preferred stock dividends paid to General Motors (1.6) -
Payment to General Motors for Delco post-closing
price adjustment - (204.7)
------- ------
Net Cash Provided by (Used in) Financing Activities2,658.1 (3.6)
------- ------
Net Cash Used in Continuing Operations (1,006.0) (1,195.4)
Net Cash Used in Discontinued Operations (177.8) (78.7)
------- -------
Net decrease in cash and cash equivalents (1,183.8) (1,274.1)
Cash and cash equivalents at beginning of the period 1,342.0 2,783.8
------- -------
Cash and cash equivalents at end of the period $ 158.2 $1,509.7
======== =======
Reference should be made to the Notes to Financial Statements.
<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 1998 financial statements and notes
thereto.
Certain prior period amounts have been reclassified to conform to the
September 1999 presentation.
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.
On January 13, 2000, Hughes announced that it had reached an agreement to
sell its satellite systems manufacturing businesses to Boeing. As a result, the
financial results for the satellite systems manufacturing businesses are treated
as discontinued operations for all periods presented herein. Consequently,
revenues, operating costs and expenses, and other non-operating results for
these businesses are excluded from Hughes' results from continuing operations.
The financial results of these businesses are presented in Hughes' Statements of
Income (Loss) and Available Separate Consolidated Net Income (Loss) in a single
line item entitled "income from discontinued operations, net of taxes" and the
related assets and liabilities are presented in the balance sheets on a single
line item entitled "net assets of discontinued operations." See further
discussion in Note 10. Income from discontinued operations of $6.9 million,
$44.4 million, $47.9 million and $144.5 million for the three months ended
September 30, 1999 and 1998 and the nine months ended September 30, 1999 and
1998, respectively, is reported net of income tax provision (benefit) of ($1.3)
million, $21.1 million, $14.8 million and $71.4 million, respectively.
In 1998, Hughes adopted American Institute of Certified Public Accountants
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that all start-up costs previously capitalized be
written off and recognized as a cumulative effect of accounting change, net of
taxes, as of the beginning of the year of adoption. On a prospective basis,
these types of costs are required to be expensed as incurred. The unfavorable
cumulative effect of this accounting change was $9.2 million after-tax, or $0.02
per share of GM Class H common stock in the first quarter of 1998.
Note 2. Inventories
Major Classes of Inventories
September 30, December 31,
(Dollars in Millions) 1999 1998
---- ----
Productive material and supplies $58.2 $55.0
Work in process 154.5 118.6
Finished goods 105.4 113.0
----- -----
Total $318.1 $286.6
===== =====
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 3. Comprehensive Income
Hughes' total comprehensive income was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
(Dollars in Millions) 1999 1998 1999 1998
---- ---- ---- ----
Net income (loss) $(34.9) $37.6 $(59.5) $127.6
Other comprehensive income
(loss):
Foreign currency translation
adjustments 17.8 2.2 13.2 (0.3)
Unrealized gains (losses)
on securities:
Unrealized holding gains
(losses) 138.2 (3.4) 138.7 (2.4)
Less: reclassification
adjustment for
unrealized gains (losses)
included in net income - 0.2 - (7.1)
------ ----- ----- -----
Unrealized gains (losses)
on securities 138.2 (3.2) 138.7 (9.5)
------ ----- ----- -----
Other comprehensive income
(loss) 156.0 (1.0) 151.9 (9.8)
----- ----- ----- -----
Total comprehensive
income $121.1 $36.6 $92.4 $117.8
===== ==== ==== =====
Note 4. Earnings (Loss) Per Share Attributable to GM Class H Common Stock
and Available Separate Consolidated Net Income (Loss)
Earnings (Loss) Attributable to GM Class H Common Stock on a per share basis
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 (Loss) ("ASCNI") of
Hughes. The ASCNI of Hughes is determined quarterly and is equal to the separate
consolidated net income (loss) of Hughes, excluding the effects of GM purchase
accounting adjustments arising from GM's acquisition of Hughes and including the
effects of preferred dividends paid and/or payable to GM (earnings (loss) used
for computation of ASCNI), multiplied by a fraction, the numerator of which is
equal to the weighted-average number of shares of GM Class H common stock
outstanding during the period (135.1 million and 105.7 million during the third
quarters of 1999 and 1998, respectively) and the denominator of which is a
number equal to the weighted- average number of shares of GM Class H common
stock which, if issued and outstanding, would represent 100% of the tracking
stock interest in the earnings of Hughes (Average Class H dividend base). The
Average Class H dividend base was 428.9 million and 399.9 million during the
third quarters of 1999 and 1998, respectively. Upon conversion of the General
Motors Series H preference stock into General Motors Class H common stock, both
the numerator and the denominator used in the computation of ASCNI will increase
by the number of shares of the General Motors Class H common stock issued (see
further discussion in Note 5). In addition, 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.
In connection with the PRIMESTAR and USSB transactions (see further
discussion in Note 7), GM contributed to Hughes an amount of cash sufficient to
enable Hughes to purchase from GM, for fair value as determined by the GM Board,
the number of shares of GM Class H common stock delivered by Hughes. In
accordance with the GM certificate of incorporation, the Class H dividend base
was increased to reflect that number of shares. The number of shares issued as
part of the PRIMESTAR acquisition and the USSB merger have been included in the
calculation of both the numerator and denominator of the fraction described
above since the consummation dates of the transactions.
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 4. Earnings (Loss) Per Share Attributable to GM Class H Common Stock
and Available Separate Consolidated Net Income (Loss) - concluded
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 increases the numerator and 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). From
time to time, in anticipation of exercises of stock options, Hughes purchases
Class H common stock from the open market. Upon purchase, these shares are
retired and therefore decrease the numerator and denominator of the fraction
referred to above.
For the three and nine months ended September 30, 1999, diluted loss per
share has not been presented as the assumed exercise of stock options and the
assumed conversion of the preferred shares in the computation of diluted loss
per share would have been anti-dilutive.
Note 5. Hughes Series A Preferred Stock
On June 24, 1999, as part of a strategic alliance with Hughes, America
Online ("AOL") invested $1.5 billion in shares of 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 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. It may be converted earlier in certain limited circumstances.
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 ASCNI of Hughes, which will have an
effect equivalent to the payment of dividends on the Series H preference stock
as 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 ASCNI of Hughes will be increased by the
corresponding 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 ASCNI will increase by the amount of the General
Motors Class H common stock issued.
Note 6. 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 7. Investments and Acquisitions
On September 24, 1999, DIRECTV Japan, Hughes' 42.2% owned affiliate, raised
approximately $275 million through the issuance of bonds, convertible into
common stock, to five of its major shareholders, including $238.1 million issued
to Hughes. If Hughes elects to convert these bonds, Hughes would have a
controlling interest in DIRECTV Japan which would require consolidation of the
entity which could, in turn, result in increased operating losses for Hughes.
On July 28, 1999, Galaxy Latin America ("GLA") acquired Galaxy Brasil, Ltda.,
the exclusive distributor of DIRECTV services in Brazil, from Tevecap S.A. for
approximately $114.0 million plus the assumption of debt. In connection with the
transaction, Tevecap also sold its 10% equity interest in GLA to Hughes and The
Cisneros Group of Companies, the remaining partners in GLA, which increased
Hughes' ownership interest in GLA to 77.8%. As part of the transaction, Hughes
also increased its ownership interest in SurFin from 59.1% to 75.0%. The total
consideration paid in the transactions amounted to approximately $101.1 million.
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 7. Investments and Acquisitions - concluded
On May 20, 1999, Hughes acquired by merger all of the outstanding capital
stock of USSB, a provider of premium subscription television programming via the
digital broadcasting system that it shares with DIRECTV. The total consideration
of about $1.6 billion paid in July 1999, consisted of about $0.4 billion in cash
and 22.6 million shares of Class H common stock.
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 related orbital frequencies of Tempo Satellite, a
wholly-owned subsidiary of TCI Satellite Entertainment, Inc. On April 28, 1999,
the acquisition of PRIMESTAR's direct-to-home business was completed. The
purchase price consisted of $1.1 billion in cash and 4.9 million shares of GM
Class H common stock, for a total purchase price of $1.3 billion, based on the
average market price of $47.87 per share of Class H common stock at the time the
acquisition agreement was signed. The purchase price will be adjusted based upon
the final adjusted net working capital of PRIMESTAR at the date of closing. The
purchase price for the Tempo Satellite assets consisted of $500 million in cash.
Of this purchase price, $150 million was paid on March 10, 1999 for a satellite
that has not yet been launched and the remaining $350 million was paid on June
4, 1999 for an in-orbit satellite and 11 related satellite orbital frequencies.
The financial information presented as of and for the periods ended September
30, 1999 reflect the effects of the PRIMESTAR, Tempo Satellite and USSB
transactions from their respective dates of acquisition. These transactions have
been accounted for using the purchase method of accounting. The adjustments made
in the third quarter financial statements for the PRIMESTAR, Tempo Satellite and
USSB transactions reflect a preliminary allocation of the purchase price for the
transactions based upon information currently available. Adjustments relating to
the tangible assets, including satellites and equipment located on customer
premises; intangible assets, including licenses granted by the Federal
Communications Commission, customer lists and dealer network; 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 USSB represents a preliminary estimate pending further review
and analysis by Hughes management. The foregoing appraisals, review and analysis
are expected to be completed by March 31, 2000. Accordingly, the final purchase
price allocations may be different from the amounts reflected herein.
As the Hughes 1999 financial statements include only USSB's and PRIMESTAR's
results of operations since their dates of acquisition, the following selected
unaudited pro forma information is provided to present a summary of the combined
results of Hughes, USSB and PRIMESTAR as if the acquisitions 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 USSB and
PRIMESTAR operated as part of Hughes for the nine months ended September 30,
1999 and September 30, 1998, nor are they necessarily indicative of the results
of future operations. The pro forma information excludes the effect of
non-recurring charges.
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
(Dollars in Millions Except Per Share Amounts)
- --------------------------------------------------------------------------------
Total revenues $4,652.1 $3,686.5
Income (loss) before cumulative effect
of accounting change (65.1) 57.9
Net income (loss) (65.1) 48.7
Pro forma available separate
consolidated net income (loss) (23.7) 20.0
Pro forma earnings (loss) per share
attributable to GM Class H
common stock on a per share basis $(0.18) $0.15
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 8. Segment Reporting
Hughes' segments, which are differentiated by their products and services,
include Direct-To-Home Broadcast, Satellite Services and Network Systems.
Direct-To-Home Broadcast is engaged in acquiring, promoting, selling and/or
distributing digital 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.
Network Systems products include satellite-based business networks, broadband
and Internet access service and DIRECTV(TM) receiver equipment. Other includes
the corporate office and other entities.
Selected information for Hughes' operating segments for the three and nine
months ended September 30, 1999 and 1998, are reported as follows:
Operating Segments:
<TABLE>
<CAPTION>
Direct-To-
Home Satellite Network
(Dollars in Millions) Broadcast Services Systems Other Eliminations Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Three Months Ended:
September 30, 1999
External Revenue $1,143.8 $176.3 $305.8 $1.9 - $1,627.8
Intersegment
Revenues 0.8 34.4 120.4 $0.4 $(156.0) -
- -----------------------------------------------------------------------------------------
Total Revenues $1,144.6 $210.7 $426.2 $2.3 $(156.0) $1,627.8
- -----------------------------------------------------------------------------------------
Operating Profit
(Loss) $(67.6) $98.2 $32.2 $(28.2) $(51.8) $(17.2)
- -----------------------------------------------------------------------------------------
For the Three Months Ended:
September 30, 1998
External Revenues $458.0 $152.0 $240.4 $4.8 - $855.2
Intersegment
Revenues 1.1 34.5 27.3 0.4 $(63.3) -
- -----------------------------------------------------------------------------------------
Total Revenues $459.1 $186.5 $267.7 $5.2 $(63.3) $855.2
- -----------------------------------------------------------------------------------------
Operating Profit
(Loss) $(61.8) $78.2 $16.9 $(16.9) $(19.8) $(3.4)
- -----------------------------------------------------------------------------------------
For the Nine Months Ended:
September 30, 1999
External Revenues $2,569.1 $503.3 $783.3 $6.6 - $3,862.3
Intersegment
Revenues 2.3 101.3 214.9 $1.3 $(319.8) -
- -----------------------------------------------------------------------------------------
Total Revenues $2,571.4 $604.6 $998.2 $7.9 $(319.8) $3,862.3
- -----------------------------------------------------------------------------------------
Operating Profit
(Loss) $(159.4) $258.9 $25.7 $(70.0) $(118.5) $(63.3)
- -----------------------------------------------------------------------------------------
For the Nine Months Ended:
September 30, 1998
External Revenues $1,247.4 $480.7 $626.5 $20.8 - $2,375.4
Intersegment
Revenues 1.1 89.9 47.6 1.3 $(139.9) -
- -----------------------------------------------------------------------------------------
Total Revenues $1,248.5 $570.6 $674.1 $22.1 $(139.9) $2,375.4
- -----------------------------------------------------------------------------------------
Operating Profit
(Loss) $(133.6) $236.7 $(20.2) $(27.5) $(59.5) $(4.1)
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 9. Commitments and Contingencies
General Electric Capital Corporation ("GECC") and DIRECTV, Inc. entered into
a contract on July 31, 1995, in which GECC agreed to establish and manage a
private label consumer credit program for consumer purchases of hardware and
related DIRECTV programming. Under the contract, GECC agreed to provide certain
related services to DIRECTV, including credit risk scoring, billing and
collections services. DIRECTV agreed to act as a surety for loans complying with
the terms of the contract. Hughes guaranteed DIRECTV's performance under the
contract. A complaint and counterclaim have been filed by the parties in the
U.S. District Court for the District of Connecticut concerning GECC's
performance and DIRECTV's obligation to act as a surety. GECC claims damages
from DIRECTV in excess of $140 million. DIRECTV is seeking damages from GECC in
excess of $45 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 its results of operations
or financial position. Pretrial discovery is completed. No specific trial date
has been set, but a trial may be held in 2000.
In connection with the 1997 spin-off of the defense electronics business of
Hughes' predecessor and the subsequent merger of that business with Raytheon
Company, the terms of the merger agreement provided processes for resolving
disputes that might arise in connection with post-closing financial adjustments
that were also called for by the terms of the merger agreement. These financial
adjustments might require a cash payment from Raytheon to Hughes or vice versa.
A dispute currently exist regarding the post-closing adjustments which Hughes
and Raytheon have proposed to one another and related issues regarding the
adequacy of disclosures made by Hughes to Raytheon in the period prior to
consummation of the merger. Hughes and Raytheon are proceeding with the dispute
resolution process. It is possible that the ultimate resolution of the
post-closing financial adjustment and of related disclosure issues may result in
Hughes making a payment to Raytheon that would be material to Hughes. However,
the amount of any payment that either party might be required to make to the
other cannot be determined at this time. Hughes intends to vigorously pursue
resolution of the disputes through the arbitration processes, opposing the
adjustments proposed by Raytheon, and seeking the payment from Raytheon that
Hughes has proposed.
There is a pending grand jury investigation into whether Hughes should be
accused of criminal violations of the export control laws arising out of the
participation of two of its employees on a committee formed to review the
findings of Chinese engineers regarding the failure of a Long March rocket in
China in 1996. Hughes also is subject to the authority of the State Department
to impose sanctions for non-criminal violations of the Arms Export Control Act.
The possible criminal and/or civil sanctions could include fines as well as
debarment from various export privileges and participating in government
contracts. Hughes does not expect the grand jury investigation or State
Department review to result in a material adverse effect upon its business.
However, there can be no assurance as to those conclusions. As part of the sale
of the satellite systems manufacturing businesses to Boeing, Hughes has agreed
to indemnify Boeing for the full amount of any monetary fines and penalties,
payable either prior to or after the closing of the transaction, resulting from
Hughes' export control activities in China that may arise prior to the closing
of the transaction. If Hughes were to enter into a settlement of this matter
prior to the closing of the Boeing transaction that involves a debarment or a
material suspension of Hughes' export licenses or other material limitation on
projected business activities of the satellite systems manufacturing businesses,
Boeing would not be obligated to complete the purchase of Hughes' satellite
systems manufacturing businesses. Hughes cannot assure that the results of these
investigations or any settlement entered into in connection with these
investigations will not adversely impact Hughes' business and results of
operations.
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 9. Commitments and Contingencies - concluded
Hughes Space and Communications International ("HSCI"), a wholly owned
subsidiary of Hughes Space and Communications Company, has certain contracts
with ICO Global Communications Operations ("ICO Global") to build the satellites
and related components for a global wireless communications system. Hughes owns
approximately 2.6% of the equity in ICO's parent company (which Hughes has
agreed to sell to Boeing as part of the sale of Hughes' satellite manufacturing
businesses). On August 27, 1999, the ICO parent company filed for bankruptcy
protection under Chapter 11 in U.S. Bankruptcy Court in Wilmington, Delaware. On
December 3, 1999, the U.S. Bankruptcy Court in this case granted final approval
of debtor-in-possession financing in the amount of $500 million to a group led
by Craig McCaw, the Chairman of Teledesic LLC, a company establishing a global
broadband Internet-in-the-Sky satellite communications network. In October 1999,
McCaw and his group also agreed to provide an additional $700 million in
financing upon the ICO parent's emergence from bankruptcy court protection, to
the extent that this financing is not provided by other investors. This exit
financing is expected to be completed in mid-2000, upon court approval and
consummation of the ICO parent company reorganization plan. There can be no
assurance when the consummation of the reorganization plan will occur or if the
ICO parent company will be successful in confirming a plan of reorganization. If
it is unable to do so the most likely outcome would be a liquidation proceeding.
In the event that a liquidation becomes probable, Hughes would expect to record
a pre-tax charge to income of up to approximately $350 million, of which $100
million would be attributable to continuing operations and $250 million would be
attributable to discontinued operations. A portion of the purchase price to be
paid by Boeing will be placed in escrow under certain circumstances if prior to
completing this sale to Boeing, Hughes' contracts with ICO are not assumed by
ICO with bankruptcy court approval or new similar contracts are not entered into
with bankruptcy court approval.
On June 3, 1999, the National Rural Telecommunications Cooperative ("NRTC")
filed a lawsuit against DIRECTV, Inc. and Hughes Communications Galaxy, Inc.
(together, "DIRECTV") in United States District Court for the Central District
of California, alleging that DIRECTV has breached the DBS Distribution Agreement
(the "Agreement") with the NRTC. The Agreement provides the NRTC with certain
rights, in certain specified portions of the United States, with respect to
DIRECTV programming delivered over 27 of the 32 frequencies at the 101 degrees
west longitude orbital location. The NRTC claims that DIRECTV has wrongfully
deprived it of the exclusive right to distribute programming formerly provided
by USSB over the other five frequencies at 101 degrees. DIRECTV denies that the
NRTC is entitled to exclusive distribution rights to the former USSB programming
because, among other things, the NRTC's exclusive distribution rights are
limited to programming distributed over 27 of the 32 frequencies at 101 degrees.
The NRTC's complaint seeks, in the alternative, the right to distribute former
USSB programming on a non-exclusive basis and the recovery of related revenues
from the date USSB was acquired by Hughes. DIRECTV maintains that the NRTC's
right under the Agreement is to market and sell the former USSB programming as
its agent and is not entitled to the claimed revenues. On August 29, 1999, the
NRTC filed a second lawsuit against DIRECTV alleging that DIRECTV has breached
the DBS Agreement. In this lawsuit, the NRTC is asking the court to require
DIRECTV to pay the NRTC a proportionate share of unspecified financial benefits
that DIRECTV derives from programming providers and other third parties. DIRECTV
denies that it owes any sums to the NRTC on account of the allegations in these
matters and plans to vigorously defend itself against these claims.
Pegasus Satellite Television, Inc. and Golden Sky Systems, Inc., the two
largest NRTC affiliates, filed a purported class action suit on January 11, 2000
on behalf of certain NRTC members and affiliates against DIRECTV in the U.S.
District Court in Los Angeles. The plaintiffs allege, among other things, that
DIRECTV has interfered with their contractual relationship with the NRTC. The
plaintiffs plead that their rights and damages are derivative of the rights and
claims asserted by the NRTC in its two cases against DIRECTV and will seek to
consolidate their case with those cases.
EchoStar Communications Corporation and others commenced an action in the
U.S. District Court in Colorado on February 1, 2000 against DIRECTV, Hughes
Network Systems and Thomson Consumer Electronics, Inc. seeking, among other
things, injunctive relief and unspecified damages, including treble damages, in
connection with allegations of monopolization and that the defendants have
entered into agreements with retailers and program providers and engaged in
other conduct that violates the antitrust laws and constitutes unfair
competition. DIRECTV believes that the complaint is without merit and intends to
vigorously defend the allegations raised.
Although the amounts of the combined claims are material to Hughes, Hughes
does not believe that the outcome of these lawsuits will result in a material
adverse impact on Hughes' results of operations or financial position. However,
there can be no assurance as to those conclusions.
<PAGE>
HUGHES ELECTRONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS--Continued
(Unaudited)
Note 10. Subsequent Events
In October 1999, Hughes issued $500.0 million of floating rate notes in a
private placement with a group of institutional investors. The notes mature on
October 23, 2000.
On January 13, 2000, Hughes announced that it had reached an agreement to
sell its satellite systems manufacturing businesses to Boeing for $3.75 billion
in cash. The transaction, which is subject to regulatory approval, is expected
to close in mid-2000. The financial results for the satellite systems
manufacturing businesses are treated as discontinued operations for all periods
presented. Either Boeing or Hughes can terminate the agreement if the sale has
not been completed by October 2000. In addition, if Hughes were to enter into a
settlement of the China investigation that could materially impact expected
sales, Boeing would have the right not to complete the purchase of the satellite
systems manufacturing businesses.
Also on January 13, 2000, Hughes announced the discontinuation of its mobile
cellular and narrowband local loop product lines at Hughes Network Systems. As a
result of this decision, Hughes recorded a fourth quarter 1999 pre-tax charge to
continuing operations of $272 million. The charge represents the write-off of
receivables and inventories, licenses, software and equipment with no
alternative use.
<PAGE>
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis should be read in
conjunction with the financial statements and notes thereto included in the
Hughes Electronics Corporation Form 10, as amended, filed with the Securities
and Exchange Commission on August 13, 1999.
This Quarterly Report may contain certain statements that Hughes believes
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. The principal important risk factors which could cause actual
performance and future actions to differ materially from forward-looking
statements made herein include economic conditions, product demand and market
acceptance, government action, local political or economic developments in or
affecting countries where Hughes has operations, ability to obtain export
licenses, competition, ability to achieve cost reductions, technological risk,
interruptions to production attributable to causes outside of Hughes' control,
limitations on access to distribution channels, the success and timeliness of
satellite launches, in-orbit performance of satellites, ability of customers to
obtain financing and Hughes' ability to access capital to maintain its financial
flexibility. Additionally, Hughes and its 81.0% owned subsidiary, PanAmSat
Corporation ("PanAmSat"), have experienced satellite anomalies in the past and
may experience satellite anomalies in the future that could lead to the loss or
reduced capacity of such satellites that could materially affect Hughes'
operations. Readers are urged to consider these factors carefully in evaluating
the forward-looking statements. The forward-looking statements included in this
Quarterly Report are made only as of the date of this Quarterly Report and we
undertake no obligation to publicly update these forward-looking statements to
reflect subsequent events or circumstances.
<PAGE>
HUGHES ELECTRONICS CORPORATION
General
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. Of the $92 million charge, $11 million was
attributable to the Network Systems segment and the remainder to discontinued
operations. This charge represents the write-off of receivables and inventory,
with no alternative use, related to the contract.
In April 1999, Hughes acquired the direct-broadcast satellite medium-power
business of PRIMESTAR and the related high-power satellite assets of Tempo
Satellite, Inc., a wholly-owned subsidiary of TCI Satellite Entertainment, Inc.,
in related transactions. PRIMESTAR operated 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 continue to operate the medium-power PRIMESTAR
business, PRIMESTAR by DIRECTV, through the end of 2000, during which time
PRIMESTAR subscribers will continue to be offered the opportunity to transition
to the high-power DIRECTV service. Since the acquisition, the PRIMESTAR
distribution network has continued to service PRIMESTAR by DIRECTV subscribers
and now offers the high-power DIRECTV service to new subscribers. The PRIMESTAR
acquisition provided 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 acquisition of the Tempo in-orbit
satellite and related frequencies 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.
In May 1999, Hughes acquired by merger all of the outstanding capital stock
of U.S. Satellite Broadcasting Company ("USSB"). USSB provided premium
subscription television programming to households throughout the continental
United States via the digital satellite broadcasting system that it shared with
DIRECTV. This acquisition has provided DIRECTV with 25 channels of video
programming, including premium networks such as HBO(R), Showtime(R), Cinemax(R)
and The Movie Channel(R) which it is now offering to its subscribers resulting
in an increase in average revenue per subscriber.
In May 1999, Hughes announced that it would collaborate with America Online
("AOL") on a new service that would combine digital satellite television
programming from DIRECTV with AOL's new interactive television Internet service.
Hughes Network Systems ("HNS") 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. In June 1999, Hughes announced a more extensive strategic alliance
with AOL to develop and market digital entertainment and Internet services
nationwide. The new alliance is expected to accelerate subscriber growth and
revenue-per-subscriber for the DIRECTV and DirecPC services, as well as expand
the subscriber base for AOL's developing AOL TV and AOL-Plus broadband 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 its marketing initiative with AOL, Hughes is committed
to increase its sales and marketing expenditures over the next three years by
approximately $1.5 billion relating to its DirecPC/AOL-Plus, DlRECTV,
DlRECTV/AOL TV and DirecDuo products and services.
As part of the alliance described above, AOL invested $1.5 billion in shares
of GM's Series H 6.25% automatically convertible preference stock. General
Motors immediately invested the $1.5 billion received from AOL in shares of
Hughes Series A preferred stock, which is designed to correspond to the
financial terms of the General Motors Series H preference shares. Dividends on
the Hughes Series A preferred stock are payable to General Motors quarterly at
an annual rate of 6.25%. See further discussion in notes 4 and 5 to the
financial statements.
On July 28, 1999, Galaxy Latin America ("GLA") acquired Galaxy Brasil, Ltda.
("GLB"), the exclusive distributor of DIRECTV services in Brazil, from Tevecap
S.A. In connection with the transaction, Tevecap also sold its 10% equity
interest in GLA to Hughes and The Cisneros Group of Companies, the remaining
partners in GLA. As a result, Hughes' ownership of GLA increased to 77.8%. Also
as part of the transaction, Hughes increased its ownership in SurFin from 59.1%
to 75.0%.
DIRECTV successfully launched an additional satellite, DTV-1R, in the fourth
quarter of 1999. DTV-1R was placed into service at DIRECTV's 101 (degree) west
longitude orbital slot and DBS-1 was moved to DIRECTV's 110 (degree) west
longitude orbital slot. The DTV-1R satellite adds additional capacity for
DIRECTV's basic programming and local network channels.
<PAGE>
HUGHES ELECTRONICS CORPORATION
Hughes Space and Communications International ("HSCI"), a wholly owned
subsidiary of Hughes Space and Communications Company, has certain contracts
with ICO Global Communications Operations ("ICO Global") to build the satellites
and related components for a global wireless communications system. Hughes owns
approximately 2.6% of the equity in ICO's parent company (which Hughes has
agreed to sell to Boeing as part of the sale of Hughes' satellite manufacturing
businesses). On August 27, 1999, the ICO parent company filed for bankruptcy
protection under Chapter 11 in U.S. Bankruptcy Court in Wilmington, Delaware. On
December 3, 1999, the U.S. Bankruptcy Court in this case granted final approval
of debtor-in-possession financing in the amount of $500 million to a group led
by Craig McCaw, the Chairman of Teledesic LLC, a company establishing a global
broadband Internet-in-the-Sky satellite communications network. In October 1999,
McCaw and his group also agreed to provide an additional $700 million in
financing upon the ICO parent's emergence from bankruptcy court protection, to
the extent that this financing is not provided by other investors. This exit
financing is expected to be completed in mid-2000, upon court approval and
consummation of the ICO parent company reorganization plan. There can be no
assurance when the consummation of the reorganization plan will occur or if the
ICO parent company will be successful in confirming a plan of reorganization. If
it is unable to do so the most likely outcome would be a liquidation proceeding.
In the event that a liquidation becomes probable, Hughes would expect to record
a pre-tax charge to income of up to approximately $350 million, of which $100
million would be attributable to continuing operations and $250 million would be
attributable to discontinued operations. A portion of the purchase price to be
paid by Boeing will be placed in escrow under certain circumstances if prior to
completing this sale to Boeing, Hughes' contracts with ICO are not assumed by
ICO with bankruptcy court approval or new similar contracts are not entered into
with bankruptcy court approval.
On January 13, 2000, Hughes announced that it had reached an agreement to
sell its satellite systems manufacturing businesses to Boeing. As a result, the
financial results for the satellite systems manufacturing businesses are treated
as discontinued operations for all periods presented herein. Consequently,
revenues, operating costs and expenses, and other non-operating results for
these businesses are excluded from Hughes' results from continuing operations.
The financial results of these businesses are presented in Hughes' Statements of
Income (Loss) and Available Separate Consolidated Net Income (Loss) in a single
line item entitled "income from discontinued operations, net of taxes" and the
related assets and liabilities are presented in the balance sheets on a single
line item entitled "net assets of discontinued operations." See further
discussion in note 10 to the financial statements. Either Boeing or Hughes can
terminate the agreement if the sale has not been completed by October 2000. In
addition, if Hughes were to enter into a settlement of the China investigation,
discussed below, prior to the closing of the Boeing transaction that involves a
debarment or a material suspension of Hughes' export licenses or other material
limitation on projected business activities of the satellite systems
manufacturing businesses. Boeing would not be obligated to complete the purchase
of Huhges' satellite systems manufacturing businesses.
Also on January 13, 2000, Hughes announced the discontinuation of its mobile
cellular and narrowband local loop product lines at HNS. As a result of this
decision, Hughes recorded a fourth quarter 1999 pre-tax charge to continuing
operations of $272 million. The charge represents the write-off of receivables
and inventories, licenses, software and equipment with no alternative use.
The financial information presented as of and for the period ended September
30, 1999 reflect the effects of the PRIMESTAR, Tempo Satellite and USSB
transactions from their respective dates of acquisition. The acquisitions have
been accounted for using the purchase method of accounting. The third quarter
1999 financial statements for the PRIMESTAR, Tempo Satellite and USSB
transactions reflect a preliminary allocation of the purchase price for the
transactions based upon information currently available. Adjustments relating to
the tangible assets including satellites and equipment located on customer
premises; intangible assets, including licenses granted by the Federal
Communications Commission, customer lists and dealer network; 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 USSB represents a preliminary estimate pending further review
and analysis by Hughes management. The foregoing appraisals, review and analysis
are expected to be completed by March 31, 2000. Accordingly, the final purchase
price allocations may be different from the amounts reflected herein.
<PAGE>
HUGHES ELECTRONICS CORPORATION
There is a pending grand jury investigation into whether Hughes should be
accused of criminal violations of the export control laws arising out of the
participation of two of its employees on a committee formed to review the
findings of Chinese engineers regarding the failure of a Long March rocket in
China in 1996. Hughes also is subject to the authority of the State Department
to impose sanctions for non-criminal violations of the Arms Export Control Act.
The possible criminal and/or civil sanctions could include fines as well as
debarment from various export privileges and participating in government
contracts. Hughes does not expect the grand jury investigation or State
Department review to result in a material adverse effect upon its business.
However, there can be no assurance as to those conclusions. As part of the sale
of the satellite systems manufacturing businesses to Boeing, Hughes has agreed
to indemnify Boeing for the full amount of any monetary fines and penalties,
payable either prior to or after the closing of the transaction, resulting from
Hughes' export control activities in China that may arise prior to the closing
of the transaction. Hughes cannot assure that the results of these
investigations or any settlement entered into in connection with these
investigations will not adversely impact Hughes' business and results of
operations.
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998 Revenues. Third quarter 1999 revenues increased to $1,627.8 million
compared with $855.2 million for the third quarter of 1998. The Direct-To-Home,
Satellite Services and Network Systems segments all contributed to the
significant increase in revenues.
The Direct-To-Home Broadcast segment's third quarter 1999 revenues more than
doubled to $1,144.6 million from $459.1 million in the third quarter of 1998.
The increase was primarily attributable to continued strong subscriber growth
for the DIRECTV(R) businesses, as well as additional revenues from the PRIMESTAR
by DIRECTV and USSB businesses acquired in the second quarter of 1999. Domestic
DIRECTV contributed significantly to this growth with quarterly revenues of
$1,052 million compared to last year's third quarter revenues of $408 million.
Domestic DIRECTV added 423,000 net new subscribers to its high-power DIRECTV
service in the third quarter of 1999 compared to 303,000 net new subscribers for
the third quarter of 1998, a 40% increase. In addition, 204,000 customers were
transitioned from the PRIMESTAR by DIRECTV medium-power service to the DIRECTV
high-power service in the third quarter of 1999. As of September 30, 1999, total
domestic DIRECTV subscribers grew to more than 7.7 million, which includes
approximately 1.8 million customers subscribing to PRIMESTAR by DIRECTV. Hughes'
DIRECTV Latin American businesses, which includes Hughes' subsidiary, GLA, more
than doubled revenues to $76 million for the third quarter of 1999 from $37
million for the third quarter of 1998. This increase in revenues was due to
continued subscriber growth and additional revenues resulting from the
consolidation of SurFin Ltd. ("SurFin"), beginning in November 1998, Grupo
Galaxy Mexicana, S.A. de C.V. ("GGM"), beginning in February 1999 and GLB,
beginning in August 1999. GLA added 67,000 net new subscribers for the third
quarter, compared to 36,000 net new subscribers acquired for the same period
last year, bringing the total cumulative DIRECTV Latin America subscribers to
668,000 as of September 30, 1999.
The Satellite Services segment's third quarter 1999 revenues increased to
$210.7 million compared with $186.5 million for the prior year. The 13.0%
increase in revenues resulted primarily from the commencement of new service
agreements on additional satellites placed into service and a one-time customer
payment associated with the termination of a direct-to-home video services
agreement in India.
Third quarter 1999 revenues for the Network Systems segment were $426.2
million compared with $267.7 million for the same period last year, an increase
of 59.2%. This increase in revenues was primarily due to higher sales of
DIRECTV(TM) receiver equipment, satellite-based mobile telephone systems and
U.S. private business network systems.
Costs and Expenses. Selling, general and administrative expenses increased to
$573.0 million in the third quarter of 1999 from $355.1 million for the same
period of 1998. The increase resulted primarily from increased subscriber
acquisition costs due to the record DIRECTV subscriber growth, added costs from
the PRIMESTAR by DIRECTV and USSB businesses, and the consolidation of GGM,
SurFin and GLB. The increase in depreciation and amortization expense to $202.4
million in the third quarter of 1999 from $99.3 million in the same period of
1998 resulted primarily from higher depreciation due to increased capital
expenditures for property and equipment, additions to PanAmSat's satellite fleet
in late 1998 and early 1999, added depreciation expense related to leased
medium-power receiving equipment for the PRIMESTAR by DIRECTV business and
additional goodwill amortization of $45.1 million that resulted from the
PRIMESTAR, USSB, GGM and GLB transactions.
Operating Profit (Loss). Hughes incurred an operating loss of $17.2 million
for the third quarter of 1999 compared with an operating loss of $3.4 million
for the third quarter of 1998. The increased operating loss resulted principally
from increased losses from the DIRECTV Latin America businesses.
<PAGE>
HUGHES ELECTRONICS CORPORATION
The operating loss in the Direct-To-Home Broadcast segment for the third
quarter of 1999 was $67.6 million compared with an operating loss of $61.8
million for the third quarter of 1998. The increased operating loss for the
third quarter of 1999 resulted primarily from increased losses at the DIRECTV
international businesses consisting primarily of DIRECTV Latin America. DIRECTV
Latin America's operating loss for the third quarter of 1999 was $53 million
compared with an operating loss of $30 million for the same period of 1998. The
increased loss at DIRECTV Latin America was primarily due to the consolidation
of GLB and GGM and higher marketing expenses. Domestic DIRECTV reported an
operating loss for the third quarter of $6 million compared with an operating
loss of $31 million for the third quarter of 1998. The decreased operating loss
at domestic DIRECTV for the quarter was due to the increased subscriber revenues
discussed above which were partially offset by increased subscriber acquisition
costs due to record subscriber growth, added goodwill and intangible
amortization that resulted from the PRIMESTAR and USSB acquisitions and added
depreciation expense related to leased medium-power receiving equipment for the
PRIMESTAR by DIRECTV business.
Domestic DIRECTV's cost of acquiring new subscribers has increased due to,
among other things, incentives granted by USSB to manufacturers of DIRECTV
receiving equipment which were assumed by DIRECTV as part of the USSB
acquisition in May 1999 and increased incentives paid to DIRECTV dealers. In
connection with the AOL alliance, DIRECTV's subscriber acquisition costs will
increase with respect to the new DIRECTV/AOL TV service. In the future,
subscriber acquisition costs will continue to be largely determined by the
competitive environment.
The Satellite Services segment's operating profit for the third quarter of
1999 increased 25.6% to $98.2 million from $78.2 million for the same period of
1998. The increase in operating profit was primarily due to the increase in
revenues discussed above, partially offset by increased depreciation from the
additions to the satellite fleet noted above.
The Network Systems segment's operating profit and operating profit margin
for the third quarter of 1999 was $32.2 million and 7.6%, respectively, compared
with operating profit and operating profit margin of $16.9 million and 6.3%,
respectively, for the third quarter of 1998. The increase in operating income
and operating profit margin for the third quarter of 1999 was primarily due to
higher sales of DIRECTV receiving equipment, satellite-based mobile telephone
systems and U.S. private business network systems.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA").
EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with generally
accepted accounting principles. However, Hughes believes EBITDA is a meaningful
measure of the company's performance and that of its business units. EBITDA is a
performance measurement commonly used by other communications, entertainment and
media service providers and therefore can be used to analyze and compare Hughes'
financial performance to that of its competitors. EBITDA is also a measurement
used for certain of Hughes' debt covenants and is used by rating agencies in
determining credit ratings. EBITDA does not give effect to cash used for debt
service requirements and thus does not reflect funds available for investment in
the business of Hughes, dividends or other discretionary uses. EBITDA margin is
calculated by dividing EBITDA by total revenues.
For the third quarter of 1999, EBITDA grew to $185.2 million from $95.9
million for the same period in 1998 primarily as a result of the EBITDA growth
in the Direct-To-Home Broadcast segment. EBITDA margin on the same basis was
11.4% for the third quarter of 1999 compared to 11.2% for the third quarter of
1998.
The Direct-To-Home Broadcast segment had EBITDA of $47.7 million for the
third quarter of 1999 compared with negative EBITDA of $30.6 million for the
third quarter of 1998. Domestic DIRECTV's EBITDA was $86 million for the third
quarter of 1999 compared to a negative EBITDA of $5 million for the third
quarter of 1998. The increase in domestic DIRECTV's EBITDA was due to EBITDA
contributions from the PRIMESTAR by DIRECTV and USSB businesses, as well as
increased revenues resulting from the larger high-power subscriber base which
more than offset increased subscriber acquisition costs. DIRECTV Latin America
reported negative EBITDA for the third quarter of 1999 of $30 million compared
to negative EBITDA of $24 million for the same period of 1998. This change was
primarily due to the acquisition of GLB during the 1999 third quarter and higher
marketing expenses.
For the Satellite Services segment, EBITDA for the third quarter of 1999 was
$169.0 million compared with $135.7 million for the same period of last year.
EBITDA margin increased to 80.2% versus 72.8% for last year's third quarter. The
increases in EBITDA and EBITDA margin were principally due to the higher
revenues discussed above and lower satellite leaseback expenses resulting from
the early buy-out of certain satellites under sale-leaseback agreements during
the first and third quarters of 1999.
The Network Systems segment's EBITDA grew to $44.3 million for the third
quarter of 1999 compared to EBITDA of $28.3 million for the third quarter of
1998 primarily due to the increased revenues discussed above. EBITDA margin for
the third quarter of 1999 was 10.4% compared to 10.6% for the third quarter of
1998.
<PAGE>
HUGHES ELECTRONICS CORPORATION
Interest Income and Expense. Interest income decreased to $2.6 million for
the third quarter of 1999 compared with $20.5 million for the third quarter of
1998 due to lower cash balances in the third quarter of 1999 compared to 1998.
Interest expense increased $48.1 million for the third quarter of 1999 from the
same period in 1998 due to the increased borrowings and interest expense
associated with certain liabilities that arose from the PRIMESTAR and USSB
acquisitions.
Other, net. Other, net for the third quarter of 1999 reflects losses from
unconsolidated subsidiaries of $31.6 million that are primarily attributable to
equity investment in DIRECTV Japan. The third quarter 1998 amount reflects
losses from unconsolidated subsidiaries of $28.1 million, primarily related to
DIRECTV Japan and American Mobile Satellite Corporation ("AMSC").
Income taxes for the third quarter of 1999 reflect the recognition of tax
benefits for the pre-tax losses incurred in the period and higher expected tax
benefits, compared to the third quarter of 1998, from the expected favorable
resolution of certain tax contingencies.
Accounting Change. In 1998, Hughes adopted American Institute of Certified
Public Accountants Statement of Position ("SOP") 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 requires that all start-up costs previously
capitalized be written off and recognized as a cumulative effect of accounting
change, net of taxes, as of the beginning of the year of adoption. On a
prospective basis, these types of costs are required to be expensed as incurred.
The unfavorable cumulative effect of this accounting change was $9.2 million
after-tax, or $0.02 per share of GM Class H common stock in the first quarter of
1998.
Income (Loss) from continuing operations. For the third quarter of 1999,
Hughes reported a loss from continuing operations and loss per share from
continuing operations, including the effect of preferred stock dividends, of
$41.8 million and $0.15, respectively, compared to a third quarter 1998 loss and
loss per share from continuing operations of $6.8 million and $0.01,
respectively. Earnings (Loss) per share are calculated excluding the effects of
GM purchase accounting resulting from GM's acquisition of Hughes in 1985. See
further discussion in Note 4 to the financial statements.
Discontinued operations. For the third quarter of 1999, revenues for the
satellite systems manufacturing businesses decreased to $510.8 million from
revenues of $688.9 million for the same period in 1998. Revenues, excluding
intercompany transactions, were $362.7 million for 1999 and $658.1 million for
1998. The decrease in revenues was principally due to reduced activity
associated with the ICO Global Communications program.
The satellite systems manufacturing businesses reported operating profit of
$41.3 million for the third quarter of 1999 compared with operating profit of
$63.8 million for the third quarter of 1998. The reported operating profit
excluding intercompany transactions, amounted to $7.0 million for 1999 compared
to operating profit of $65.6 million in 1998. The decrease in operating profit
resulted primarily from the decrease in revenues discussed above.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998 Revenues. For the first nine months of 1999, revenues
increased 62.6% to $3,862.3 million compared to $2,375.4 million for the first
nine months of 1998. The Direct-To-Home Broadcast, Satellite Services and
Network Systems segments all contributed to the significant growth in revenues.
The Direct-To-Home Broadcast segment's revenues for the first nine months of
1999 increased 106.0% to $2,571.4 million from $1,248.5 million for the same
period of 1998. The increase resulted from continued record subscriber growth,
as well as additional revenues from the PRIMESTAR by DIRECTV and USSB
businesses.
For the first nine months of 1999, the Satellite Services segment's revenues
increased to $604.6 million compared with $570.6 million for the comparable
period in the prior year, a 6.0% increase. The increase in revenues resulted
primarily from the commencement of new service agreements on additional
satellites placed into service and a one-time customer payment associated with
the termination of a direct-to-home video services agreement in India.
The Network Systems segment's revenues for the first nine months of 1999 were
$998.2 million compared with $674.1 million for the same period last year, an
increase of 48.1%. This increase in revenues was primarily due to higher sales
of DIRECTV receiver equipment, satellite-based mobile telephone systems and U.S.
private business network systems.
Costs and Expenses. Selling, general and administrative expenses increased to
$1,459.2 million for the first nine months of 1999 from $946.7 million for the
same period of 1998. The increase resulted primarily from increased subscriber
acquisition costs, added costs for the PRIMESTAR by DIRECTV and USSB businesses,
and the consolidation of GGM, SurFin and GLB. The increase in depreciation and
amortization expense to $460.4 million for the first nine months of 1999 from
$276.6 million for the same period of 1998 resulted primarily from higher
depreciation due to increased capital expenditures for property and equipment,
additions to PanAmSat's satellite fleet, added depreciation expense related to
leased medium-power receiving equipment for the PRIMESTAR by DIRECTV business,
increased goodwill amortization related to the May 1998 purchase of an
additional 9.5% interest in PanAmSat and added depreciation expense and goodwill
and intangible amortization that resulted from the PRIMESTAR, USSB, GGM and GLB
acquisitions.
<PAGE>
HUGHES ELECTRONICS CORPORATION
Operating Profit (Loss). Hughes incurred an operating loss of $63.3 million
for the first nine months of 1999 compared with an operating loss of $4.1
million for the first nine months of 1998. The operating loss for the first nine
months of 1999 resulted from the higher depreciation and amortization expense
and increased subscriber acquisition costs discussed above.
The operating loss in the Direct-To-Home Broadcast segment for the first nine
months of 1999 was $159.4 million compared with an operating loss of $133.6
million for the first nine months of 1998. The increase in operating loss for
the first nine months of 1999 was due primarily to increased losses at the
DIRECTV Latin America businesses that resulted from the consolidation of GLB and
GGM and higher marketing expenses. These losses were partially offset by a
decrease in operating losses at the domestic DIRECTV businesses.
The Satellite Services segment's operating profit for the first nine months
of 1999 was $258.9 million compared to $236.7 million for the same period of
1998. The increase in operating profit was primarily due to the increase in
revenues discussed above offset by higher depreciation expense due to additions
to the satellite fleet. Also affecting the comparison was a second quarter 1998
provision for losses related to the May 1998 failure of PanAmSat's Galaxy IV
satellite.
The Network Systems segment's operating profit for the first nine months of
1999 was $25.7 million compared with an operating loss of $20.2 million for the
first nine months of 1998. The increase for the first nine months of 1999
compared to 1998 was primarily due to the higher sales noted above partially
offset by a one-time pre-tax charge of $11.0 million in the first quarter of
1999 resulting from the termination of the APMT contract due to export licenses
not being issued. Also affecting the comparison was a 1998 provision of $26.0
million associated with the bankruptcy filing by a customer.
EBITDA. For the first nine months of 1999, EBITDA was $397.1 million versus
$272.5 million for the same period in 1998. EBITDA margin on the same basis was
10.3% for the first nine months of 1999 compared to 11.5% for the first nine
months of 1998. The increase in EBITDA was driven by the EBITDA growth at the
Direct-To-Home Broadcast segment. The slight decrease in EBITDA margin resulted
from the increased corporate costs and increased costs at the DIRECTV Latin
America businesses and higher subscriber acquisition costs noted above.
The Direct-To-Home Broadcast segment had EBITDA for the first nine months of
1999 of $44.8 million compared with negative EBITDA of $56.4 million for the
first nine months of 1998. This improvement in EBITDA for the first nine months
of 1999 was primarily due to continued strong subscriber growth in the domestic
DIRECTV business, the contributions from PRIMESTAR by DIRECTV and USSB
businesses from their dates of acquisition and the consolidation of SurFin.
The Satellite Services segment's EBITDA for the first nine months of 1999 was
$465.9 million compared with $409.0 million for the same period of last year.
EBITDA margin increased to 77.1% versus 71.7% for last year's first nine months.
The increases in EBITDA and EBITDA margin were principally due to the higher
revenues discussed above, and lower satellite leaseback expenses resulting from
the 1999 early buy-out of certain satellites under sale-leaseback agreements.
Also affecting the comparison was a second quarter 1998 provision for losses
related to the May 1998 failure of PanAmSat's Galaxy IV satellite.
The Network Systems segment's EBITDA increased to $63.4 million for the first
nine months of 1999, compared to EBITDA of $9.6 million for the first nine
months of 1998. EBITDA margin for the first nine months of 1999 was 6.4%
compared to EBITDA margin of 1.4% for the first nine months of 1998. The
increase in EBITDA and EBITDA margin for the first nine months of 1999 was
primarily due to the higher sales discussed above, partially offset by the first
quarter 1999 pre-tax charge of $11.0 million related to the termination of the
APMT contract. Also, the second quarter of 1998 included a $26.0 million
provision associated with the bankruptcy filing by a customer.
Interest Income and Expense. Interest income decreased to $20.8 million for
the first nine months of 1999 compared with $88.6 million for the first nine
months of 1998 due to lower cash balances for the first nine months of 1999
compared to 1998. Interest expense increased $61.5 million for the first nine
months of 1999 from the same period in 1998 due to increased borrowings and
interest expense associated with certain liabilities that arose from the
PRIMESTAR and USSB acquisitions.
Other, net. Other, net for the first nine months of 1999 reflects the losses
from unconsolidated subsidiaries of $96.3 million attributable principally to
equity investments in DIRECTV Japan and AMSC. The first nine months of 1998
includes losses from unconsolidated subsidiaries of $79.0 million, primarily
related to DIRECTV Japan and AMSC and $17.5 million of losses associated with
bankruptcy filings by two unaffiliated customers.
Income Taxes. For the first nine months of 1999, Hughes recorded an income
tax benefit of $59.7 million, while Hughes recorded an income tax provision of
$0.7 million for the first nine months of 1998. Income taxes for the first nine
months of 1999 reflect the recognition of tax benefits for the higher pre-tax
losses incurred in the period and higher expected tax benefits from the expected
favorable resolution of certain tax contingencies, compared to the first nine
months of 1998. The tax provision for 1998 reflects the effect of permanent
differences on the lower 1998 pre-tax losses.
<PAGE>
HUGHES ELECTRONICS CORPORATION
Income (Loss) from continuing operations. The loss from continuing operations
was $107.4 million for the first nine months of 1999 compared with a loss of
$7.7 million for the same period of 1998. The loss per share from continuing
operations was $0.32 in 1999 compared to $0.01 in 1998. The loss per share from
continuing operations for 1999 includes the effect of preferred stock dividends
of $26.3 million. Earnings (loss) per share exclude the effects of GM purchase
accounting which resulted from GM's acquisition of Hughes Aircraft Company in
1985. See further discussion in Note 4 to the financial statements.
Discontinued operations. Revenues for the first nine months of 1999 for the
satellite systems manufacturing businesses decreased to $1,694.9 million from
revenues of $1,988.0 million for the same period in 1998. Revenues, excluding
intercompany transactions, were $1,356.0 million for 1999 and $1,797.9 million
for 1998. The decrease in revenues was principally due to contract revenue
adjustments and delayed revenue recognition that resulted from increased
development costs and schedule delays on several new product lines and decreased
activity associated with a contract with ICO Global Communications.
The satellite systems manufacturing businesses reported an operating loss for
the first nine months of 1999 of $106.1 million compared to operating profit of
$178.9 million for the first nine months of 1998. The reported operating loss
excluding intercompany transactions amounted to $90.9 million for 1999 compared
to operating profit of $217.5 million in 1998. The operating loss for the first
nine months of 1999 included a pre-tax charge of $125.0 million that resulted
from increased development costs and schedule delays on several new product
lines, a one-time pre-tax charge of $81.0 million resulting from the termination
of the APMT contract and decreased activity associated with a contract with ICO
Global Communications.
Hughes had maintained a lawsuit against the U.S. government since September
1973 regarding the U.S. government's infringement and use of a Hughes patent
covering "Velocity Control and Orientation of a Spin Stabilized Body,"
principally satellites (the "Williams Patent"). On April 7, 1998, the U.S. Court
of Appeals for the Federal Circuit reaffirmed earlier decisions in the Williams
Patent case, including an award of $114.0 million in damages, plus interest. In
March 1999, Hughes received a payment from the U.S. government as a final
settlement of the suit and as a result, recognized as income from discontinued
operations a pre-tax gain of $154.6 million.
Liquidity and Capital Resources
Cash and Cash Equivalents. Cash and cash equivalents were $158.2 million at
September 30, 1999 compared to $1,342.0 million at December 31, 1998. The
$1,183.8 million decrease was due to increased investments in companies, which
included the acquisitions of PRIMESTAR, USSB, the Tempo Satellite assets and
GLB, additional equity investments in DIRECTV Japan, the early buy-out of
satellite sale-leasebacks by PanAmSat, additional capital expenditures for
satellites and property and equipment and general working capital requirements.
These uses of cash were partially funded by GM's $1.5 billion investment in
Hughes as part of the alliance with AOL and the $154.6 million received in
connection with the settlement of the Williams Patent infringement case.
Cash used in operating activities for the first nine months of 1999 was $66.5
million, compared to cash provided by operating activities of $332.8 million in
the same period of 1998. The decrease was due primarily to increased losses for
the first nine months of 1999 and an increase in prepaid dealer commissions and
prepaid marketing expenses at the DIRECTV businesses.
Net cash used in investing activities was $3,597.6 million for the nine
months ended September 30, 1999 and $1,524.6 million for the same period in
1998. The substantial increase in 1999 compared to 1998 resulted from increased
investments in companies, which included the acquisitions of PRIMESTAR, USSB,
Tempo Satellite assets, GLB and additional investments in DIRECTV Japan, and an
increase in capital expenditures for satellites and property and equipment,
partially offset by a decrease in proceeds from insurance claims related to the
loss of satellites in the prior year.
Net cash provided by financing activities for the first nine months of 1999
was $2,658.1 million, compared to cash used in financing activities of $3.6
million for the same period in 1998. The substantial increase was primarily due
to an increase in net borrowings compared to 1998 and proceeds received in 1999
from the issuance of Hughes Series A preferred stock to GM in connection with
the AOL transaction.
Net Cash used in discontinued operations for the first nine months of 1999
was $177.8 million, compared to $78.7 million for the same period in 1998. The
change was due primarily to the decrease in income from discontinued operations,
net of taxes, and an increase in working capital requirements.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) at September 30, 1999 and December 31,
1998 was 1.92 and 3.03, respectively. Working capital decreased by $810.9
million to $1,918.3 million at September 30, 1999 from $2,729.2 million at
December 31, 1998.
<PAGE>
HUGHES ELECTRONICS CORPORATION
Common Stock Dividend Policy and Use of Cash. Since the completion of the
recapitalization of Hughes in late 1997, the GM Board has not paid, and does not
currently intend to pay in the foreseeable future, cash dividends on its GM
Class H common stock. Similarly, since such time, Hughes has not paid dividends
on its common stock to GM and does not currently intend to do so in the
foreseeable future. Future Hughes earnings, if any, are expected to be retained
for the development of the businesses of Hughes. Hughes expects to have
significant cash requirements in 2000 primarily due to capital expenditures of
approximately $1.5 to $2.0 billion for property and equipment as well as
expenditures for new satellites. In addition, Hughes expects to increase its
investment in affiliated companies, primarily related to its international
DIRECTV businesses. Also, although Hughes may be required to make a cash payment
to, or receive a cash payment from, Raytheon in connection with the merger of
the defense electronics business of Hughes with Ratheon in 1997, the amount of a
cash payment to or from Raytheon, if any, is not determinable at this time.
These cash requirements are expected to be funded from a combination of cash
provided from operations, cash to be received upon the completion of the Boeing
transaction, amounts available under credit facilities and debt and equity
offerings, as needed.
Debt and Credit Facilities. At September 30, 1999, Hughes' 75% owned
subsidiary, SurFin, had a total of $197.6 million outstanding under a $400.0
million unsecured revolving credit facility expiring in June 2002.
At September 30, 1999, GLA's 100% owned subsidiary, GLB, had a total of $26.7
million outstanding under a variable rate note.
In January 1998, PanAmSat issued five, seven, ten and thirty-year notes
totaling $750.0 million. The proceeds received were used by PanAmSat to repay
$600.0 million of outstanding borrowings.
PanAmSat maintains a $500.0 million multi-year revolving credit facility and
a $500.0 million commercial paper program. The multi-year revolving credit
facility provides for a commitment through December 24, 2002. Borrowings under
the credit facility and commercial paper program are limited to $500.0 million
in the aggregate and are expected to be used to fund PanAmSat's satellite
expansion program. No amounts were outstanding under the credit facility at
September 30, 1999. $185.0 million was outstanding under the commercial paper
program at September 30, 1999.
In July 1999, in connection with the early buy-out of satellite
sale-leasebacks, PanAmSat assumed variable rate notes. The notes bear interest
at London Interbank Offered Rate plus 0.25%, and mature on various dates through
January 2, 2002. At September 30, 1999, $124.1 million was outstanding.
Hughes has three unsecured revolving credit facilities totaling $1.6 billion,
consisting of a $750.0 million multi-year facility, a $350.0 million 364-day
facility and a $500 million bridge facility. The multi-year credit facility
provides for a commitment of $750.0 million through December 5, 2002, the
364-day credit facility provides for a commitment of $350.0 million through
November 22, 2000 and the bridge facility provides for a $500 million commitment
through the earlier of November 22, 2000 or the receipt of proceeds from the
issuance of any debt securities of Hughes in a public offering. $665.0 million
was outstanding under the multi-year facility at September 30, 1999. No amount
was outstanding under the 364-day credit facility or bridge facility at
September 30, 1999. The multi-year and 364-day credit facilities provide backup
capacity for Hughes' $1.0 billion commercial paper program. $196.6 million was
outstanding under the commercial paper program at September 30, 1999.
At September 30, 1999, other short-term and long-term debt of $82.3 million
was outstanding.
Hughes has filed a shelf registration statement with the Securities and
Exchange Commission with respect to an issuance of up to $2.0 billion of debt
securities from time to time. Currently, no amounts have been issued under that
registration statement.
In October 1999, Hughes issued $500.0 million of floating rate notes in a
private placement with a group of institutional investors. The notes mature on
October 23, 2000.
Acquisitions, Investments and Divestitures. On January 13, 2000, Hughes
announced that it had reached an agreement to sell its satellite systems
manufacturing businesses to Boeing for $3.75 billion in cash. The transaction,
which is subject to regulatory approval, is expected to close in mid-2000. The
financial results for the satellite systems manufacturing businesses are treated
as discontinued operations for all periods presented herein.
On September 24, 1999, DIRECTV Japan, Hughes' 42.2% owned affiliate, raised
approximately $275 million through the issuance of bonds, convertible into
common stock, to five of its major shareholders, including $238.1 million issued
to Hughes. If Hughes elects to convert these bonds, Hughes would have a
controlling interest in DIRECTV Japan which would require consolidation of the
entity which could, in turn, result in increased operating losses for Hughes.
On July 28, 1999, GLA acquired GLB, the exclusive distributor of DIRECTV
services in Brazil, from Tevecap S.A. for approximately $114.0 million plus the
assumption of debt. In connection with the transaction, Tevecap also sold its
10% equity interest in GLA to Hughes and The Cisneros Group of Companies, the
remaining partners in GLA, which increased Hughes' ownership interest in GLA to
77.8%. As part of the transaction, Hughes also increased its ownership interest
in SurFin from 59.1% to 75.0%. The total consideration paid in the transactions
amounted to approximately $101.1 million.
<PAGE>
HUGHES ELECTRONICS CORPORATION
On May 20, 1999, Hughes acquired by merger all of the outstanding capital
stock of USSB, a provider of premium subscription television programming via the
digital broadcasting system that it shares with DIRECTV. The total consideration
of about $1.6 billion paid in July 1999, consisted of about $0.4 billion in cash
and 22.6 million shares of Class H common stock. The USSB acquisition was
accounted for using the purchase method of accounting. 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
related orbital frequencies of Tempo Satellite, a wholly-owned subsidiary of TCI
Satellite Entertainment, Inc. On April 28, 1999, the acquisition of PRIMESTAR's
direct-to-home business was completed. The purchase price consisted of $1.1
billion in cash and 4.9 million shares of GM Class H common stock, for a total
purchase price of $1.3 billion, based on the average market price of $47.87 per
share of Class H common stock at the time the acquisition agreement was signed.
The purchase price will be adjusted based upon the final adjusted net working
capital of PRIMESTAR at the date of closing. The purchase price for the Tempo
Satellite assets consisted of $500 million in cash. Of this purchase price, $150
million was paid on March 10, 1999 for a satellite that has not yet been
launched and the remaining $350 million was paid on June 4, 1999 for an in-orbit
satellite and 11 related satellite orbital frequencies.
New Accounting Standards. In September 1999, the Financial Accounting
Standards Board ("FASB") issued Emerging Issues Task Force Issue 99-10 ("EITF
99-10"), Percentage Used to Determine the Amount of Equity Method Losses. EITF
99-10 addresses the percentage of ownership that should be used to compute
equity method losses when the investment has been reduced to zero and the
investor holds other securities of the investee. EITF 99-10 requires that equity
method losses should not be recognized solely on the percentage of common stock
owned; rather, an entity-wide approach should be adopted. Under such an
approach, equity method losses may be recognized based on the ownership level
that includes other equity securities (e.g., preferred stock) and loans/advances
to the investee or based on the change in the investor's claim on the investee's
book value. Hughes adopted EITF 99-10 during the third quarter of 1999 which
resulted in Hughes recording a higher percentage of DIRECTV Japan's losses
subsequent to the effective date of September 23, 1999. The impact of adopting
EITF 99-10 was not material to the third quarter 1999 results.
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 requires all derivatives to be recorded as either assets or
liabilities and the instruments to be measured at fair value. Gains or losses
resulting from changes in the values of those derivatives are to be recognized
immediately or deferred depending on the use of the derivative and whether or
not it qualifies as a hedge. Hughes plans to adopt SFAS No. 133 by January 1,
2001, as required. Hughes' management is currently assessing the impact of this
statement on Hughes' results of operations and financial position.
<PAGE>
HUGHES ELECTRONICS CORPORATION
Year 2000
Many computer technologies made or used by Hughes throughout its business
have the potential for operational problems if they lack the ability to handle
the transition to the Year 2000. Computer technologies include both information
technology ("IT") in the form of hardware and software, as well as
non-information technology ("Non-IT") which includes embedded technology such as
microprocessors.
Because of the potential disruption that this issue could cause to Hughes'
business operations and its customers, a comprehensive, company-wide, Year 2000
program was initiated in 1996 to identify and remediate potential Year 2000
problems. The Year 2000 program addresses both IT and Non-IT systems related to
internal systems and Hughes' products and services.
Hughes' Year 2000 program is being implemented in seven phases, some of which
are being conducted concurrently:
(1)Awareness - establish project teams made up of project leaders from each
Hughes operating company, assign responsibilities and establish awareness
of Year 2000 issues. The awareness phase has been completed.
(2)Inventory - identify all systems within Hughes, determine if they are
critical and identify responsible personnel for compliance. The inventory
phase has been completed. Many of Hughes' systems are already Year 2000
compliant, or had already been scheduled for replacement as part of
Hughes' ongoing systems plans.
(3)Assessment - categorize all systems and determine activities that are
required to achieve compliance, including contacting and assessing the
Year 2000 readiness of material third party vendors and suppliers of
hardware and software. The assessment phase has been completed. All
critical systems were identified in this phase and were the primary focus
of the project teams. Critical systems identified requiring remediation
included satellite control and communication software, broadcast systems
and systems utilized in customer service/billing, engineering and
manufacturing operations. Hughes has also identified the need to upgrade
network control software for customers who have maintenance agreements
with Hughes. Hughes' in-orbit satellites do not have date-dependent
processing.
(4)Remediation - modify, repair or replace categorized systems. Remediation
tasks have been completed on all critical systems.
(5)Testing - test remediated systems to assure normal function when placed
in their original operating environment and further test for Year 2000
compliance. Testing has been successfully completed on all critical
systems.
(6)Implementation - once a remediated system and its interfaces have been
successfully tested, the system will be put into its operating
environment. The majority of the remediated systems have been placed into
their operating environment.
(7)Contingency Planning - development and execution of plans that narrow the
focus on specific areas of significant concern and concentrate resources
to address them. Hughes has developed contingency plans to address the
risk of any critical system not being Year 2000 compliant. These
contingency plans are frequently reviewed and updated as necessary. Hughes
currently believes that the most reasonably likely worst case scenario is
a temporary loss of functionality in satellite control and communication
software. The loss of real-time satellite control software functionality
for these satellites would be addressed through the use of back-dated
processors or through manual procedures. These alternative procedures
would restore any loss in functionality but could result in slightly
higher operating costs until the Year 2000 problems are corrected.
Hughes has utilized both internal and external resources for the remediation
and testing of its systems that are undergoing Year 2000 modification. Hughes
has incurred and expensed approximately $9 million during the first nine months
of 1999 and approximately $4 million during 1998, related to the assessment of,
and on-going efforts in connection with, its Year 2000 program. Future spending
for remaining system remediation and testing is currently estimated to be from
$1.6 million to $2 million. Each Hughes operating company is funding its
respective Year 2000 efforts with current and future operating cash flows.
Hughes has received certification of Year 2000 compliance from a majority of its
critical third parties. For those third party systems that are not yet Year 2000
compliant, Hughes has identified action plans or alternatives to meet Hughes'
requirements.
<PAGE>
HUGHES ELECTRONICS CORPORATION
Year 2000 - concluded
As of the date of this filing, Hughes has experienced no significant problems
related to the Year 2000 conversion either domestically or in foreign locations.
After extensive system verification and testing all computerized information and
process control systems are operating normally. The performance of critical
customers and suppliers continues without notable changes. Production and
business activities are normal at all locations. Hughes also has not received
any material complaints regarding any Year 2000 issues related to its products.
However, Hughes cannot assure that problems will not arise.
Hughes continues to monitor the status of its operations, suppliers and
distribution channels to ensure no significant business interruptions.
The satellite systems manufacturing businesses have incurred and expensed
approximately $6 million and approximately $5 million during 1998 related to the
Year 2000. Approximately $5 million was incurred in the fourth quarter of 1999.
Future spending for the satellite systems manufacturing businesses is estimated
at approximately $1 million. As of the date of the filing, the satellite systems
manufacturing businesses have experienced no significant problems related to the
Year 2000 conversions, however, Hughes cannot assure you that problems will not
arise.
<PAGE>
HUGHES ELECTRONICS CORPORATION
Security Ratings
On January 14, 2000, subsequent to the announced sale of Hughes' satellite
systems manufacturing businesses to Boeing, Standard & Poor's Rating Services
("S&P") and Moody's Investors Service ("Moody's") each affirmed its respective
debt ratings for Hughes. S&P maintained its BBB - minus credit rating, which
indicates the issuer has adequate capacity to pay interest and repay principal.
S&P maintained the short-term corporate credit and commercial paper ratings at
A-3. S&P revised its outlook to positive from negative.
Moody's confirmed Hughes' Baa2 long-term credit and P-2 commercial paper
ratings. While the outlook remains negative, Moody's ended its review for
possible downgrade. The Baa2 rating for senior debt indicates adequate
likelihood of interest and principal payment and principal security. The P-2
commercial paper rating is the second highest rating available and indicates
that the issuer has a strong ability for repayment relative to other issuers.
Debt ratings by the various rating agencies reflect each agency's opinion of
the ability of issuers to repay debt obligations as they come due. 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.
<PAGE>
HUGHES ELECTRONICS CORPORATION
Unaudited Summary Financial Data
Selected Segment Data
Supplemental Data
In order to provide additional analytical data to the users of Hughes
financial information, supplemental data, including certain ratios and balances
not presented elsewhere in the document, are provided.
Direct-To-
Home Satellite Network Eliminations
(Dollars in Millions) Broadcast Services Systems and Other Total
- --------------------------------------------------------------------------------
For the Three Months Ended:
September 30, 1999
Total Revenues $1,144.6 $210.7 $426.2 $(153.7) $1,627.8
- --------------------------------------------------------------------------------
Operating Profit
(Loss) $(67.6) $98.2 $32.2 $(80.0) $(17.2)
Operating Profit
Margin - 46.6% 7.6% - -
EBITDA (1) $47.7 $169.0 $44.3 $(75.8) $185.2
EBITDA Margin(1) 4.2% 80.2% 10.4% - 11.4%
- --------------------------------------------------------------------------------
Depreciation and
Amortization $115.3 $70.8 $12.1 $4.2 $202.4
Capital Expenditures $97.6(2) $347.8(3) $5.4 $41.4 $492.2
- --------------------------------------------------------------------------------
September 30, 1998
Total Revenues $459.1 $186.5 $267.7 $(58.1) $855.2
- --------------------------------------------------------------------------------
Operating Profit
(Loss) $(61.8) $78.2 $16.9 $(36.7) $(3.4)
Operating Profit
Margin - 41.9% 6.3% - -
EBITDA(1) $(30.6) $135.7 $28.3 $(37.5) $95.9
EBITDA Margin(1) - 72.8% 10.6% - 11.2%
- --------------------------------------------------------------------------------
Depreciation and
Amortization $31.2 $57.5 $11.4 $(0.8) $99.3
Capital Expenditures $82.0(2) $190.7(3) $10.7 $(21.4) $262.0
- --------------------------------------------------------------------------------
For the Nine Months Ended:
September 30, 1999
Total Revenues $2,571.4 $604.6 $998.2 $(311.9) $3,862.3
- --------------------------------------------------------------------------------
Operating Profit
(Loss) $(159.4) $258.9 $25.7 $(188.5) $(63.3)
Operating Profit
Margin - 42.8% 2.6% - -
EBITDA(1) $44.8 $465.9 $63.4 $(177.0) $397.1
EBITDA Margin(1) 1.7% 77.1% 6.4% - 10.3%
- --------------------------------------------------------------------------------
Depreciation and
Amortization $204.2 $207.0 $37.7 $11.5 $460.4
Capital Expenditures $253.4(2) $823.0(3) $23.1 $45.9 $1,145.4
- --------------------------------------------------------------------------------
September 30, 1998
Total Revenues $1,248.5 $570.6 $674.1 $(117.8) $2,375.4
- --------------------------------------------------------------------------------
Operating Profit
(Loss) $(133.6) $236.7 $(20.2) $(87.0) $(4.1)
Operating Profit
Margin - 41.5% - - -
EBITDA(1) $(56.4) $409.0 $9.6 $(89.7) $272.5
EBITDA Margin(1) - 71.7% 1.4% - 11.5%
- --------------------------------------------------------------------------------
Depreciation and
Amortization $77.2 $172.3 $29.8 $(2.7) $276.6
Capital Expenditures $130.1(2) $605.0(3) $26.4 $114.5 $876.0
- --------------------------------------------------------------------------------
(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. EBITDA margin is calculated by
dividing EBITDA by total revenues. See discussion in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
(2)Includes satellite expenditures amounting to $13.6 million, $38.0 million,
$89.1 and $38.0 million, respectively.
(3)Includes satellite expenditures amounting to $93.2 million, $182.2 million,
$408.8 million and $422.2 million, respectively. Also included are
expenditures related to the early buy-out of satellite sale-leasebacks
totaling $228.2 million for the third quarter of 1999 and $369.5 million and
$155.5 million for the first nine months of 1999 and 1998, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Hughes
Electronics Corporation September 30, 1998 Financial Statements and is qualified
in its entirety by reference to the February 18, 2000, 8-K.
</LEGEND>
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Hughes
Electronics Corporation September 30, 1999 Financial Statements and is qualified
in its entirety by reference to the February 18, 2000, 8-K.
</LEGEND>
<CIK> 0000944868
<NAME> Hughes Electronics Corporation
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