-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KkEejJEg7HwSCtXaYfbDc6li3ewdlkkGnZYheiQRb3SxZrkJqLfxlm+asWrCm3tH AQ9y39FePGc5uX31BN6wwg== 0000040730-00-000019.txt : 20000221 0000040730-00-000019.hdr.sgml : 20000221 ACCESSION NUMBER: 0000040730-00-000019 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000218 ITEM INFORMATION: FILED AS OF DATE: 20000218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL MOTORS CORP CENTRAL INDEX KEY: 0000040730 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 380572515 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-00143 FILM NUMBER: 549680 BUSINESS ADDRESS: STREET 1: 300 RENAISSANCE CTR CITY: DETROIT STATE: MI ZIP: 48265-1000 BUSINESS PHONE: 3135565000 MAIL ADDRESS: STREET 1: 3044 W GRAND BOULEVARD CITY: DETROIT STATE: MI ZIP: 48202-3091 8-K 1 8-K ON HUGHES' RESTATEMENT'S 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 (Date of earliest event reported) January 13, 2000 ---------------- GENERAL MOTORS CORPORATION ----------------------------------------------------- (Exact name of registrant as specified in its charter) STATE OF DELAWARE 1-143 38-0572515 - ---------------------------- ----------------------- ------------------- (State or other jurisdiction (Commission File Number) (I.R.S. Employer of incorporation) Identification No.) 100 Renaissance Center, Detroit, Michigan 48265-1000 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (313)-556-5000 -------------- ITEM 5. OTHER EVENTS On January 13, 2000, General Motors Corporation's (GM) subisidary, 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 Exhibit 99 to the GM 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 in this Form 8-K as Exhibit 99.3. The satellite systems businesses are not considered discontinued operations for GM's consolidated financial statements as this does not reflect a segment of GM's operations. Exhibit 99.1 Hughes' press release dated January 13, 2000 Exhibit 99.2 GM's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 Exhibit 99.3 Hughes' Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 * * * * * * SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. GENERAL MOTORS CORPORATION ------------------------------ (Registrant) Date February 18, 2000 ----------------- By /s/ Peter R. Bible ------------------------------ (Peter R. Bible, Chief Accounting Officer) EX-99.1 2 HUGHES PRESS RELEASE 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 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. 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. EX-99.2 3 GM'S THIRD QUARTER 10-Q Exhibit 99.2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-143 GENERAL MOTORS CORPORATION (Exact name of registrant as specified in its charter) STATE OF DELAWARE 38-0572515 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Renaissance Center, Detroit, Michigan 48243-7301 3044 West Grand Boulevard, Detroit, Michigan 48202-3091 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (313) 556-5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . As of September 30, 1999, there were outstanding 640,208,136 shares of the issuer's $1-2/3 par value common stock and 135,137,857 shares of GM Class H $0.10 par value common stock. - 1 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES INDEX Page No. -------- Part I - Financial Information (Unaudited) Item 1. Financial Statements Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1999 and 1998 3 Consolidated Balance Sheets as of September 30, 1999, December 31, 1998 and September 30, 1998 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Part II - Other Information (Unaudited) Item 1. Legal Proceedings 37 Item 6. Exhibits and Reports on Form 8-K 38 Signature 38 Exhibit 99 Hughes Electronics Corporation Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) 39 Exhibit 27 Financial Data Schedule (for Securities and Exchange Commission information only) - 2 - PART I GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Unaudited) CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in Millions Except Per Share Amounts) GENERAL MOTORS CORPORATION AND SUBSIDIARIES Manufactured products sales and revenues $36,748 $28,464 $112,629 $95,202 Financing revenues 3,725 3,360 10,805 10,090 Other income (Note 12) 2,321 1,701 6,862 5,529 ------- ------- ------- -------- Total net sales and revenues 42,794 33,525 130,296 110,821 ------ ------ ------- ------- Cost of sales and other operating expenses, exclusive of items listed below 31,061 25,278 94,011 82,607 Selling, general and administrative expenses 4,703 3,816 13,027 11,457 Depreciation and amortization expense 3,088 2,674 9,039 8,029 Interest expense 1,985 1,690 5,624 4,951 Other expenses (Note 12) 439 486 1,353 1,602 ------- -------- -------- -------- Total costs and expenses 41,276 33,944 123,054 108,646 Income (loss) from continuing operations before income taxes and minority interests 1,518 (419) 7,242 2,175 Income tax expense (benefit) 553 (144) 2,538 710 Minority interests (7) (1) (28) (11) Losses of nonconsolidated associates (81) (33) (245) (89) ---- ---- ------ ------- Income (loss) from continuing operations 877 (309) 4,431 1,365 (Loss) income from discontinued operations (Note 2) - (500) 426 (181) ------ --- ------ ------ Net income (loss) 877 (809) 4,857 1,184 Dividends on preference stocks (28) (16) (51) (48) ---- ---- ------- ------- Earnings (losses) attributable to common stocks $849 $(825) $4,806 $1,136 === === ===== ===== Basic earnings (losses) per share attributable to common stocks $1-2/3 par value common stock (Note 11) Continuing operations $1.35 $(0.52) $6.79 $1.92 Discontinued operations - (0.76) 0.66 (0.27) ----- ---- ---- ---- Earnings per share attributable to $1-2/3 par value $1.35 $(1.28) $7.45 $1.65 ==== ==== ==== ==== Earnings per share attributable to Class H $(0.13) $0.11 $(0.17) $0.38 ==== ==== ==== ==== Diluted earnings (losses) per share attributable to common stocks $1-2/3 par value common stock (Note 11) Continuing operations $1.33 $(0.52) $6.67 $1.87 Discontinued operations - (0.76) 0.65 (0.27) ----- ---- ---- ---- Earnings per share attributable to $1-2/3 par value $1.33 $(1.28) $7.32 $1.60 ==== ==== ==== ==== Earnings per share attributable to Class H $(0.13) $0.11 $(0.17) $0.38 ==== ==== ==== ==== Reference should be made to the notes to consolidated financial statements. - 3 - CONSOLIDATED STATEMENTS OF INCOME - Concluded (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, -------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in Millions) AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS Manufactured products sales and revenues $36,748 $28,464 $112,629 $95,202 Other income 798 547 2,557 2,050 --- --- ----- ----- Total net sales and revenues 37,546 29,011 115,186 97,252 ------ ------ ------- ------ Cost of sales and other operating expenses, exclusive of items listed below 31,061 25,278 94,011 82,607 Selling, general and administrative expenses 3,487 2,794 9,598 8,449 Depreciation and amortization expense 1,717 1,472 5,121 4,399 ----- ----- ----- ----- Total operating costs and expenses 36,265 29,544 108,730 95,455 ------ ------ ------- ------ Interest expense 223 195 597 586 Other expenses 115 131 322 507 Net expense from transactions with Financing and Insurance Operations 85 48 245 117 -- -- --- --- Income (loss) from continuing operations before income taxes and minority interests 858 (907) 5,292 587 Income tax expense (benefit) 291 (281) 1,799 241 Minority interests 1 5 (5) 5 Losses of nonconsolidated associates (81) (33) (245) (89) ---- ---- ------ ---- Income (loss) from continuing operations 487 (654) 3,243 262 (Loss) income from discontinued operations (Note 2) - (500) 426 (181) --- ---- ----- --- Net income (loss) - Automotive, Electronics and Other Operations $487 $(1,154) $3,669 $81 === ===== ===== == Three Months Ended Nine Months Ended September 30, September 30, -------------- --------------- 1999 1998 1999 1998 ---- ---- ---- ---- (Dollars in Millions) FINANCING AND INSURANCE OPERATIONS Financing revenues $3,725 $3,360 $10,805 $10,090 Insurance, mortgage and other income 1,523 1,154 4,305 3,479 ----- ----- ------- ------- Total revenues and other income 5,248 4,514 15,110 13,569 ----- ----- ------ ------ Interest expense 1,762 1,495 5,027 4,365 Depreciation and amortization expense 1,371 1,202 3,918 3,630 Operating and other expenses 1,216 1,022 3,429 3,008 Provisions for financing losses 98 94 328 323 Insurance losses and loss adjustment expenses 226 261 703 772 ----- ----- ------ ------ Total costs and expenses 4,673 4,074 13,405 12,098 ----- ----- ------ ------ Net income from transactions with Automotive, Electronics and Other Operations 85 48 245 117 ---- --- ------ ------ Income before income taxes 660 488 1,950 1,588 Income tax expense 262 137 739 469 Minority interests (8) (6) (23) (16) --- --- ----- ----- Net income - Financing and Insurance Operations $390 $345 $1,188 $1,103 === === ===== ===== The above supplemental consolidating information is explained in Note 1. Reference should be made to the notes to consolidated financial statements. - 4 - CONSOLIDATED BALANCE SHEETS Sept. 30, Sept. 30, 1999 Dec. 31, 1998 GENERAL MOTORS CORPORATION AND SUBSIDIARIES (Unaudited) 1998 (Unaudited) --------- -------- --------- ASSETS (Dollars in Millions) Automotive, Electronics and Other Operations Cash and cash equivalents $12,056 $9,728 $6,888 Marketable securities 1,666 402 420 ------- ------- ------ Total cash and marketable securities 13,722 10,130 7,308 Accounts and notes receivable (less allowances) 5,480 4,750 5,258 Inventories (less allowances) (Note 3) 10,603 10,437 11,062 Net assets of discontinued operations (Note 2) - 77 - Equipment on operating leases (less accumulated depreciation) 6,244 4,954 4,797 Deferred income taxes and other current assets 7,494 10,051 5,994 ------- ------ ------- Total current assets 43,543 40,399 34,419 Equity in net assets of nonconsolidated associates 1,642 950 1,100 Property - net (Note 4) 31,761 32,222 31,652 Intangible assets - net 12,338 9,994 11,342 Deferred income taxes 17,139 14,967 18,124 Other assets 13,894 16,062 14,912 -------- -------- -------- Total Automotive, Electronics and Other Operations assets 120,317 114,594 111,549 Financing and Insurance Operations Cash and cash equivalents 328 146 93 Investments in securities 8,937 8,748 8,248 Finance receivables - net 76,449 70,436 62,460 Investment in leases and other receivables 35,837 32,798 33,220 Other assets 19,705 18,807 13,868 Net receivable from Automotive, Electronics and Other Operations 369 816 186 -------- -------- -------- Total Financing and Insurance Operations assets 141,625 131,751 118,075 -------- -------- -------- Total assets $261,942 $246,345 $229,624 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Automotive, Electronics and Other Operations Accounts payable (principally trade) $16,323 $13,542 $12,437 Loans payable 695 1,204 1,950 Accrued expenses 32,803 30,548 29,599 Net payable to Financing and Insurance Operations 369 816 186 -------- -------- -------- Total current liabilities 50,190 46,110 44,172 Long-term debt 7,880 7,118 6,817 Postretirement benefits other than pensions (Note 5) 34,455 33,503 33,479 Pensions (Note 6) 3,179 4,410 3,782 Net liabilities of discontinued operations (Note 2) - - 2 Other liabilities and deferred income taxes 18,170 17,807 17,729 -------- -------- -------- Total Automotive, Electronics and Other Operations liabilities 113,874 108,948 105,981 Financing and Insurance Operations Accounts payable 4,587 4,148 3,784 Debt 115,329 107,753 94,991 Deferred income taxes and other liabilities 10,723 9,661 9,399 -------- --------- --------- Total Financing and Insurance Operations liabilities 130,639 121,562 108,174 Minority interests 635 563 531 General Motors - obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of General Motors (Note 7) Series D 79 79 79 Series G 140 141 142 Stockholders' equity Preference stocks (Note 8) - 1 1 $1-2/3 par value common stock (issued, 642,050,210; 655,008,344 and 655,036,035 shares)(Note 9) 1,071 1,092 1,092 Class H common stock (issued, 135,195,966; 106,159,776, and 105,959,765 shares) 14 11 11 Capital surplus (principally additional paid-in capital) (Note 13) 15,282 12,661 12,769 Retained earnings 5,573 6,984 5,554 ------- ------- ------- Subtotal 21,940 20,749 19,427 Accumulated foreign currency translation adjustments (1,969) (1,089) (1,060) Net unrealized gains on securities 631 481 412 Minimum pension liability adjustment (Note 6) (4,027) (5,089) (4,062) -------- -------- -------- Accumulated other comprehensive loss (5,365) (5,697) (4,710) -------- -------- -------- Total stockholders' equity 16,575 15,052 14,717 -------- -------- -------- Total liabilities and stockholders' equity $261,942 $246,345 $229,624 ======= ======= ======= Reference should be made to the notes to consolidated financial statements. - 5 - CONSOLIDATED BALANCE SHEETS - Concluded Sept. 30, Sept. 30, 1999 Dec. 31, 1998 AUTOMOTIVE, ELECTRONICS AND OTHER OPERATIONS(Unaudited) 1998 (Unaudited) --------- -------- --------- (Dollars in Millions) ASSETS Cash and cash equivalents $12,056 $9,728 $6,888 Marketable securities 1,666 402 420 ------ ------ ------ Total cash and marketable securities 13,722 10,130 7,308 Accounts and notes receivable (less allowances) 5,480 4,750 5,258 Inventories (less allowances) (Note 3) 10,603 10,437 11,062 Net assets of discontinued operations (Note 2) - 77 - Equipment on operating leases (less accumulated depreciation) 6,244 4,954 4,797 Deferred income taxes and other current assets 7,494 10,051 5,994 ------ ------ ------- Total current assets 43,543 40,399 34,419 Equity in net assets of nonconsolidated associates 1,642 950 1,100 Property - net (Note 4) 31,761 32,222 31,652 Intangible assets - net 12,338 9,994 11,342 Deferred income taxes 17,139 14,967 18,124 Other assets 13,894 16,062 14,912 ------ ------ ------ Total Automotive, Electronics and Other Operations assets $120,317 $114,594 $111,549 ======= ======= ======= LIABILITIES AND GM INVESTMENT Accounts payable (principally trade) $16,323 $13,542 $12,437 Loans payable 695 1,204 1,950 Accrued expenses 32,803 30,548 29,599 Net payable to Financing and Insurance Operations 369 816 186 ------ ------ ------ Total current liabilities 50,190 46,110 44,172 Long-term debt 7,880 7,118 6,817 Postretirement benefits other than pensions (Note 5) 34,455 33,503 33,479 Pensions (Note 6) 3,179 4,410 3,782 Net liabilities of discontinued operations (Note 2) - - 2 Other liabilities and deferred income taxes 18,170 17,807 17,729 ------- ------- ------- Total Automotive, Electronics and Other Operations liabilities 113,874 108,948 105,981 Minority interests 558 511 484 GM investment in Automotive, Electronics and Other Operations 5,885 5,135 5,084 ------- ------- ------- Total Automotive, Electronics and Other Operations liabilities and GM investment $120,317 $114,594 $111,549 ======== ======== ======== Sept. 30, Sept. 30, 1999 Dec. 31, 1998 FINANCING AND INSURANCE OPERATIONS (Unaudited) 1998 (Unaudited) ----------- ---- ----------- (Dollars in Millions) ASSETS Cash and cash equivalents $328 $146 $93 Investments in securities 8,937 8,748 8,248 Finance receivables - net 76,449 70,436 62,460 Investment in leases and other receivables 35,837 32,798 33,220 Other assets 19,705 18,807 13,868 Net receivable from Automotive, Electronics and Other Operations 369 816 186 ------- ------- ------- Total Financing and Insurance Operations assets $141,625 $131,751 $118,075 ======== ======== ======== LIABILITIES AND GM INVESTMENT Accounts payable $4,587 $4,148 $3,784 Debt 115,329 107,753 94,991 Deferred income taxes and other liabilities 10,723 9,661 9,399 -------- --------- --------- Total Financing and Insurance Operations liabilities 130,639 121,562 108,174 Minority interests 77 52 47 GM investment in Financing and Insurance Operations 10,909 10,137 9,854 -------- --------- --------- Total Financing and Insurance Operations liabilities and GM investment $141,625 $131,751 $118,075 ======== ======== ======== The above supplemental consolidating information is explained in Note 1. Reference should be made to the notes to consolidating financial statements. - 6 - CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, ------------------------------- 1999 1998 ---- ---- (Dollars in Millions) GENERAL MOTORS CORPORATION AND SUBSIDIARIES Net cash provided by operating activities $25,292 $6,566 Cash flows from investing activities Expenditures for property (4,925) (5,921) Investments in marketable securities - acquisitions (19,570) (22,717) Investments in marketable securities - liquidations 17,706 26,501 Mortgage servicing rights - acquisitions (1,199) (897) Mortgage servicing rights - liquidations 34 67 Finance receivables - acquisitions (139,165) (112,962) Finance receivables - liquidations 100,692 86,709 Proceeds from sales of finance receivables 35,120 21,922 Operating leases - acquisitions (20,123) (18,281) Operating leases - liquidations 11,383 11,717 Investments in companies, net of cash acquired (Note 13) (5,005) (475) Other (154) (431) ------- ------- Net cash used in investing activities (25,206) (14,768) ------ ------ Cash flows from financing activities Net (decrease) increase in loans payable (8,152) 3,402 Long-term debt - borrowings 27,086 16,620 Long-term debt - repayments (15,168) (10,860) Repurchases of common and preference stocks (2,149) (3,071) Proceeds from issuing common and preference stocks 1,868 343 Cash dividends paid to stockholders (1,023) (1,045) ----- ----- Net cash provided by financing activities 2,462 5,389 ----- ----- Effect of exchange rate changes on cash and cash equivalents (166) 271 ------ ------ Net cash provided by (used in) continuing operations 2,382 (2,542) Net cash provided by (used in) discontinued operations 128 (750) ------ ------ Net increase (decrease) in cash and cash equivalents 2,510 (3,292) Cash and cash equivalents at beginning of the period 9,874 10,273 ------ ------ Cash and cash equivalents at end of the period $12,384 $6,981 ====== ===== Reference should be made to the notes to consolidated financial statements. - 7 - CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Concluded (Unaudited)
Nine Months Ended September 30, ------------------------------- 1999 1998 ---- ---- Automotive, Financing Automotive, Financing Electronics and Electronics and and Other Insurance and Other Insurance --------- --------- --------- --------- (Dollars in Millions) Net cash provided by operating activities $15,409 $9,883 $2,778 $3,788 Cash flows from investing activities Expenditures for property (4,721) (204) (5,813) (108) Investments in marketable securities - acquisitions (3,481) (16,089) (8,022) (14,695) Investments in marketable securities - liquidations 2,217 15,489 11,255 15,246 Mortgage servicing rights - acquisitions - (1,199) - (897) Mortgage servicing rights - liquidations - 34 - 67 Finance receivables - acquisitions - (139,165) - (112,962) Finance receivables - liquidations - 100,692 - 86,709 Proceeds from sales of finance receivables - 35,120 - 21,922 Operating leases - acquisitions (6,175) (13,948) (4,382) (13,899) Operating leases - liquidations 4,279 7,104 4,092 7,625 Investments in companies, net of cash acquired (Note 13) (2,885) (2,120) (417) (58) Net investing activity with Financing and Insurance Operations 75 - 238 - Other (831) 677 (1,198) 767 ------ ------- ----- ------- Net cash used in investing activities (11,522) (13,609) (4,247) (10,283) ------ ------ ----- ------ Cash flows from financing activities Net (decrease) increase in loans payable (551) (7,601) 961 2,441 Long-term debt - borrowings 5,414 21,672 2,689 13,931 Long-term debt - repayments (4,632) (10,536) (1,243) (9,617) Net financing activity with Automotive, Electronics and Other Operations - (75) - (238) Repurchases of common and preference stocks (2,149) - (3,071) - Proceeds from issuing common and preference stocks 1,868 - 343 - Cash dividends paid to stockholders (1,023) - (1,045) - ----- ------ ----- ------ Net cash (used in) provided by financing activities (1,073) 3,460 (1,366) 6,517 ----- ----- ----- ----- Effect of exchange rate changes on cash and cash equivalents (167) 1 272 (1) Net transactions with Automotive/ Financing Operations (447) 447 505 (505) ----- --- ----- --- Net cash provided by (used in) continuing operations 2,200 182 (2,058) (484) Net cash provided by (used in) discontinued operations 128 - (750) - ----- --- ----- --- Net increase (decrease) in cash and cash equivalents 2,328 182 (2,808) (484) Cash and cash equivalents at beginning of the period 9,728 146 9,696 577 ------ --- ----- --- Cash and cash equivalents at end of the period $12,056 $328 $6,888 $93 ====== === ===== ==
The above supplemental consolidating information is explained in Note 1. Reference should be made to the notes to consolidated financial statements. - 8 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Financial Statement Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The consolidated financial statements include the accounts of General Motors Corporation (hereinafter referred to as the "Corporation") and domestic and foreign subsidiaries that are more than 50% owned, principally General Motors Acceptance Corporation and Subsidiaries (GMAC) and Hughes Electronics Corporation (Hughes), (collectively referred to as "General Motors" or "GM"). The financial data related to Delphi Automotive Systems Corporation (Delphi) is presented as discontinued operations for all periods presented. In the opinion of management, all adjustments (consisting of only normal recurring items), which are necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year. For further information, refer to the December 31, 1998 consolidated financial statements and notes thereto included in GM's Current Report on Form 8-K, dated April 12, 1999, which was filed with the Securities and Exchange Commission on April 15, 1999; Hughes financial statements and notes thereto included as Exhibit 99 to GM's 1998 Annual Report on Form 10-K for the period ended December 31, 1998; the GMAC Annual Report on Form 10-K for the period ended December 31, 1998; the Hughes financial statements and notes thereto for the period ended September 30, 1999, included as Exhibit 99 to this GM Quarterly Report on Form 10-Q for the period ended September 30, 1999 and related Hughes' Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission; and the GMAC Quarterly Report on Form 10-Q for the period ended September 30, 1999, filed with the Securities and Exchange Commission. GM presents separate supplemental consolidating financial information for the following businesses: (1) Automotive, Electronics and Other Operations which consists of the design, manufacturing and marketing of cars, trucks, locomotives and heavy duty transmissions and related parts and accessories, as well as the operations of Hughes; and (2) Financing and Insurance Operations which consists primarily of GMAC, which provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, vehicle and homeowners insurance, and asset-backed lending. Transactions between businesses have been eliminated in the Corporation's consolidated statements of income. Certain amounts for 1998 were reclassified to conform with the 1999 classifications. Note 2. Discontinued Operations Delphi is a diverse supplier of automotive systems and components. Delphi offers products and services in the areas of electronics and mobile communication; safety, thermal and electrical architecture; and dynamics and propulsion. In February 1999, Delphi completed an initial public offering (IPO) of 100 million shares of its common stock, which represented 17.7% of its outstanding common shares. On April 12, 1999, the GM Board of Directors (GM Board) approved the complete separation of Delphi from GM by means of a spin-off (which was tax-free to GM and its stockholders for U.S. federal income tax purposes). On May 28, 1999 GM distributed to holders of its $1-2/3 par value common stock 97.8% of the shares of Delphi which GM then held, representing 80.1 percent of the outstanding shares of Delphi, which resulted in 0.69893 shares of Delphi common stock being distributed for each share of GM $1-2/3 par value common stock outstanding on the record date of May 25, 1999. In addition, GM contributed the remaining 2.2% of Delphi shares it held (around 12.4 million shares), to a Voluntary Employee Beneficiary Association (VEBA) trust established by GM to fund benefits to its hourly retirees. The financial data related to GM's investment in Delphi through May 28, 1999 is classified as discontinued operations for all periods presented. The financial data of Delphi reflect the historical results of operations and cash flows of the businesses that were considered part of the Delphi business segment of GM during each respective period; they do not reflect many significant changes that will occur in the operations and funding of Delphi as a result of the separation from GM and the IPO. The Delphi financial data classified as discontinued operations reflect the assets and liabilities transferred to Delphi in accordance with the terms of a master separation agreement to which Delphi and GM are parties (the "Separation Agreement"). Delphi and Delco Electronics Corporation (Delco Electronics), the electronics and mobile communication business that was transferred to Delphi in December 1997, were under the common control of GM during such periods; therefore, the Delphi financial data include amounts relating to Delco Electronics for all periods presented, although Delco Electronics was not integrated with Delphi until December 1997. Delphi net sales (including sales to GM) included in discontinued operations totaled $12.5 billion and $20.7 billion for the nine months ended September 30, 1999 and 1998, respectively. Income (loss) from Delphi discontinued operations of $426 million and $(181) million for the nine months ended September 30, 1999 and 1998 is reported net of income tax expense (benefit) of $314 million and $(178) million, respectively. Delphi net sales (including sales to GM) included in discontinued operations totaled $6.0 billion for the quarter ended September 30, 1998. Losses from Delphi discontinued operations of $(500) million for the quarter ended September 30, 1998, is reported net of income tax benefit of $307 million. - 9 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 2. Discontinued Operations (concluded) The net assets (liabilities) of Delphi were as follows (in millions): Dec. 31, September 30, 1998 1998 ---- ---- Current assets $6,405 $6,359 Property and equipment - net 4,965 4,878 Deferred income taxes and other assets 4,136 3,693 Current liabilities (4,057) (3,831) Long-term debt (3,141) (3,294) Other liabilities (8,299) (7,844) Accumulated translation adjustments 68 37 -- -- Net assets (liabilities) of discontinued operations $77 $(2) == = In the first quarter of 1999, GM recorded an increase to stockholders' equity of $1.2 billion reflecting a gain, as a result of Delphi's IPO, of $1.7 billion, less the cost of GM's investment in Delphi and the costs of the IPO and establishing Delphi as an independent entity. As a result of the complete separation of Delphi by means of the spin-off (which was tax-free to GM and its stockholders for U.S. federal income tax purposes) and VEBA trust contribution on May 28, 1999, GM recorded a decrease to stockholders' equity of $5.2 billion in the second quarter of 1999. This amount reflects the elimination of Delphi net assets of $3.4 billion, the allocation to Delphi of pension plan assets and obligations and other related adjustments totaling $1.8 billion (see Note 6). In total, the complete separation of Delphi in the nine-month period ending September 30, 1999 resulted in a reduction to stockholders' equity of $4.0 billion. The Separation Agreement provided that Delphi's U.S. hourly employees would continue to participate in the defined benefit pension plan for hourly workers and other postretirement benefit plans administered by GM until full separation from GM. Generally, Delphi would assume the pension and other postretirement benefit obligations for U.S. hourly employees who retire after October 1, 1999 and GM would retain pension and postretirement benefit obligations for U.S. hourly employees who retire on or before October 1, 1999. In connection with the 1999 United Auto Workers (UAW) labor contract (see Note 16), the October 1, 1999 date for Delphi's assumption of these retirement obligations was extended to January 1, 2000. The allocation of pension and other postretirement benefit obligations between Delphi and GM assumed certain levels of employee retirements prior to October 1, 1999, based on historical experience and conditions surrounding the separation. Prior to the spin-off, Delphi and GM agreed to recalculate the allocation of those liabilities based on the actual level of retirements on or before October 1, 1999, which was subsequently extended to January 1, 2000 in connection with the 1999 UAW labor contract. Accordingly, if and to the extent that greater than the assumed number of employees retire on or before January 1, 2000, Delphi would be required to make a payment to GM. If and to the extent that less than the assumed number of employees retire on or before January 1, 2000, GM would be required to make a payment to Delphi. Presently, GM expects to receive a payment from Delphi, the amount of which will be determined in 2000. GM does not presently anticipate that the finalization of these retirement obligations will have a significant effect on its financial position. Note 3. Inventories Inventories included the following for Automotive, Electronics and Other Operations (in millions): Sept. 30, Dec. 31, Sept. 30, 1999 1998 1998 ---- ---- ---- Productive material, work in process, and supplies $5,858 $5,377 $6,094 Finished product, service parts, etc. 6,647 6,962 6,805 ------- ------ ------- Total inventories at FIFO 12,505 12,339 12,899 Less LIFO allowance 1,902 1,902 1,837 ------- ------- ------- Total inventories (less allowances) $10,603 $10,437 $11,062 ====== ====== ====== - 10 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 4. Property - Net Property - net included the following for Automotive, Electronics and Other Operations (in millions): Sept. 30, Dec. 31, Sept. 30, 1999 1998 1998 ---- ---- ---- Real estate, plants, and equipment $59,527 $59,565 $58,718 Less accumulated depreciation (34,727) (34,641) (34,296) ------ ------ ------ Real estate, plants, and equipment - net 24,800 24,924 24,422 Special tools - net 6,961 7,298 7,230 ------- ------- ------- Total property - net $31,761 $32,222 $31,652 ====== ====== ====== Financing and Insurance Operations had net property of $431 million, $386 million, and $272 million recorded in other assets at September 30, 1999, December 31, 1998, and September 30, 1998, respectively. Note 5. Postretirement Benefits Other than Pensions GM has disclosed in the consolidated financial statements certain amounts associated with estimated future postretirement benefits other than pensions and characterized such amounts as "accumulated postretirement benefit obligations," "liabilities," or "obligations." Notwithstanding the recording of such amounts and the use of these terms, GM does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of GM (other than pensions) represent legally enforceable liabilities of GM. Note 6. Pensions In the second quarter of 1999, as a result of the Delphi Separation, GM recognized a charge of $2.3 billion pre-tax, related to splitting the U.S. Hourly Pension plan, as a reduction of stockholders' equity (see Note 2). This charge reflects the allocation to Delphi of pension plan assets and obligations relating to Delphi employees no longer covered by the GM U.S. Hourly Pension Plan. Furthermore, the GM U.S. Hourly Pension plan has been remeasured as of May 28, 1999. The remeasurement was based on May 28, 1999 demographics, updated mortality assumptions, assets and liabilities adjusted for the plan split, and an updated discount rate of 7.0% compared to the December 31, 1998 discount rate of 6.8%. No change was made to the expected return on plan assets of 10.0%. Note 7. Preferred Securities of Subsidiary Trusts General Motors - Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts In July 1997, the General Motors Capital Trust D (Series D Trust) issued approximately $79 million of its 8.67% Trust Originated Preferred Securitiessm (TOPrSsm) Series D, (Series D Preferred Securities), in a one-for-one exchange for 3,055,255 of the outstanding GM Series D 7.92% Depositary Shares, each representing one-fourth of a share of GM Series D Preference Stock, $0.10 par value per share. In addition, the General Motors Capital Trust G (Series G Trust) issued approximately $143 million of its 9.87% TOPrS, Series G (Series G Preferred Securities), in a one-for-one exchange for 5,064,489 of the outstanding GM Series G 9.12% Depositary Shares, each representing one-fourth of a share of GM Series G Preference Stock, $0.10 par value per share. Concurrently with the exchanges and the related purchases by GM from the Series D and Series G Trusts (Trusts) of the common securities of such Trusts, which represent approximately 3 percent of the total assets of such Trusts, GM issued to the wholly-owned Trusts, as the Series D Trust's sole assets its 8.67% Junior Subordinated Deferrable Interest Debentures, Series D, due July 1, 2012 and as the Series G Trust's sole assets, its 9.87% Junior Subordinated Deferrable Interest Debentures, Series G, due July 1, 2012 (the "Series D Debentures" and "Series G Debentures" or collectively the "Debentures"), having aggregate principal amounts equal to the aggregate stated liquidation amounts of the Series D and Series G Preferred Securities and the related common securities, respectively ($79 million with respect to the Series D Debentures and $131 million with respect to the Series G Debentures). The Series D Debentures are redeemable, in whole or in part, at GM's option on or after August 1, 1999, at a redemption price equal to 100% of the outstanding principal amount of the Series D Debentures plus accrued and unpaid interest. The Series D Preferred Securities will be redeemed upon the maturity or earlier redemption of the Series D Debentures. - 11 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 7. Preferred Securities of Subsidiary Trusts (concluded) The Series G Debentures are redeemable, in whole or in part, at GM's option on or after January 1, 2001, at a redemption price equal to 100% of the outstanding principal amount of the Series G Debentures plus accrued and unpaid interest, or, under certain circumstances, prior to January 1, 2001, at a redemption price equal to 114% of the outstanding principal of the Series G Debentures from the Series G expiration date through December 31, 1997, declining ratably on each January 1 thereafter to 100% on January 1, 2001, plus accrued and unpaid interest. The Series G Preferred Securities will be redeemed upon the maturity or earlier redemption of the Series G Debentures. GM has guaranteed the payment in full to the holders of the Series D and Series G Preferred Securities (collectively the "Preferred Securities") of all distributions and other payments on the Preferred Securities to the extent not paid by the Trusts only if and to the extent that the Trusts have assets. GM has made payments of interest or principal on the related Debentures. These guarantees, when taken together with GM's obligations under the Preferred Securities Guarantees, the Debentures, and the Indentures relating thereto and the obligations under the Declaration of Trust of the Trusts, including the obligations to pay certain costs and expenses of the Trusts, constitute full and unconditional guarantees by GM of each Trust's obligations under its Preferred Securities. - -------------------- sm "Trust Originated Preferred Securities" and "TOPrS" are service trademarks of Merrill Lynch & Co. Note 8. America Online's Investment in GM Preference Stock On June 24, 1999, as part of a strategic alliance with Hughes, America Online (AOL) invested $1.5 billion in return for approximately 2.7 million shares of GM Series H 6.25% Automatically Convertible Preference Stock, par value $0.10 per share. This preference stock will automatically convert into GM Class H common stock in three years, based upon a variable conversion factor linked to the GM Class H common stock price at the time of conversion, and accrues quarterly dividends at a rate of 6.25% per year. It may be converted earlier in certain limited circumstances. GM immediately invested the $1.5 billion received from AOL into shares of Hughes Series A Preferred Stock designed to correspond to the financial terms of the GM Series H 6.25% Automatically Convertible Preference Stock. Dividends on the Hughes Series A Preferred Stock are payable to GM quarterly at an annual rate of 6.25%. These preferred stock dividends payable to GM will reduce Hughes' earnings used for computation of the Available Separate Consolidated Net Income (Loss) (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 GM Series H 6.25% Automatically Convertible Preference Stock into GM Class H common stock, Hughes will redeem the Series A Preferred Stock through a cash payment to GM equal to the fair market value of GM Class H common stock issuable upon the conversion. Simultaneous with GM's receipt of the cash redemption proceeds, GM will make a capital contribution to Hughes of the same amount. In connection with this capital contribution, the denominator of the fraction used in the computation of the ASCNI of Hughes will be increased by the corresponding number of shares of GM Class H common stock issued. Accordingly, upon conversion of the GM Series H 6.25% Automatically Convertible Preference Stock into GM Class H common stock, both the numerator and denominator used in the computation of ASCNI will increase by the amount of the GM Class H common stock issued. Note 9. Stock Repurchases During the nine months ended September 30, 1999, GM used $1.0 billion to acquire approximately 13.0 million shares of $1-2/3 par value common stock under the Corporation's $4.0 billion stock repurchase program announced in February 1998. GM also used approximately $648 million to repurchase shares of $1-2/3 par value common stock for certain employee benefit plans and $501 million to repurchase and retire Series B preference stock during the nine months ended September 30, 1999. - 12 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 10. Comprehensive Income GM's total comprehensive income (loss) was as follows (in millions): Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net income (loss) $877 $(809) $4,857 $1,184 Other comprehensive income (loss): Foreign currency translation adjustments 18 189 (880)(1) (250) Unrealized gains (losses) on securities 70 (95) 150 (92) Minimum pension liability adjustment - - 1,062(2) - ---- ---- ----- ----- Other comprehensive income (loss) 88 94 332 (342) ---- ---- ------ --- Total comprehensive income (loss) $965 $(715) $5,189 $842 === === ===== === (1)Includes approximately $450 million of translation adjustments associated with the devaluation of the Brazilian Real in the first quarter of 1999. (2)Adjustment of $614 million due to remeasurement of the U.S. Hourly Pension Plan as of May 28, 1999 (see Note 6) and adjustments of $448 million to reflect the allocation to Delphi of pension plan assets and obligations (see Note 2). Note 11. Earnings Per Share Attributable to Common Stocks Earnings per share attributable to each class of GM common stock was determined based on the attribution of earnings to each such class of common stock for the period divided by the weighted-average number of common shares for each such class outstanding during the period. Diluted earnings per share attributable to each class of GM common stock considers the impact of potential common shares, unless the inclusion of the potential common shares would have an antidilutive effect. The attribution of earnings to each class of GM common stock was as follows (in millions): Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Earnings (losses) attributable to common stocks $1-2/3 par value Continuing operations $866 $(336) $4,400 $1,277 Discontinued operations - (500) 426 (181) ------ --- ------ ----- Earnings (losses) attributable to $1-2/3 par value $866 $(836) $4,826 $1,096 (Losses) earnings attributable to Class H $(17) $11 $(20) $40 Earnings attributable to $1-2/3 par value common stock for the period represent the earnings attributable to all GM common stocks for the period, reduced by the ASCNI of Hughes for the respective period and dividends on preference stocks. Losses attributable to GM Class H common stock for the three and nine months ended September 30, 1999 represent the ASCNI of Hughes. Losses used for computation of the ASCNI of Hughes are based on the separate consolidated net income (loss) of Hughes, excluding the effects of GM purchase accounting adjustments arising from GM's acquisition of Hughes Aircraft Company (HAC) which remains after the spin-off of Hughes Defense, reduced by the amount of dividends accrued on the Series A Preferred Stock of Hughes (as an equivalent measure of the effect that GM's payment of dividends on the GM Series H 6.25% Automatically Convertible Preference Stock would have if paid by Hughes). - 13 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 11. Earnings Per Share Attributable to Common Stocks (continued) The calculated losses used for computation of the ASCNI of Hughes is then 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 three and nine months ended September 30, 1999 (135 million and 121 million, 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 a 100% interest in the earnings of Hughes (the "Average Class H dividend base"). The Average Class H dividend base was 429 million and 415 million during the three and nine months ended September 30, 1999, respectively. Earnings attributable to GM Class H common stock for the three and nine months ended September 30, 1998 represent the ASCNI of Hughes, excluding the effects of GM purchase accounting adjustments arising from GM's acquisition of HAC which remains after the spin-off of Hughes Defense, calculated for such period and multiplied by a fraction, the numerator of which is equal to the weighted-average number of shares of GM Class H common stock outstanding for each of the periods (110 million), 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 a 100% interest in the earnings of Hughes. The Average Class H dividend base was 400 million during both the three and nine months ended September 30, 1998. Upon conversion of the GM Series H 6.25% Automatically Convertible Preference Stock into GM Class H common stock, both the numerator and the denominator used in the computation of ASCNI will increase by the number of shares of the GM Class H common stock issued (see further discussion in Note 8). 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 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 13), 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 GM 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. - 14 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 11. Earnings Per Share Attributable to Common Stocks (concluded) Effective January 1, 1999, shares of GM 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 common stock dividend base (denominator). From time to time, in anticipation of exercises of stock options, Hughes purchases GM 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. The reconciliation of the amounts used in the basic and diluted earnings per share computations for income from continuing operations was as follows (in millions except per share amounts):
$1-2/3 Par Value Common Stock Class H Common Stock ----------------------------- -------------------- Per Share Per Share Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Three Months Ended September 30, 1999 Income (loss) from continuing operations $886 $(9) Less:Dividends on preference stocks 20 8 --- -- Basic EPS Income (loss) from continuing operations attributable to common stocks 866 641 $1.35 (17) 135 $(0.13) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 11 - - ----- ---- --- ---- Diluted EPS Adjusted income (loss) from continuing operations attributable to common stocks $866 652 $1.33 $(17) 135 $(0.13) === === ==== == === ==== Three Months Ended September 30, 1998 (Loss) income from continuing operations $(320) $11 Less:Dividends on preference stocks 16 - --- -- Basic EPS (Loss) income from continuing operations attributable to common stocks $(336) 654 $(0.52) $11 106 $0.11 ===== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - - - 4 ----- ---- ---- ---- Diluted EPS Adjusted (loss) income from continuing operations attributable to common stocks $(336) 654 $(0.52) $11 110 $0.11 === === ===== == === ==== Nine Months Ended September 30, 1999 Income (loss) from continuing operations $4,444 $(13) Less:Dividends on preference stocks 44 7 ----- -- Basic EPS Income (loss) from continuing operations attributable to common stocks 4,400 648 $6.79 $(20) 121 $(0.17) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 12 - - ---- --- ---- ----- Diluted EPS Adjusted income (loss) from continuing operations attributable to common stocks $4,400 660 $6.67 $(20) 121 $(0.17) ===== === ==== == === ==== Nine Months Ended September 30, 1998 Income from continuing operations $1,325 $40 Less:Dividends on preference stocks 48 - Basic EPS Income from continuing operations attributable to common stocks $1,277 666 $1.92 $40 105 $0.38 ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options (2) 10 2 5 ----- ---- ---- --- Diluted EPS Adjusted income from continuing operations attributable to common stocks $1,275 676 $1.87 $42 110 $0.38 ===== === ==== == === ====
- 15 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 12. Other Income and Other Expenses Other income and other expenses consisted of the following (in millions): Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ------- ------- ------- ------ Other income Interest income $545 $491 $1,693 $1,599 Insurance premiums 327 354 1,001 1,092 Rental car lease revenue 430 318 1,330 983 Mortgage operations investment income and servicing fees 673 529 2,015 1,462 Other 346 9 823 393 ------ ------- ------- ------- Total other income $2,321 $1,701 $6,862 $5,529 ===== ===== ===== ===== Other expenses Provision for financing losses $98 $94 $328 $323 Insurance losses and loss adjustment expenses 226 261 703 772 Other 115 131 322 507 --- --- ------ ------ Total other expenses $439 $486 $1,353 $1,602 === === ===== ===== Note 13. Acquisitions and Investments On January 22, 1999, Hughes agreed to acquire PRIMESTAR's 2.3 million subscriber medium-power direct-to-home satellite business and the high-power satellite assets and direct-broadcast satellite orbital frequencies of Tempo Satellite, a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. 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 GM 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. In December 1998, Hughes agreed to acquire all of the outstanding capital stock of United States Satellite Broadcasting Company, Inc. (USSB). USSB provided direct-to-home premium satellite programming in conjunction with DIRECTV's basic programming service. The USSB acquisition was closed on May 20, 1999. On July 6, 1999, based upon elections made by the former USSB shareholders, Hughes paid approximately $360 million in cash and issued approximately 22.6 million shares of GM Class H common stock, for a total purchase price of approximately $1.6 billion. On July 22, 1999, GMAC completed the acquisition of the asset-based lending and factoring business unit of The Bank of New York for consideration of approximately $1.8 billion. GMAC also completed the acquisition of the full service leasing business of Arriva Automotive Solutions Limited (Arriva) on July 30, 1999 which was valued at (pound)484 million (approximately $775 million at the July 30, 1999 exchange rate), which included debt refinancing. The financial information presented as of and for the periods ended September 30, 1999 reflect the effects of the PRIMESTAR, Tempo Satellite, USSB, The Bank of New York and Arriva Automotive Solutions Limited transactions, discussed above, from their respective dates of acquisition. These transactions have been accounted for using the purchase method of accounting; however, the adjustments made in the September 30, 1999 financial statements reflect a preliminary allocation of the purchase price for the transactions based upon information currently available. Adjustments relating to the tangible assets (i.e., satellites, equipment located on customer premises, etc.), intangible assets (i.e., licenses granted by the Federal Communications Commission, customer lists, dealer network, etc.), and accrued liabilities for programming contracts and leases with above-market rates are estimates pending the completion of independent appraisals currently in process. Additionally, the adjustment to recognize the benefit of net operating loss carry forwards of USSB represents a preliminary estimate pending further review and analysis by the management of Hughes. These appraisals, valuations and studies are expected to be completed by December 31, 1999. Accordingly, the final purchase price allocations may be different from the amounts reflected herein. - 16 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 13. Acquisitions and Investments (concluded) As the GM 1999 financial statements include only USSB's, PRIMESTAR's, The Bank of New York's and Arriva'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 GM, USSB, PRIMESTAR, The Bank of New York and Arriva 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 GM had USSB, PRIMESTAR, The Bank of New York and Arriva operated as part of GM 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. The pro forma information is as follows (in millions except per share amounts): Nine Months Ended Nine Months Ended September 30, 1999 September 30, 1998 ------------------ ------------------ Total net sales and revenues $131,623 $112,699 Net income from continuing operations (1) $4,430 $1,294 Net income from discontinued operations 426 (181) ------ ------ Net income (1) $4,856 $1,113 ===== ===== Basic earnings (losses) per share attributable to common stocks $1-2/3 par value common stock Continuing operations $6.80 $1.84 Discontinued operations 0.66 (0.27) ---- ---- Earnings per share attributable to $1-2/3 par value $7.46 $1.57 ==== ==== Earnings per share attributable to Class H (1) $(0.18) $0.16 ==== ==== Diluted earnings (losses) per share attributable to common stocks $1-2/3 par value common stock Continuing operations $6.67 $1.81 Discontinued operations 0.65 (0.27) ---- ---- Earnings per share attributable to $1-2/3 par value $7.32 $1.54 ==== ==== Earnings per share attributable to Class H (1) $(0.18) $0.16 ==== ==== (1) 1998 results exclude the cumulative effect of accounting change of $9 million, after tax, due to Hughes' adoption of SOP 98-5, Reporting on the Costs of Start-Up Activities. GM reported the $9 million charge in its fourth quarter 1998 results and Hughes reported the change as a restatement of its first quarter 1998 results. Separately, on March 2, 1999, GM invested an additional $440 million in Isuzu Motors Limited (Isuzu), taking its common ownership interest in Isuzu to 49%. GM has arranged for appraisals, valuations and other studies to be performed to aid in the allocation of the $440 million investment to its interest in Isuzu. This allocation is expected to be completed in the first quarter of 2000. 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 million plus the assumption of debt. In connection with the transaction, Tevecap sold its 10% equity interest in GLA to Hughes and Cisneros Group, the remaining GLA partners. Hughes' share of the GLA purchase amounted to approximately $101 million and increased Hughes' ownership of GLA to 77.8%. 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 approximately $238 million issued to Hughes. If Hughes elects to convert these bonds, Hughes would have a controlling interest in DIRECTV Japan. - 17 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 14. Segment Reporting GM's reportable operating segments within its Automotive, Electronics and Other Operations business consist of GM Automotive (GMA), which is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin America/Africa/Mid-East (GMLAAM); Hughes, and Other. GM's reportable operating segments within its Financing and Insurance Operations business consist of GMAC and Other. Selected information regarding GM's reportable operating segments and regions are as follows:
Elimin- Auto- Other Total GMNA GME GMLAAM GMAP ations GMA Hughes Other motive GMAC Financing Financing ---- --- ------ ---- ------ --- ------ ----- ------ ---- --------- --------- (in millions) For the Three Months Ended September 30, 1999 Manufactured products sales & revenues: External customers $26,516 $5,657 $1,127 $755 $1 $34,056 $1,995 $697 $36,748 $ - $ - $ - Intersegment 309 598 65 93 (1,065) - (5) 5 - - - - ------ ------ ------ ---- ----- ------ ----- ---- ------ ---- ---- ---- Total manufactured products 26,825 6,255 1,192 848 (1,064) 34,056 1,990 702 36,748 - - - Financing revenues - - - - - - - - - 3,480 245 3,725 Other income (a) 805 136 8 36 - 985 8 (195) 798 1,723 (200) 1,523 ------ ------ ------ ---- ----- ------ ----- ---- ------ ----- ----- ----- Total net sales and revenues $27,630 $6,391 $1,200 $884 $(1,064) $35,041 $1,998 $507 $37,546 $5,203 $45 $5,248 ====== ===== ===== === ===== ====== ===== === ====== ===== == ===== Interest income (a) $232 $115 $11 $2 $(1) $359 $2 $(196) $165 $45 $(76) $380 Interest expense $327 $89 $29 $2 $(1) $446 $52 $(275) $223 $1,667 $95 $1,762 Net income (loss) $671 $32 $(36) $(54) $ - $613 $(30)(b) $(96) $487 $393 $(3) $390 Segment assets $77,511 $19,764 $3,908 $1,223 $(2,738) $99,668 $18,395(c) $2,254 $120,317 $141,707 $(82) $141,625 For the Three Months Ended September 30, 1998 Manufactured products sales & revenues: External customers $18,122 $5,925 $1,665 $615 $(1) $26,326 $1,507 $631 $28,464 $ - $ - $ - Intersegment 374 302 37 56 (769) - 6 (6) - - - - ------ ----- ----- ----- --- ------ ----- --- ------ ---- ---- ---- Total manufactured products 18,496 6,227 1,702 671 (770) 26,326 1,513 625 28,464 - - - Financing revenues - - - - - - - - - 3,150 210 3,360 Other income (a) 435 163 71 10 1 680 23 (156) 547 1,296 (142) 1,154 ------ ------ ------ ---- ----- ------ ----- --- ------ ----- --- ----- Total net sales and revenues $18,931 $6,390 $1,773 $681 $(769) $27,006 $1,536 $469 $29,011 $4,446 $68 $4,514 ====== ===== ===== === === ====== ===== === ====== ===== == ===== Interest income (a) $83 $137 $30 $3 $ - $253 $21 $(169) 105 440 (54) 386 Interest expense $227 $137 $22 $1 $1 $388 $4 $(197) $195 $1,478 $17 $1,495 Net (loss) income $(595) $50 $(64) $ - $(24) $(633) $43(b) $(564) $(1,154) $313 $32 $345 Segment assets $65,499 $18,243 $5,640 $1,358 $(596) $90,144 $12,461(c) $8,944 $111,549 $118,623 $(548) $118,075
(a)Interest income is included in other income. (b)The amount reported for Hughes excludes amortization of GM purchase accounting adjustments of approximately $5 million for both 1999 and 1998, related to GM's acquisition of Hughes Aircraft Company. Such amortization was allocated to GM's Other segment which is consistent with the basis upon which the segments are evaluated. (c)The amount reported for Hughes excludes the unamortized GM purchase accounting adjustments of approximately $411 million and $432 million, for 1999 and 1998, respectively, related to GM's acquisition of Hughes Aircraft Company. These adjustments were allocated to GM's Other segment which is consistent with the basis upon which the segments are evaluated. - 18 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 14. Segment Reporting (concluded)
Elimin- Auto- Other Total GMNA GME GMLAAM GMAP ations GMA Hughes Other motive GMAC Financing Financing ---- --- ------ ---- ------ --- ------ ----- ------ ---- --------- --------- For the Nine Months Ended September 30, 1999 Manufactured products sales & revenues: External customers $81,530 $18,513 $3,250 $1,975 $ 1 $105,269 $5,203 $2,157 $112,629 $ - $ - $ - Intersegment 1,286 757 170 180 (2,393) - 15 (15) - - - - ------ ------ ------ ------ ----- ------- ----- ----- ------- --- --- --- Total manufactured products 82,816 19,270 3,420 2,155 (2,392) 105,269 5,218 2,142 112,629 - - - Financing revenues - - - - - - - - - 10,118 687 10,805 Other income (a) 2,368 399 28 91 1 2,887 199 (529) 2,557 4,813 (508) 4,305 ------ ------ ----- ----- ----- ------- ----- ------ ------- ------ --- ------ Total net sales and revenues $85,184 $19,669 $3,448 $2,246 $(2,391)$108,156 $5,417 $1,613 $115,186 $14,931 $179 $15,110 ====== ====== ===== ===== ===== ======= ===== ===== ======= ====== === ====== Interest income (a) $734 $313 $36 $6 $ - $1,089 $21 $(525) $585 $1,278 $(170) $1,108 Interest expense $928 $242 $64 $9 $ - $1,243 $71 $(717) $597 $4,718 $309 $5,027 Net income (loss) $3,552 $393 $(99) $(195) $23 $3,674 $(44)(c) $39(b)$3,669 $1,176 $12 $1,188 For the Nine Months Ended September 30, 1998 Manufactured products sales & revenues: External customers $64,440 $16,967 $5,778 $2,092 $(1) $89,276 $4,158 $1,768 $95,202 $ - $ - $ - Intersegment 1,849 884 141 63 (2,937) - 15 (15) - - - - ------ ------ ----- ----- ----- ------ ----- ----- ------ ---- --- --- Total manufactured products 66,289 17,851 5,919 2,155 (2,938) 89,276 4,173 1,753 95,202 - - - Financing revenues - - - - - - - - - 9,462 628 10,090 Other income (a) 1,630 496 197 39 1 2,363 109 (422) 2,050 3,833 (354) 3,479 ------ ------ ----- ----- ----- ------ ----- ----- ----- ----- ---- ------ Total net sales and revenues $67,919 $18,347 $6,116 $2,194 $(2,937) $91,639 $4,282 $1,331 $97,252 $13,295 $274 $13,569 ====== ====== ===== ===== ===== ====== ===== ===== ====== ====== === ====== Interest income (a) $364 $409 $91 $7 $ - $871 $89 $(461) $499 $1,157 $(57) $1,100 Interest expense $634 $338 $72 $5 $ - $1,049 $10 $(473) $586 $4,317 $48 $4,365 Net income (loss) $52 $273 $37 $(30) $3 $335 $153(c) $(407)(b) $81 $1,027 $76 $1,103
(a)Interest income is included in other income. (b)The amount reported for Other net income (loss) includes income from discontinued operations of $426 million and $(181) million for the nine months ended September 30, 1999 and 1998, respectively. (c)The amount reported for Hughes excludes amortization of GM purchase accounting adjustments of approximately $16 million for both 1999 and 1998, related to GM's acquisition of Hughes Aircraft Company. Such amortization was allocated to GM's Other segment which is consistent with the basis upon which the segments are evaluated. 1998 results exclude the cumulative effect of accounting change of $9 million due to Hughes' adoption of SOP 98-5. GM had reported the $9 million change in fourth quarter 1998 results and Hughes reported the change as a restatement of first quarter 1998 results. - 19 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 15. Contingent Matters In connection with the 1997 spin-off of the defense electronics business of Hughes' predecessor and the subsequent merger of that business with Raytheon Company, the terms of the merger agreement provided a process for resolving disputes that might arise in connection with post-closing financial adjustments that were also called for by the terms of the merger agreement. Such financial adjustments might require a cash payment from Raytheon to Hughes or vice versa. Disputes 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. Raytheon and Hughes are now proceeding with the dispute resolution processes as to these matters. It is possible that ultimate resolution of the post-closing financial adjustment and of related disclosure issues may result in Hughes making a payment to Raytheon that would be material to Hughes. However, the amount of any payment that either party might be required to make to the other cannot be determined at this time. Hughes intends to vigorously pursue resolution of the disputes through the arbitration processes, opposing the adjustments proposed by Raytheon, and seeking the payment from Raytheon that it has proposed. General Electric Capital Corporation (GECC) and DIRECTV, Inc. entered into a contract on July 31, 1995, in which GECC agreed to provide financing for consumer purchases of DIRECTV hardware and related programming. Under the contract, GECC also agreed to provide certain related services to DIRECTV, including credit risk scoring, billing and collections services. DIRECTV agreed to act as a surety for loans complying with the terms of the contract. Hughes guaranteed DIRECTV's performance under the contract. A complaint and counterclaim 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 $70 million. Hughes intends to vigorously contest GECC's allegations and pursue Hughes' own contractual rights and remedies. Pretrial discovery is not yet completed in the case and no trial date has been set. Hughes does not believe that the litigation will have a material adverse impact on Hughes' results of operations or financial position. As part of a marketing agreement entered into with AOL on June 21, 1999, Hughes committed to increase its sales and marketing expenditures over the next three years by approximately $1.5 billion relating to DirecPC/AOL-Plus, DlRECTV, DlRECTV/AOL TV and DirecDuo. Hughes Space and Communications International (HSCI) has a contract 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 the parent company, ICO Global Communications (Holdings) (ICO). On August 27, 1999, ICO filed for bankruptcy protection under Chapter 11 in U.S. Bankruptcy Court in Wilmington, Delaware. On November 9, 1999, the bankruptcy court approved an iterim financing arrangement that will allow ICO to continue its operations while it negotiates a plan of reorganization. ICO has indicated that under its proposed plan, which is subject to bankruptcy court approval, ICO would continue its contract with HSCI, pay amounts owed to HSCI and have adequate financing to complete the contract. There can be no assurance that ICO will be successful in confirming a plan of reorganization, and if 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 earnings of up to approximately $500 million. 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 exclusive distribution rights, in certain specified portions of the United States, 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 5 frequencies at 101 degrees. DIRECTV denies that the NRTC is entitled to exclusive distribution rights to the former USSB programming because 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 26, 1999, the NRTC filed a second lawsuit against DIRECTV, for damages in excess of $75 million, in which it alleges that DIRECTV has breached the agreement it has with NRTC. In this suit, NRTC is asking the court to require DIRECTV to pay to NRTC a proportionate share of the financial benefits DIRECTV derives from programming providers and certain other third parties. DIRECTV denies that it owes any sums to the NRTC on account - 20 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 15. Contingent Matters (concluded) of the allegations in these matters and plans to vigorously defend itself against these claims. 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. In Anderson, et al v. General Motors Corporation, a jury in a Los Angeles Superior Court returned a verdict of $4.9 billion against GM in a product liability lawsuit involving a post-collision fuel fed fire in a 1979 Chevrolet Malibu. In post-trial developments, the trial court has reduced the punitive damages from $4.8 billion to $1.1 billion and GM has posted a bond for the punitive and compensatory damages (the cost of which was not material to the Corporation). GM continues to pursue its appellate rights, including efforts to secure a new trial and the complete elimination of responsibility to pay any damages in this matter consistent with GM's view that the design of the Chevrolet Malibu was not responsible for plaintiffs' injuries. In connection with GM's disposition of certain businesses (including Delphi), GM has granted the UAW guarantees covering benefits to be provided to certain former U.S. hourly employees of GM who became employees of the disposed businesses. These guarantees have limited terms that do not extend beyond October 2007. In connection with such guarantees relating to certain of Delphi's U.S. hourly employees, GM and Delphi have agreed to enter into an agreement, the provisions of which are designed to prevent or mitigate the risk that GM's guarantee relating to Delphi's employees would ever be called upon, or, if it is, any payments thereunder by GM would result in the obligation of Delphi to indemnify and hold GM harmless as to such amounts. GM believes that the likelihood it will make payments under any of these various guarantees is remote and that if such payments are made they will not be material to GM's financial position or results of operations. GM is subject to potential liability under government regulations and various claims and legal actions which are pending or may be asserted against them. Some of the pending actions purport to be class actions. The aggregate ultimate liability of GM under these government regulations and under these claims and actions, was not determinable at December 31, 1998. After discussion with counsel, it is the opinion of management that such liability is not expected to have a material adverse effect on the Corporation's consolidated financial condition or results of operations. Note 16. Subsequent Events The 1999 UAW labor contract was ratified on October 13, 1999 covering a four year term from 1999-2003. The contract included an annual salary increase of 3% per year and an up-front signing bonus of $1,350 per UAW employee, which will be amortized evenly over the life of the contract. Active UAW employees were also granted pension benefit increases. In addition, retiree benefit increases include lump sum payments and a $1.25 monthly benefit increase per year of service. The retiree lump sum payments will result in a charge against GM's 1999 fourth quarter earnings of approximately $444 million after-tax. The other pension benefit increases will be paid out of plan assets. The new contract includes job security and sourcing provisions containing an employment floor set at 95% of 1996 employment levels in the event of net outsourcing. It also requires a level of attrition replacement based on a 1999 benchmark minimum employment level, which is reduced by 5% over the life of the contract. The 1999 Canadian Auto Workers (CAW) labor agreement was ratified on October 24,1999 covering a three year term from 1999-2002. The contract included an annual salary increase of 3% per year and an up-front signing bonus of $1,000 Canadian per CAW employee, which will be amortized evenly over the life of the contract. In addition, hourly actives and retirees were granted pension benefit increases to be paid out of plan assets. The 1999 labor agreement continues to provide flexibility to cut costs and streamline operations. In prior years, GM had established liabilities which as of September 30, 1999 totaled approximately $1.1 billion for terminations and other postemployment benefits to be paid pursuant to UAW and CAW labor contracts in connection with closed plants. Periodically, the Corporation reviews the adequacy and continuing need for these liabilities. The 1999 review, which will be completed in the fourth quarter, will take into consideration the provisions of the new UAW and CAW contracts, including the job security and sourcing provisions, as well as the current more favorable than expected U.S. vehicle market and higher than expected employee attrition rates. GM expects this review will likely result in the elimination of the need for a significant amount of the termination and other postemployment benefits liabilities previously provided for employees at a number of closed plants. In October 1999, Hughes issued $500 million of floating rate notes in a private placement with a group of institutional investors. The notes mature on October 23, 2000. * * * * * * - 21 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the consolidated financial statements and notes thereto along with the MD&A included in GM's Current Reports on Form 8-K, dated April 12, 1999, which was filed with the Securities and Exchange Commission on April 15, 1999 and April 21, 1999, respectively; Hughes Electronics Corporation (Hughes) financial statements and MD&A for the period ended December 31, 1998, included as Exhibit 99 to GM's 1998 Annual Report on Form 10-K; the General Motors Acceptance Corporation (GMAC) Annual Report on Form 10-K for the period ended December 31, 1998; the Hughes financial statements and MD&A for the period ended September 30, 1999, included as Exhibit 99 to this GM Quarterly Report on Form 10-Q for the period ended September 30, 1999 and related Hughes' Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission; and the GMAC Quarterly Report on Form 10-Q for the period ended September 30, 1999, filed with the Securities and Exchange Commission. All earnings per share amounts included in the MD&A are reported as diluted. GM presents separate supplemental consolidating financial information for the following businesses: Automotive, Electronics and Other Operations and Financing and Insurance Operations. GM's reportable operating segments within its Automotive, Electronics and Other Operations business consist of: . GM Automotive (GMA), is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin America/Africa/Mid-East (GMLAAM). GMNA designs, manufactures, and markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, and Saturn. GME, GMAP and GMLAAM meet the demands of customers outside North America with vehicles designed, manufactured and marketed under the following nameplates: Opel, Vauxhall, Holden, Isuzu, Saab, Chevrolet, GMC, and Cadillac. . Hughes includes activities relating to designing, manufacturing, and marketing advanced technology electronic systems, products, and services for the satellite & wireless communications industries. . The Other segment includes the design, manufacturing and marketing of locomotives and heavy-duty transmissions and the elimination of intersegment transactions. GM's reportable operating segments within its Financing and Insurance Operations business consist of GMAC and Other. GMAC provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, vehicle and homeowners insurance, and asset-backed lending. The Financing and Insurance Operations' Other segment includes financing entities operating in Canada, Germany and Brazil. The disaggregated financial results for GMA have been prepared using a management approach, which is consistent with the basis and manner in which GM management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. In this regard, certain common expenses were allocated among regions less precisely than would be required for standalone financial information prepared in accordance with generally accepted accounting principles (GAAP) and certain expenses (primarily certain U.S. taxes related to non-U.S. operations) were included in the Automotive, Electronics and Other Operations' Other segment. The financial results represent the historical information used by management for internal decision making purposes; therefore, other data prepared to represent the way in which the business will operate in the future, or data prepared on a GAAP basis, may be materially different. - 22- GENERAL MOTORS CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS In the third quarter of 1999, GM's consolidated income from continuing operations totaled $877 million or $1.33 per share of $1-2/3 par value common stock, which represents an increase of $1.2 billion compared with a loss of $309 million or a loss of $0.52 per share of $1-2/3 par value common stock in the third quarter of 1998. GM's net income from continuing operations for the nine months ended September 30, 1999 was $4.4 billion or $6.67 per share of $1-2/3 par value common stock, which represents an increase of $3.0 billion compared with $1.4 billion or $1.87 per share of $1-2/3 par value common stock for the nine months ended September 30, 1998. On April 12, 1999, the GM Board of Directors (GM Board) approved the complete separation of Delphi from GM by means of a spin-off (which was tax-free to GM and its stockholders for U.S. federal income tax purposes) which was completed on May 28,1999 and, accordingly, the financial results related to Delphi for all periods presented are reported as discontinued operations. GM's net income for the third quarter of 1999, including the income from discontinued operations totaled $877 million or $1.33 per share of $1-2/3 par value common stock compared with a loss of $809 million or a loss of $1.28 per share of $1-2/3 par value common stock in the third quarter of 1998. GM's net income for the nine months ended September 30, 1999, including the income from discontinued operations totaled $4.9 billion or $7.32 per share of $1-2/3 par value common stock compared with $1.2 billion or $1.60 per share of $1-2/3 par value common stock for the nine months ended September 30, 1998. Additional information regarding the spin-off of Delphi is contained in Note 2 to the GM consolidated financial statements. Additionally, refer to Note 13 of the GM consolidated financial statements for financial information regarding the effect of current year acquisitions. Automotive, Electronics and Other Operations Highlights of financial performance by GM's Automotive, Electronics and Other Operations business were as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 -------- -------- ------- -------- (Dollars in Millions) Total net sales and revenues GMA $35,041 $27,006 $108,156 $91,639 Hughes 1,998 1,536 5,417 4,282 Other 507 469 1,613 1,331 -------- -------- --------- ------- Total net sales and revenues $37,546 $29,011 $115,186 $97,252 ====== ====== ======= ====== Net income (loss) GMA $613 $(633) $3,674 $335 Hughes (1) (30) 43 (44) 153 Other (96) (64) (387) (226) --- ---- ------ --- Income (loss) from continuing operations 487 (654) 3,243 262 Discontinued operations - (500) 426 (181) ------ ----- ------ --- Net income (loss) $487 $(1,154) $3,669 $81 === ===== ===== == _______________ (1)Excludes amortization of GM purchase accounting adjustments of $5 million for the third quarters of 1999 and 1998 and $16 million for the nine-month periods ended September 30, 1999 and 1998, related to GM's acquisition of Hughes Aircraft Company (HAC) in 1985. - 23- GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Highlights Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 -------- -------- ------- -------- 1998 (Dollars in Millions) GMNA Total net sales and revenues $27,630 $18,931 $85,184 $67,919 ------ ------ ------ ------ Pre-tax income (loss) 1,009 (883) 5,228 6 Income tax expense (benefit) 336 (288) 1,671 (26) Earnings/(losses) of nonconsolidated associates and minority interests (2) - (5) 20 ----- ------ ----- -- GMNA income (loss) $671 $(595) $3,552 $52 === === ===== == GME Total net sales and revenues $6,391 $6,390 $19,669 $18,347 ----- ----- ------ ------ Pre-tax income 52 64 605 511 Income tax expense 19 18 208 238 Earnings/(losses) of nonconsolidated associates and minority interests (1) 4 (4) - --- --- ----- ------ GME income $32 $50 $393 $273 == == === === GMLAAM Total net sales and revenues $1,200 $1,773 $3,448 $6,116 ----- ----- ----- ----- Pre-tax loss (79) (138) (224) (105) Income tax benefit (37) (45) (106) (74) Earnings/(losses) of nonconsolidated associates and minority interests 6 29 19 68 -- -- -- -- GMLAAM (loss) income $(36) $(64) $(99) $37 == == == == GMAP Total net sales and revenues $884 $681 $2,246 $2,194 --- --- ----- ----- Pre-tax income (loss) 12 19 (49) 15 Income tax expense (benefit) 11 2 (8) 6 Earnings/(losses) of nonconsolidated associates and minority interests (55) (17) (154) (39) -- -- --- -- GMAP (loss) income $(54) $- $(195) $(30) == = === == GMA (1) Total net sales and revenues $35,041 $27,006 $108,156 $91,639 ------ ------ ------- ------ Pre-tax income (loss) 993 (975) 5,596 432 Income tax expense (benefit) 329 (328) 1,779 145 Earnings/(losses)of nonconsolidated associates and minority interests (51) 14 (143) 48 ---- ---- ------ ---- GMA income (loss) $613 $(633) $3,674 $335 === === ===== === (1) GMA's results include eliminations of transactions among GMNA, GME, GMLAAM, and GMAP. - 24 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Vehicle Unit Deliveries of Cars and Trucks - GMA Three Months Ended September 30, -------------------------------- 1999 1998 ---- ---- GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- -- -------- -------- -- -------- (Units in Thousands) GMNA United States Cars 2,300 675 29.4 2,007 517 25.7 Trucks 2,195 623 28.4 1,837 411 22.4 ----- ------ ----- --- Total United States 4,495 1,298 28.9 3,844 928 24.1 Canada and Mexico 633 170 26.9 600 160 26.7 ------ ------ ------ --- Total GMNA 5,128 1,468 28.6 4,444 1,088 24.5 GME 4,906 489 10.0 4,760 463 9.7 GMLAAM 876 145 16.6 1,069 160 15.0 GMAP 2,803 128 4.6 2,705 127 4.7 ------- ------ ------- ----- Total Worldwide 13,713 2,230 16.3 12,978 1,838 14.2 ====== ===== ====== ===== Nine Months Ended September 30, ------------------------------- 1999 1998 ---- ---- GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- -- -------- -------- -- -------- (Units in Thousands) GMNA United States Cars 6,730 2,030 30.2 6,213 1,837 29.6 Trucks 6,531 1,826 28.0 5,796 1,617 27.9 ------- ----- ------- ----- Total United States 13,261 3,856 29.1 12,009 3,454 28.8 Canada and Mexico 1,868 516 27.6 1,806 491 27.2 ------- ------ ------- ------ Total GMNA 15,129 4,372 28.9 13,815 3,945 28.6 GME 15,552 1,537 9.9 14,798 1,406 9.5 GMLAAM 2,444 399 16.3 3,193 511 16.0 GMAP 8,618 338 3.9 8,260 379 4.6 ------- ------ ------- ------ Total Worldwide 41,743 6,646 15.9 40,066 6,241 15.6 ====== ===== ====== ===== Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ------- --------- ------- ------- (Units in Thousands) Wholesale Sales GMNA Cars 661 597 2,199 1,901 Trucks 680 413 2,181 1,648 ----- ----- ----- ----- Total GMNA 1,341 1,010 4,380 3,549 ----- ----- ----- ----- GME Cars 413 514 1,367 1,451 Trucks 33 20 104 89 ----- ----- ----- ----- Total GME 446 534 1,471 1,540 ----- ----- ----- ----- GMLAAM Cars 98 102 266 327 Trucks 43 61 133 194 ----- ----- ----- ----- Total GMLAAM 141 163 399 521 ----- ----- ----- ----- GMAP Cars 45 52 121 147 Trucks 76 62 191 181 ----- ----- ----- ----- Total GMAP 121 114 312 328 ----- ----- ----- ----- Total Worldwide 2,049 1,821 6,562 5,938 ===== ===== ===== ===== - 25 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review GMA reported income of $613 million for the 1999 third quarter compared with a loss of $633 million for the prior year quarter. The increase in income from the prior year quarter was primarily due to continued improvement in the profitability of new vehicles and lower production at GMNA in the prior year quarter due to the work stoppages at two component plants in Flint, Michigan that halted production of wholesale units at 26 of 29 assembly plants in North America. These factors also contributed to the improvement in GMA's net margin to 1.7% for the third quarter of 1999 from (2.3%) for the third quarter of 1998. Income for the nine months ended September 30, 1999 totaled $3.7 billion compared with $335 million for the prior year nine-month period. The increase in income from the prior year nine-month period was primarily due to improvement in the profitability of new vehicles, lower production at GMNA in the prior year quarter due to the work stoppages, and lower material costs. Total net sales and revenues for GMA in the third quarter of 1999 were $35.0 billion compared with $27.0 billion in the third quarter of 1998. GMA's total net sales and revenues for the nine months ended September 30, 1999 totaled $108.2 billion compared with $91.6 billion for the prior year nine-month period. These increases were primarily due to increases in wholesale sales volumes of 228,000 units from the prior year third quarter and 624,000 units from the prior year nine months ended September 30, 1998. These increases in wholesale sales volumes are primarily due to GMNA's work stoppages in the prior year periods. Pre-tax income for the third quarter of 1999 increased to $993 million compared with the prior year quarter pre-tax loss of $975 million and pre-tax income for the nine months ended September 30, 1999 increased to $5.6 billion from $432 million in the prior year period. These increases in pre-tax income were primarily due to continued improvement in the profitability of new vehicles and lower production at GMNA in the prior year quarter due to the work stoppages. GMA's worldwide vehicle deliveries were 2,230,000 for the third quarter of 1999, which represented a market share of 16.3% compared with 1,838,000 for the third quarter of 1998, which represented a market share of 14.2%. GMNA's market share for the third quarter of 1999 was 28.6% compared with 24.5% for the third quarter of 1998. For the nine months ended September 30, 1999, GMNA's market share was 28.9% compared with 28.6% for the prior year nine-month period. GMNA reported income of $671 million for the 1999 third quarter compared with a loss of $595 million for the prior year quarter. The improvement in GMNA's 1999 third quarter income was primarily due to the prior year's work stoppages, higher wholesale sales volumes, lower material costs and favorable net price, partially offset by increased manufacturing, pre-production and launch costs associated with the new LeSabre, Impala, Monte Carlo and Saturn LS models. Income for the nine months ended September 30, 1999 totaled $3.6 billion compared with $52 million for the prior year nine-month period. The improvement in income for the first nine months of 1999 was primarily due to the prior year's work stoppages, higher wholesale sales volumes, continued improvement in the cost and profitability of new vehicles, and lower material and engineering costs. This improvement was partially offset by increased manufacturing costs and pre-production and launch costs associated with the new vehicles mentioned above. Net price was slightly higher for the quarter at 0.4% year over year. Net price comprehends the percent increase/decrease a customer pays in the current period for the same comparably equipped vehicle produced in the previous year's period. The 1999 UAW labor contract was ratified on October 13, 1999 covering a four year term from 1999-2003. The contract included an annual salary increase of 3% per year and an up-front signing bonus of $1,350 per UAW employee, which will be amortized evenly over the life of the contract. Active UAW employees were also granted pension benefit increases. In addition, retiree benefit increases include lump sum payments and a $1.25 monthly benefit increase per year of service. The retiree lump sum payments will result in a charge against GM's 1999 fourth quarter earnings of approximately $444 million after-tax. The other pension benefit increases will be paid out of plan assets. The new contract includes job security and sourcing provisions containing an employment floor set at 95% of 1996 employment levels in the event of net outsourcing. It also requires a level of attrition replacement based on a 1999 benchmark minimum employment level, which is reduced by 5% over the life of the contract. The 1999 Canadian Auto Workers (CAW) labor agreement was ratified on October 24,1999 covering a three year term from 1999-2002. The contract included an annual salary increase of 3% per year and an up-front signing bonus of $1,000 Canadian per CAW employee, which will be amortized evenly over the life of the contract. In addition, hourly actives and retirees were granted pension benefit increases to be paid out of plan assets. The 1999 labor agreement continues to provide flexibility to cut costs and streamline operations. - 26 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review (concluded) In prior years, GM had established liabilities which as of September 30, 1999 totaled approximately $1.1 billion for terminations and other postemployment benefits to be paid pursuant to UAW and CAW labor contracts in connection with closed plants. Periodically, the Corporation reviews the adequacy and continuing need for these liabilities. The 1999 review, which will be completed in the fourth quarter, will take into consideration the provisions of the new UAW and CAW contracts, including the job security and sourcing provisions, as well as the current more favorable than expected U.S. vehicle market and higher than expected employee attrition rates. GM expects this review will likely result in the elimination of the need for a significant amount of the termination and other postemployment benefits liabilities previously provided for employees at a number of closed plants. GME reported income of $32 million for the 1999 third quarter compared with $50 million in the prior year quarter. The decrease in GME's 1999 third quarter income was primarily due to increasing competitive pricing pressure, partially offset by continued material cost improvements as a result of GM's global purchasing efforts, as well as improved manufacturing performance. Income for the nine months ended September 30, 1999 totaled $393 million compared with $273 million for the prior year nine-month period. The overall improvement in income for the first nine months of 1999 was primarily due to continued material cost improvements as a result of GM's global purchasing efforts. GMLAAM reported a loss of $36 million for the 1999 third quarter compared with a loss of $64 million for the prior year quarter. The decrease in the 1999 third quarter loss compared to the 1998 third quarter loss was primarily due to reduced structural costs and nominal price increases throughout the region. GMLAAM reported a loss for the nine months ended September 30, 1999 of $99 million compared with income of $37 million for the prior year nine-month period. The decrease in the nine months ended September 30, 1999 compared to the prior year period was primarily due to significantly lower industry volumes due to the economic crisis throughout Latin America. GMAP reported a loss of $54 million for the 1999 third quarter compared with zero net income for the prior year quarter. The decrease in 1999 third quarter earnings compared to 1998 third quarter results was primarily due to start-up costs in the region and equity losses at Isuzu as a result of continued poor economic conditions in Asia. These decreases were partially offset by improved results at Shanghai GM. Losses for the nine months ended September 30, 1999 totaled $195 million compared with losses of $30 million for the prior year nine-month period. The increase in losses for the first nine-month period in 1999 was primarily due to decreased volumes in the region, equity losses at Isuzu due to the economic downturn in Asia, and continued spending associated with GMAP's growth strategy. Hughes Financial Highlights Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ------- -------- ------ ------- (Dollars in Millions Except Per Share Amounts) Total net sales and revenues $1,998 $1,536 $5,417 $4,282 ----- ----- ----- ----- Pre-tax (loss) income (51) 74 (31) 269 Income tax (benefit) expense (38) 17 (45) 72 Minority interests 9 9 22 19 Losses in nonconsolidated associates (31) (28) (96) (79) -- -- -- --- Net (loss) income $(35) $38 $(60) $137(2) == == == === (Losses) Earnings used for computation of Available Separate Consolidated Net (Loss) Income (1) (2) $(54) $43 $(70) $153 (Losses) Earnings per share attributable to Class H common stock - Basic and Diluted (2) $(0.13) $0.11 $(0.17) $0.38 - ------------ (1)Excludes amortization of GM purchase accounting adjustments of $5 million for the third quarters of 1999 and 1998 and $16 million for the nine-month periods ended September 30, 1999 and 1998, related to GM's acquisition of HAC in 1985. Includes accrued preferred stock dividends of $24 million and $26 million for the three and nine months ended September 30, 1999. (2)1998 results exclude the cumulative effect of accounting change of $9 million, after tax, due to Hughes' adoption of SOP 98-5, Reporting on the Costs of Start-Up Activities. GM reported the $9 million charge in its fourth quarter 1998 results and Hughes reported the change as a restatement of its first quarter 1998 results. - 27 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes Financial Review Third quarter total net sales and revenues increased 30.1% to $2.0 billion, compared with $1.5 billion in the third quarter of 1998. Total net sales and revenues for the first nine months of 1999 increased 26.5% to $5.4 billion compared with $4.3 billion in the same periods of 1998. Revenue growth for the third quarter and first nine months of 1999 compared to the same period in 1998 was primarily attributable to continued strong subscriber growth for the DIRECTV(R) businesses, as well as additional revenues from the second quarter 1999 acquisitions of the PRIMESTAR medium-power direct-to-home and United States Satellite Broadcasting Company, Inc. (USSB) businesses and increased sales of DIRECTV(TM) receiving equipment by Hughes Network Systems (HNS). The first nine months of 1999 also included a $155 million pre-tax gain that resulted from the settlement of the Williams patent infringement case. These increases were offset by a decrease in Hughes Space and Communications (HSC) revenues primarily due to delayed revenue recognition that resulted from increased costs and schedule delays on several new product lines, reduced activity associated with the ICO Global Communications program in the third quarter of 1999, and a decrease in interest income due to a decrease in cash and cash equivalents. Hughes had a pre-tax loss of $51 million for the third quarter of 1999, compared with pre-tax income of $74 million for the same period of 1998. Hughes had a pre-tax loss of $31 million for the first nine months of 1999, compared with pre-tax income of $269 million for the first nine months of 1998. The pre-tax loss for the third quarter of 1999 and for the first nine months of 1999 resulted primarily from increased losses from the DIRECTV Latin America businesses, reduced operating profit at HSC due to the lower revenues as previously discussed, lower interest income as discussed above and increased interest expense. The pre-tax loss for the first nine months of 1999 also included a one-time first quarter pre-tax charge of $92 million that resulted from the termination of the Asia-Pacific Mobile Telecommunications satellite system contract due to export licenses not being issued and a second quarter pre-tax charge of $125 million related to the increased development costs and schedule delays at HSC. These decreases in the first nine months of 1999 were offset by the $155 million pre-tax gain discussed above. Income taxes for the third quarter and first nine months of 1999 reflect tax benefits recorded for the pre-tax losses incurred in those periods and higher expected tax benefits, compared to the third quarter and first nine months of 1998, from the expected favorable resolution of certain tax contingencies. (Losses) earnings used for computation of available separate consolidated net (loss) income for the third quarter of 1999 was a loss of $54 million, compared with earnings of $43 million for the third quarter of 1998, and a loss of $70 million for the first nine months of 1999, compared with earnings of $153 million for the first nine months of 1998. The third quarter and first nine months of 1999 included $24 million and $26 million of accrued preferred stock dividends, respectively. 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 million issued to Hughes. If Hughes elects to convert these bonds, Hughes would have a controlling interest in DIRECTV Japan. 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 million plus the assumption of debt. In connection with the transaction, Tevecap sold its 10% equity interest in GLA to Hughes and the Cisneros Group, the remaining GLA partners. Hughes' share of the GLA purchase amounted to approximately $101 million and increased Hughes' ownership of GLA to 77.8%. - 28 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Financing and Insurance Operations Highlights of financial performance by GM's Financing and Insurance Operations business were as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ------- -------- ------- ------- (Dollars in Millions) Total net sales and revenues GMAC $5,203 $4,446 $14,931 $13,295 Other 45 68 179 274 ----- ------ ------- ------- Total net sales and revenues $5,248 $4,514 $15,110 $13,569 ===== ===== ====== ====== Net income (loss) GMAC $393 $313 $1,176 $1,027 Other (3) 32 12 76 --- --- ----- ----- Total $390 $345 $1,188 $1,103 === === ===== ===== GMAC Financial Highlights Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ------ ------- ------ ------- (Dollars in Millions) Financing revenue Retail and lease financing $1,095 $982 $3,170 $2,834 Operating leases 1,902 1,822 5,494 5,416 Wholesale, commercial and other loans 483 346 1,454 1,212 ------ ------ ------- ----- Total financing revenue 3,480 3,150 10,118 9,462 Interest and discount 1,667 1,477 4,718 4,317 Depreciation on operating leases 1,226 1,149 3,576 3,488 ----- ----- ------- ----- Net financing revenue 587 524 1,824 1,657 Insurance premiums earned 450 466 1,339 1,417 Mortgage revenue 790 538 2,248 1,456 Other income 483 292 1,223 960 ------ ------ ----- ------ Net financing revenue and other 2,310 1,820 6,634 5,490 Expenses 1,655 1,377 4,698 4,004 ----- ----- ----- ----- Pre-tax income 655 443 1,936 1,486 Income tax expense 262 130 760 459 --- --- ------ ------ Net income $393 $313 $1,176 $1,027 === === ===== ===== Net income from automotive financing operations $287 $250 $791 $784 Net income from insurance operations 55 54 170 188 Net income from mortgage operations 51 9 215 55 ---- ----- ------ ------- Net income $393 $313 $1,176 $1,027 === === ===== ===== GMAC Financial Review Consolidated net income for the third quarter and first nine months of 1999 increased by 25% and 14% compared to the same periods during 1998. Net income from automotive financing operations increased by 15% during the third quarter of 1999, compared to the same period in 1998. Earnings were higher due primarily to increased financing volumes, partially offset by a significantly higher effective tax rate. Additionally, net income in the third quarter of 1998 was adversely impacted by the effects of the GM work stoppage. Earnings from insurance operations were virtually unchanged from the same period in 1998. Net income from mortgage operations during the third quarter of 1999 was $42 million higher than the third quarter of 1998. Earnings were higher primarily due to unusually low earnings in the third quarter of 1998, which were negatively impacted by illiquidity in the capital markets and accelerated prepayment experience on mortgage assets. During the three months and nine months ended September 30, 1999, GMAC financed 36.5% and 33.8% of new GM vehicles delivered in the U.S., respectively, down from 37.7% and 36.2% for the same periods in 1998. The continued decline in financing penetration was primarily the result of competitive market conditions. - 29 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMAC Financial Review (concluded) In the United States, inventory financing was provided for 852,000 and 2,580,000 new GM vehicles during the third quarter and first nine months of 1999, respectively, compared with 564,000 and 1,931,000 new GM vehicles during the respective periods in 1998. The significant increase in new GM vehicles financed is primarily a result of the 54-day work stoppage at two GM component plants in June of last year that halted production of wholesale units at 26 of 29 vehicle assembly plants in North America. GMAC's wholesale financing represented 66.9% of all GM U.S. vehicle sales to dealers during the first nine months of 1999, up from 63.4% for the comparable period a year ago. The increase in wholesale penetration levels was a result of competitive pricing strategies by GMAC. Financing revenue totaled $3.5 billion and $10.1 billion in the third quarter and first nine months of 1999, respectively, compared to $3.2 billion and $9.5 billion for the same periods in 1998. The increases were mainly due to higher average retail, operating lease, and other loan receivable balances which resulted from continued retail financing incentives sponsored by GM. Additionally, increased wholesale revenues resulting from higher average wholesale balances contributed to the change. The increased wholesale balances were primarily attributable to the 1998 work stoppages previously mentioned. Insurance premiums earned totaled $450 million and $1.3 billion for the third quarter and nine months ended September 30, 1999, respectively, compared to $466 million and $1.4 billion for the same periods during 1998. The reduction in insurance premiums earned was due to a decline in personal line coverages, partially offset by an increase in commercial lines and reinsurance. Mortgage revenue and other income totaled $1.3 billion and $3.5 billion for the third quarter and nine months ended September 30, 1999, respectively, compared to $830 million and $2.4 billion during the comparable periods a year ago. The increase in 1999 over 1998 was primarily the result of substantial increases in mortgage servicing and processing fees. Furthermore, GMAC Mortgage Group, Inc.'s (GMACMG) other income increased substantially, mainly due to their expansion into diversified businesses, specifically, Home Services, Newman and Associates, Auritec, Capstead, Triad and American Financial Consultants LLC. GMAC's worldwide cost of borrowing for the third quarter and first nine months of 1999 averaged 5.62% and 5.55%, respectively, a decrease of 44 and 52 basis points from the comparable periods a year ago. Total borrowing costs for U.S. operations averaged 5.61% and 5.50% for the third quarter and first nine months of 1999, compared to 5.93% and 6.00% for the respective periods in 1998. The lower average borrowing costs for the first nine months of 1999 are largely a result of lower short-term market interest rates. Consolidated salaries and other operating expenses totaled $1.2 billion and $3.3 billion for the third quarter and first nine months of 1999, respectively, compared to $930 million and $2.6 billion for the comparable periods last year. The increase was mainly attributable to continued growth and acquisitions at GMACMG. Annualized net retail losses were 0.50% and 0.57% of total average serviced automotive receivables during the third quarter and first nine months of 1999, respectively, compared to 0.74% and 0.83% for the same periods last year. The provision for credit losses totaled $328 million and $323 million for the nine month periods ended September 30, 1999 and 1998, respectively. Although comparable period loss rates declined, the higher loss provision reflects an increase in retail receivables during the first nine months of 1999 and favorable wholesale loss provision adjustments during the first quarter of 1998. The effective income tax rate for the first nine months of 1999 was 39.3%, compared to 31.6% and 30.9% for the periods ended December 31, 1998 and September 30, 1998, respectively. The increase in the effective tax rate can be attributed to a decrease in U.S. and foreign taxes assessed on foreign source income for the first nine months of 1998. Year 2000 Computers, software applications and microprocessors (embedded in a variety of products either made or used by GM) have the potential for operational problems if they lack the capability to handle the transition to the Year 2000. To protect against this risk, GM implemented a comprehensive, worldwide program to identify and remediate potential Year 2000 problems in its business information systems and other systems embedded in its engineering and manufacturing operations. Additionally, GM established communications and site assessments with its suppliers, its dealers and other third parties to assess and reduce the risk that GM's operations could be adversely affected by the failure of these third parties to adequately address the Year 2000 issue. One of GM's first priorities was the analysis of microprocessors in GM passenger cars and trucks. This review included all current and planned models as well as the electronics in older cars and trucks produced during the period of approximately the last 15 years, back to when GM began installing microprocessors capable of processing date information. Most of the microprocessors reviewed have no date-related functionality and, accordingly, have no Year 2000 issues. Of the vehicles with microprocessors that perform date-related functions, none were found to have any Year 2000 issues. - 30 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Year 2000 (continued) GM assigned responsibility for remediating all of GM's information technology and embedded systems to multiple Year 2000 program teams. Information technology principally consists of business information systems (such as mainframe and other shared computers and associated business application software) and infrastructure (such as personal computers, operating systems, networks and devices like switches and routers). Embedded systems include microprocessors used in factory automation and in systems such as elevators, security and facility management. GM's Year 2000 program included assessment and remediation services provided by Electronic Data Systems Corporation (EDS), GM's primary information technology supplier, pursuant to a Master Service Agreement with GM. The expenditures and other figures contained herein have been adjusted to reflect the spin-off of Delphi Automotive Systems. The Year 2000 program has been implemented in seven phases, some of which were conducted concurrently: Inventory -- This first phase consisted of the identification and validation of an inventory of all systems that could be affected by the Year 2000 issue. The inventory phase began in earnest in 1996 and is complete. The effort identified approximately 6,100 business information systems and about 1.4 million infrastructure items and embedded systems. Assessment -- The assessment phase included the initial testing, code scanning, and supplier contacts to determine whether remediation was needed and, if so, the development of a remediation plan. The assessment of business information systems is completed and included the determination that about one quarter of these systems were "critical" based on criteria such as the potential for business disruption. The assessment of infrastructure items and embedded systems is also complete. Remediation -- This phase involved the design and execution of a remediation plan, followed by testing for adherence to the design. GM has completed the remediation of its systems, with the exception of work which is continuing into the fourth quarter involving the previously existing Year 2000 programs of certain recent business acquisitions by GMAC to ensure conformance of those programs to GMAC's Year 2000 program standards. The cost of such remediation efforts is not material to GMAC and it is comprehended by the Corporation's total cost estimates. The risk of nonremediation of these programs is not material to GM or GMAC. System Test -- The system test phase involved testing of remediated items to ensure that they functioned normally after being replaced in their original operating environment. System test was closely related to the remediation phase and followed essentially the same schedule. Implementation -- Implementation involved the return of items to normal operation after satisfactory performance in system testing. This phase followed essentially the same schedule as remediation and system testing. Readiness Testing -- This phase included the planning for and testing of integrated systems in a Year 2000 ready environment, including ongoing auditing and follow-up. Three distinct types of readiness tests were conducted: (1) individual system tests; (2) tests of groups of related systems that comprised a major business process or manufacturing function; and (3) running plant floor systems while production was in process. Individual system tests of GM's critical applications, and approximately 300 integrated business process tests and 900 integrated manufacturing system tests have been completed. More than 100 live production tests have also been successfully completed. In addition to GM readiness testing, a third party Independent Validation & Verification (IV&V) process has been used to examine remediated code to identify potential oversights or errors in select mission-critical systems. The results have validated the success of GM's testing program. Contingency Planning -- This final step involved the development and execution of plans that focus on areas of significant concern and the concentration of resources to address those issues both proactively and reactively. GM believes that the most reasonably likely worst case scenario is that there will be some localized disruptions of systems that will affect individual business processes, facilities or suppliers for a short time, rather than systemic or long-term problems affecting its business operations as a whole. - 31 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Year 2000 (continued) GM's contingency planning efforts identified systems, business processes and some suppliers that it believes are potentially vulnerable to Year 2000 problems. GM contingency planning also has addressed those business operations in which a localized disruption could have the potential for causing a wider problem by interrupting the flow of products, materials or data to other operations. Because there is uncertainty as to which activities may be affected and the exact nature of the problems that may arise, GM's contingency planning has focused on minimizing the scope and duration of any disruptions by developing comprehensive, detailed plans. These reactive plans permit a flexible, real-time response to specific problems that may arise at individual locations around the world. A natural extension of GM's contingency planning is the deployment of a command center structure, that began limited operations in September 1999. The Global Command Center at the GM Technical Center has redundant communication and power, allowing for uninterrupted operations and connectivity with other GM command centers strategically located around the world. Detailed plans and procedures have been developed and are being validated. The centers will be staffed with appropriate personnel 24 hours a day, seven days a week beginning the week of December 27, 1999. Operation will continue for as long as conditions warrant. GM's communication with its suppliers is a focused element of the assessment and remediation phases described above. GM has been a leading participant in an industry trade association, the Automotive Industry Action Group, which has distributed Year 2000 compliance questionnaires as well as numerous awareness and assistance mailings to about half of the 90,000 supplier sites that service GM throughout the world. Responses to these questionnaires, which were generally sent to GM's principal suppliers, were received from about half of the supplier sites to which they were sent. Many of the non-responding suppliers have communicated directly with GM on an informal basis. However, GM has not relied on the receipt of responses to questionnaires or written assurances from suppliers regarding their Year 2000 readiness. GM conducted its own review and assistance program for suppliers considered to be critical to GM's operations, including approximately 4,800 on-site assessments to date. In addition, Year 2000 program management workshops have been conducted for more than 2,500 supplier companies. GM's assessment efforts have been substantially completed with respect to the critical supplier sites. Based on its assessment activity to date, GM believes that a substantial majority of its suppliers are adequately prepared for Year 2000. Additionally, GM established a program to provide further remediation assistance to suppliers considered to be "high-risk." This supplier assistance program included providing remediation consultants to work with suppliers on developing, implementing and accelerating their own Year 2000 readiness efforts. With specific regard to the "off-shore" component of critical suppliers, GM's readiness activities have been managed by a global Year 2000 supplier readiness organization with regional offices and personnel in Mexico City, Mexico; Russelsheim, Germany; Sao Paulo, Brazil; Melbourne, Australia; and Singapore, in addition to the supplier readiness program headquarters in Detroit. Of the critical supplier sites being tracked globally in 60 countries for specific risk management action, approximately 41% are outside of North America. Of the high-risk suppliers who have received or are receiving direct remediation assistance, approximately 76% are outside of North America. For the small percentage of suppliers still judged to be "failure-likely" after completion of the remediation assistance program, GM has taken proactive steps to minimize the possibility of business interruption. These steps include, among other actions, deploying further intensive supplier assistance and follow-up, establishing buffer inventories, and working with supplier personnel to develop internal supplier contingency plans to deal with likely failure scenarios. To address uncertainties in GM's risk management process and Year 2000 readiness factors outside the direct control of GM or its suppliers, GM has developed reactive contingency plans to minimize business disruption related to these uncertainties. These initiatives include emergency response teams, allocation plans, strategically located command centers, and "early warning" communication links with key suppliers during the millennium transition. GM has accorded a high priority to contingency planning, command centers and in-depth risk management for those countries and global regions that, as a result of prior assessment activities, show a high concentration of failure-likely suppliers or utility sites. GM also has been working with its independent dealers on their Year 2000 readiness. This program included distributing materials that assist dealers in designing and executing their own assessment and remediation efforts. Additionally, GM developed Year 2000 compliance criteria as part of its established program for certifying that third-party business information systems properly interface with other systems provided to dealers by GM. - 32- GENERAL MOTORS CORPORATION AND SUBSIDIARIES Year 2000 (concluded) GM's direct Year 2000 program cost is being expensed as incurred with the exception of capitalizable replacement hardware and, beginning in 1999, internal-use software. Total incremental spending by GM is not expected to be material to the Corporation's operations, liquidity or capital resources. In addition to the work for which GM has direct financial responsibility, EDS has provided Year 2000-related services to GM, as required under the Master Service Agreement. EDS provided these services as part of normal fixed price services and other ongoing payments. GM's current forecast is that its total direct expenditures, plus the value of services performed by EDS attributable to GM's Year 2000 program, will be between $566 million and $626 million. This amount includes the following: o an estimated $360 million to $420 million in direct GM expenditures. This estimate includes a $62 million payment from GM to EDS at the end of the first quarter of 2000 if systems remediated by EDS under the Master Service Agreement do not cause a significant business disruption that results in material financial loss to GM due to the millennium change; o and an estimated $206 million representing the value of Year 2000 services that EDS is providing to GM as part of normal fixed price services and other ongoing payments to EDS under the Master Service Agreement. This estimate does not include the $62 million additional payment from GM to EDS at the end of the first quarter of 2000 mentioned above. GM incurred approximately $142 million of direct spending during 1997 and 1998, and approximately $142 million in 1999 through the end of the third quarter. The estimated value of services provided to GM by EDS under the Master Service Agreement from January 1997 through the end of the third quarter of 1999 attributable to work performed in connection with GM's Year 2000 program was approximately $253 million. Thus, the total direct expenditures by GM, and value of Year 2000-related services performed by EDS attributable to GM's Year 2000 program, for the period from January 1997 through September 1999, amounted to approximately $537 million. Despite the incremental Year 2000 spending expected to be incurred throughout the Corporation, GM's current business plan projects declining information technology expenses. GM's total Year 2000 costs noted above do not include the cost of information technology projects that have been delayed due to Year 2000, which are estimated to be approximately $27 million or information technology projects that have been accelerated due to Year 2000 which are estimated to be approximately $20 million. In view of the foregoing, GM does not currently anticipate that it will experience a significant disruption of its business as a result of the Year 2000 issue. However, there is still uncertainty about the broader scope of the Year 2000 issue as it may affect GM and third parties that are critical to GM's operations. For example, lack of readiness by electrical and water utilities, financial institutions, government agencies or other providers of general infrastructure could, in some geographic areas, pose significant impediments to GM's ability to carry on its normal operations in the area or areas so affected. In the event that GM is unable to implement adequate contingency plans in the event that problems are encountered, there could be a material adverse effect on GM's business, results of operations, or financial condition. The foregoing discussion describes the Year 2000 program being implemented by GM and its consolidated subsidiaries other than Hughes. Information about the Year 2000 efforts of Hughes can be found in Exhibit 99. As previously stated, the financial and other data contained herein have been adjusted to reflect the spin-off of Delphi Automotive Systems. Statements made herein regarding the implementation of various phases of GM's Year 2000 program, the costs expected to be associated with that program and the results that GM expects to achieve constitute forward-looking information. As noted above, there are many uncertainties involved in the Year 2000 issue, including the extent to which GM has been able to successfully remediate systems and adequately provide for contingencies that may arise, as well as the broader scope of the Year 2000 issue as it may affect third parties that are not controlled by GM. Accordingly, the costs and results of GM's Year 2000 program and the extent of any impact on GM's operations could vary materially from those stated herein. - 33 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES Automotive, Electronics and Other Operations Cash, marketable securities, and $3.0 billion of assets of the Voluntary Employees' Beneficiary Association (VEBA) trust invested in fixed-income securities, at September 30, 1999 totaled $16.7 billion compared with $10.3 billion at September 30, 1998 and $13.1 billion at December 31, 1998. The increase in cash and marketable securities from September 30, 1998 and December 31, 1998 to September 30, 1999 was primarily due to stronger operating cash flows in the first nine months of 1999 versus 1998 due to the work stoppages during 1998. The total VEBA assets in the VEBA trust used to pre-fund part of GM's other postretirement benefits liability approximated $4.7 billion at September 30, 1999, $4.6 billion at December 31, 1998, and $4.5 billion at September 30, 1998. Net liquidity, calculated as cash and marketable securities less the total of loans payable and long-term debt, was $5.1 billion at September 30, 1999, compared with $1.8 billion at December 31, 1998 and $(1.5) billion at September 30, 1998. GM previously indicated that it had a goal of maintaining $13.0 billion of cash and marketable securities in order to continue funding product development programs throughout the next downturn in the business cycle. This $13.0 billion target includes cash to pay certain costs that were pre-funded in part by VEBA contributions. Long-term debt was $7.9 billion at September 30, 1999, compared to $7.1 billion at December 31, 1998 and $6.8 billion at September 30, 1998. The ratio of long-term debt to long-term debt and GM investment in Automotive, Electronics and Other Operations was 57.2% at September 30, 1999, compared to 58.1% at December 31, 1998 and 57.3% at September 30, 1998. The ratio of long-term debt and short-term loans payable to the total of this debt and GM investment was 59.3% at September 30, 1999, compared to 61.8% at December 31, 1998 and 63.3% at September 30, 1998. Financing and Insurance Operations Financing and Insurance Operations are conducted by GMAC and certain of its subsidiaries. At September 30, 1999, GMAC owned assets and serviced automotive receivables totaling $154.5 billion, $15.8 billion above year-end 1998, and $28.4 billion above September 30, 1998. Earning assets totaled $133.6 billion at September 30, 1999, compared to $125.1 billion and $112.9 billion at December 31 and September 30, 1998, respectively. The higher balances compared to third quarter of last year were primarily attributable to increases in serviced wholesale, retail, operating lease, commercial, and other loan receivables. GMAC's finance receivables, including sold receivables, totaled $92.0 billion at September 30, 1999, $12.1 billion above December 31, 1998 levels and $20.0 billion above September 30, 1998 levels. The change from December 31, 1998 was primarily attributed to a $6.4 billion increase in commercial and other loan receivables, a $4.8 billion increase in serviced retail receivables, and a $1.2 billion increase in serviced wholesale receivables. This year-to-year increase was primarily a result of a $7.3 billion increase in serviced wholesale receivables, a $7.3 billion increase in commercial and other loan receivables, and a $5.6 billion increase in serviced retail receivables. The increase in wholesale receivable balances over December 31 and September 30, 1998 was a result of the 1998 work stoppages previously mentioned and higher penetration. The change in commercial and other loan receivables was due to the acquisition of Bank of New York Financial Corporation in July 1999 and increases in other secured notes. The increase in retail receivable balances over December 31 and September 30, 1998 was due to continued retail financing incentives sponsored by GM. GMAC's liquidity, as well as its ability to profit from ongoing acquisition activity, is in large part dependent on its access to capital and the costs associated with raising funds in different segments of the capital markets. In this regard, GMAC regularly accesses the short-, medium-, and long-term debt markets, principally through commercial paper, term notes and underwritten issuances. As of September 30, 1999, GMAC's total borrowings were $114.4 billion, compared with $106.2 billion and $93.5 billion at December 31, 1998 and September 30, 1998, respectively. The higher borrowings were used to fund increased earning asset levels. GMAC's ratio of consolidated debt to total stockholder's equity at September 30, 1999 was 10.7:1, compared to 10.8:1 at December 31, 1998 and 9.8:1 at September 30, 1998. GMAC and its subsidiaries maintain substantial bank lines of credit which totaled $45.8 billion at September 30, 1999, compared to $42.9 billion at year-end 1998 and $42.7 billion at September 30, 1998. The unused portion of these credit lines totaled $35.8 billion at September 30, 1999, $2.6 billion and $2.0 billion higher than December 31 and September 30, 1998, respectively. - 34 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Book Value Per Share Book value per share of $1-2/3 par value common stock was $20.59 at September 30, 1999, compared with $20.00 at December 31, 1998 and $19.54 at September 30, 1998. Book value per share of GM Class H common stock was $12.36 at September 30, 1999, compared with $12.00 at December 31, 1998 and $11.72 at September 30, 1998. Book value per share was determined based on the liquidation rights of the various classes of common stock. Return on Net Assets (RONA) As part of its shareholder value initiatives, GM has adopted RONA as a performance measure to heighten management's focus on balance sheet investments and the return on those investments. GM's RONA calculation is based on principles established by management and approved by the Board of Directors. GM's 1999 third quarter RONA for continuing operations on an annualized basis, excluding Hughes, was 10.1%. CASH FLOWS Automotive, Electronics and Other Operations Net cash provided by operating activities was $15.4 billion during the nine months ended September 30, 1999 compared with $2.8 billion for the prior year period. The increase in net cash provided by operating activities was primarily the result of increased income from continuing operations and the net changes in operating assets and liabilites. These were primarily related to increases in accounts payable resulting from an extension of payment terms and increases in accrued and other liabilities. Net cash used in investing activities amounted to $11.5 billion during the nine months ended September 30, 1999 compared with $4.2 billion in the prior year period. The increase in net cash used in investing activities was primarily attributable to increased cash used for investments in companies, investments in marketable securities, and operating leases. Net cash used in financing activities was $1.1 billion during the nine months ended September 30, 1999 compared with $1.4 billion in the prior year period. The decrease in cash used for financing activities during the first nine months of 1999 was primarily due to reduced stock repurchases and proceeds from issuing preference stock in the second quarter of 1999, partially offset by decreases in short-term loans payable and long-term debt. Financing and Insurance Operations Cash provided by operating activities totaled $9.9 billion and $3.8 billion during the nine months ended September 30, 1999 and 1998, respectively. The additional operating cash flow was primarily the result of an increase in proceeds from sales of mortgage loans and mortgage-related securities held for trading, a reduction in acquisitions of mortgage-related securities held for trading and decreases in other miscellaneous assets and investments. These net inflows were partially offset by the net changes in operating assets and liabilities and increases in purchases of mortgage loans and mortgage related securities held for trading. Cash used for investing activities during the nine months ended September 30, 1999 totaled $13.6 billion, a $3.3 billion increase in cash used compared to the same period last year. Cash usage increased primarily as a result of investments in companies, net increases in acquisitions of finance receivables compared to liquidations of such receivables, largely offset by increased proceeds from sales of finance receivables. Cash provided by financing activities during the nine months ended September 30, 1999 totaled $3.5 billion, compared with cash provided of $6.5 billion during the comparable 1998 period. The change was primarily the result of a reduction in short-term debt, partially offset by an increase in long-term debt. Dividends Dividends may be paid on common stocks only when, as and if declared by the GM Board in its sole discretion. GM's policy is to distribute dividends on its $1-2/3 par value common stock based on the outlook and indicated capital needs of the business. On August 2, 1999, the GM Board declared a quarterly cash dividend of $0.50 per share on $1-2/3 par value common stock, paid September 10, 1999, to holders of record as of August 2, 1999. The GM Board also declared quarterly dividends on the Series D and Series G Depositary Shares of $0.495 and $0.57 per share, respectively, paid November 1, 1999, to holders of record on October 4, 1999. The Series B preference stock was redeemed on April 5, - 35 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Dividends (concluded) 1999, and as a result, the amount paid out on that date to the Series B shareholders of record included accrued and unpaid dividends as part of the total redemption price. With respect to GM Class H common stock, the GM Board determined that it will not pay any cash dividends at this time in order to allow the earnings of Hughes to be retained for investment in its telecommunications and space businesses. On August 2, 1999 the GM Board declared two dividends on the GM Series H 6.25% Automatically Convertible Preference Stock. A dividend of $0.5853 per share of GM Series H 6.25% Automatically Convertible Preference Stock was paid on August 2, 1999, to the sole holder of record on that date for the period between the close of the transaction and the end of the second quarter. A quarterly dividend of $8.7793 per share for the GM Series H 6.25% Automatically Convertible Preference Stock was paid November 1, 1999, to the holder of record on October 4, 1999. Employment and Payrolls Worldwide employment at September 30, 1999 1998 (in thousands) ---- ---- GMNA 219 229 GME 82 81 GMLAAM 23 25 GMAP 10 10 GMAC 27 23 Hughes 18 15 Other 12 12 ---- ---- Total employees 391 395 === === Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ------ ------ ------ ------ 1998 Worldwide payrolls - (in billions) $5.5 $5.0 $16.5 $15.3 === === ==== ==== New Accounting Standard In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No. 133. This statement defers, for one year, the effective date of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to those fiscal years beginning after June 15, 2000. 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. GM will adopt SFAS No. 133 by January 1, 2001, as required. Management is currently assessing the impact of this statement on GM's results of operations and financial position. - 36 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES PART II ITEM 1. LEGAL PROCEEDINGS (a) Material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Corporation became, or was, a party during the quarter ended September 30, 1999 or subsequent thereto, but before the filing of this report are summarized below: Other Matters With respect to the previously reported matter, Anderson, et al v. General Motors Corporation, in which a jury in a Los Angeles Superior Court returned a verdict of $4.9 billion against GM in a product liability lawsuit involving a post-collision fuel fed fire in a 1979 Chevrolet Malibu, the following post-trial developments have occurred. The trial court has reduced the punitive damages from $4.8 billion to $1.1 billion and GM has posted a bond for the punitive and compensatory damages (the cost of which was not material to the Corporation). GM continues to pursue its appellate rights, including efforts to secure a new trial and the complete elimination of responsibility to pay any damages in this matter consistent with GM's view that the design of the Chevrolet Malibu was not responsible for plaintiffs' injuries. * * * With respect to the previously reported matter, National Rural Telecommunications Cooperative (NRTC) v. DIRECTV, Inc. and Hughes Communications Galaxy, Inc. (together "DIRECTV"), the following has occurred. On August 26, 1999, the NRTC filed a second lawsuit against DIRECTV in which it alleges that DIRECTV has breached the agreement it has with NRTC. In this suit, NRTC is asking the court to require DIRECTV to pay to NRTC a proportionate share of the financial benefits DIRECTV derives from programming providers and certain other third parties. DIRECTV denies that it owes any sums to the NRTC on account of the allegations in this matter and plans to vigorously defend itself against these claims. * * * (b) Previously reported legal proceedings which have been terminated, either during the quarter ended September 30, 1999, or subsequent thereto, but before the filing of this report are summarized below: As previously reported, on April 25, 1997, a purported nationwide class action was filed against the Corporation and certain other vehicle manufacturers in the Circuit Court of Coosa County, Alabama, Ellen Smith, et al v. General Motors Corporation, Ford Motor Company Chrysler Motors Corporation, Sylacauga Auto Plex, et al, claiming that the front seat air bags installed in 1993 to 1997 model vehicles are defective because, when deployed, they are likely to injure small-statured adults and children. The complaint sought compensatory damages, the cost of repair or replacement of the allegedly defective air bags, plus attorneys' fees. That case has now been dismissed without prejudice. * * * * * * * - 37 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS (Including Those Incorporated by Reference). Exhibit Number Exhibit Name Page No. 99 Hughes Electronics Corporation Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations 39 27 Financial Data Schedule (for Securities and Exchange Commission information only) (b) REPORTS ON FORM 8-K. Three reports on Form 8-K, dated July 9, 1999, July 19, 1999 and June 24, 1999 (filed August 24, 1999) were filed during the quarter ended September 30, 1999 reporting matters under Item 5, Other Events and reporting certain agreements under Item 7, Financial Statements, Pro Forma Financial Information, and Exhibits. * * * * * * SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. GENERAL MOTORS CORPORATION -------------------------- (Registrant) Date November 12, 1999 /s/Peter R. Bible - ---------------------- ------------------------------ (Peter R. Bible, Chief Accounting Officer) - 38 - EX-99.3 4 HUGHES' RESTATED THIRD QUARTER 10-Q Exhibit 99.3 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) 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 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. 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 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. 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. 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. 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 ===== ===== 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. 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. 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 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:
Direct-To- Home Satellite Network (Dollars in Millions) Broadcast Services Systems Other Eliminations Total - ----------------------------------------------------------------------------------------- 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) - -----------------------------------------------------------------------------------------
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. 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. 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. HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis should be read in conjunction with the Hughes management's discussion and analysis included in the General Motors ("GM") 1998 Annual Report to the Securities and Exchange Commission ("SEC") on Form 10-K; the management's discussion and analysis relating to Hughes included in Exhibit 99 to GM's Quarterly Reports on Form 10-Q dated March 31, 1999 and June 30, 1999 and related Hughes' Quarterly Report on Form 10-Q filed with the SEC; and Current Reports on Form 8-K filed with the SEC subsequent to the filing date for GM's 1998 Form 10-K. In addition, the following discussion excludes purchase accounting adjustments related to GM's acquisition of Hughes. This Quarterly Report may contain certain statements that Hughes believes are, or may be considered to be, "forward-looking statements", within the meaning of 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. -----END PRIVACY-ENHANCED MESSAGE-----