-----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, IA0J4jOcLQ4EaX4nGPSevsDi+oauZqMUdA1XSRz2cwup7mRdiO8PoDD+WjvAWyGK zfI30xZTtPT3rjA/CA5pkQ== 0000040730-01-500113.txt : 20010815 0000040730-01-500113.hdr.sgml : 20010815 ACCESSION NUMBER: 0000040730-01-500113 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00143 FILM NUMBER: 1711489 BUSINESS ADDRESS: STREET 1: 300 RENAISSANCE CTR STREET 2: MAIL CODE: 482-C34-D71 CITY: DETROIT STATE: MI ZIP: 48265-3000 BUSINESS PHONE: 3135565000 MAIL ADDRESS: STREET 1: 300 RENAISSANCE CTR STREET 2: MAIL CODE: 482-C34-D71 CITY: DETROIT STATE: MI ZIP: 48265-3000 10-Q 1 june01-10q081401.txt SECOND QUARTER 2001 10-Q 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 June 30, 2001 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.) 300 Renaissance Center, Detroit, Michigan 48265-3000 (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 July 31, 2001, there were outstanding 550,027,429 shares of the issuer's $1-2/3 par value common stock and 876,564,617 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 Six Months Ended June 30, 2001 and 2000 3 Consolidated Balance Sheets as of June 30, 2001, December 31, 2000, and June 30, 2000 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Part II - Other Information (Unaudited) Item 1. Legal Proceedings 18 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 22 Exhibit 99 Hughes Electronics Corporation Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) 23 - 2 - PART I GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, -------- -------- 2001 2000 2001 2000 ---- ---- ---- ---- (dollars in millions except per share amounts) GENERAL MOTORS CORPORATION AND SUBSIDIARIES Total net sales and revenues $46,220 $48,743 $88,835 $95,601 ------ ------ ------ ------ Cost of sales and other expenses (Note 9) 37,181 38,069 71,691 75,210 Selling, general, and administrative expenses 5,855 5,481 11,245 10,338 Interest expense 2,259 2,358 4,470 4,586 ------ ------ ------ ------ Total costs and expenses 45,295 45,908 87,406 90,134 ------ ------ ------ ------ Income before income taxes and minority interests 925 2,835 1,429 5,467 Income tax expense 304 929 512 1,712 Equity income/(loss) and minority interests (144) (155) (203) (221) --- ----- --- ------ Net income 477 1,751 714 3,534 Dividends on preference stocks (23) (27) (51) (56) ---- ------- ---- ------- Earnings attributable to common stocks $454 $1,724 $663 $3,478 === ===== === ===== Basic earnings (losses) per share attributable to common stocks (Note 8) Earnings per share attributable to $1-2/3 par value $1.05 $2.99 $1.59 $5.87 ==== ==== ==== ==== Earnings per share attributable to Class H $(0.14) $(0.07) $(0.24) $(0.15) ==== ==== ==== ==== Earnings (losses) per share attributable to common stocks assuming dilution (Note 8) Earnings per share attributable to $1-2/3 par value $1.03 $2.93 $1.56 $5.74 ==== ==== ==== ==== Earnings per share attributable to Class H $(0.14) $(0.07) $(0.24) $(0.15) ==== ==== ==== ==== Reference should be made to the notes to consolidated financial statements. - 3 - CONSOLIDATED STATEMENTS OF INCOME - concluded (Unaudited) Three Months Ended Six Months Ended June 30, June 30, -------- -------- 2001 2000 2001 2000 ---- ---- ---- ---- (dollars in millions) AUTOMOTIVE, COMMUNICATIONS SERVICES, AND OTHER OPERATIONS Total net sales and revenues $39,731 $42,870 $75,895 $84,065 ------ ------ ------ ------ Cost of sales and other expenses (Note 9) 35,182 36,260 67,676 71,581 Selling, general, and administrative expenses 4,091 4,032 7,730 7,539 ------ ------ ------ ------ Total costs and expenses 39,273 40,292 75,406 79,120 ------ ------ ------ ------ Interest expense 151 222 313 438 Net expense from transactions with Financing and Insurance Operations 87 172 218 311 ---- ------ --- ------ Income (loss) before income taxes and minority interests 220 2,184 (42) 4,196 Income tax expense (benefit) 68 698 (13) 1,240 Equity income/(loss) and minority interests (113) (155) (149) (220) --- ----- --- ------ Net income (loss) - Automotive, Communications Services, and Other Operations $39 $1,331 $(178) $2,736 == ===== === ===== FINANCING AND INSURANCE OPERATIONS Total revenues $6,489 $5,873 $12,940 $11,536 ----- ----- ------ ------ Interest expense 2,108 2,136 4,157 4,148 Depreciation and amortization expense 1,443 1,483 2,952 3,006 Operating and other expenses 1,729 1,391 3,446 2,697 Provision for financing and insurance losses 591 384 1,132 725 ----- ----- ------ ------ Total costs and expenses 5,871 5,394 11,687 10,576 ----- ----- ------ ------ Net income from transactions with Automotive, Communications Services, and Other Operations (87) (172) (218) (311) --- --- --- ----- Income before income taxes and minority interests 705 651 1,471 1,271 Income tax expense 236 231 525 472 Equity income/(loss) and minority interests (31) - (54) (1) --- --- --- --- Net income - Financing and Insurance Operations $438 $420 $892 $798 === === === === The above supplemental consolidating information is explained in Note 1, "Financial Statement Presentation." Reference should be made to the notes to consolidated financial statements. - 4 - CONSOLIDATED BALANCE SHEETS June 30, June 30, 2001 Dec. 31, 2000 (Unaudited) 2000 (Unaudited) ----------- ---- ----------- GENERAL MOTORS CORPORATION AND SUBSIDIARIES (dollars in millions) ASSETS Automotive, Communications Services, and Other Operations Cash and cash equivalents $8,370 $9,119 $9,441 Marketable securities 795 1,161 893 ------ ------- -------- Total cash and marketable securities 9,165 10,280 10,334 Accounts and notes receivable (less allowances) 6,533 5,835 5,968 Inventories (less allowances) (Note 2) 11,072 10,945 11,680 Equipment on operating leases (less accumulated depreciation) 5,084 5,699 5,973 Deferred income taxes and other current assets 8,499 8,388 9,678 ------ ------ ------ Total current assets 40,353 41,147 43,633 Equity in net assets of nonconsolidated associates 4,934 3,497 3,377 Property - net 33,922 33,977 33,436 Intangible assets - net 7,743 7,622 8,726 Deferred income taxes 15,560 14,870 13,456 Other assets 31,226 32,243 30,207 ------- ------- ------- Total Automotive, Communications Services, and Other Operations assets 133,738 133,356 132,835 Financing and Insurance Operations Cash and cash equivalents 1,139 1,165 692 Investments in securities 10,614 9,595 9,447 Finance receivables - net 89,608 92,415 85,782 Investment in leases and other receivables 35,701 36,752 37,883 Other assets 31,281 27,846 23,528 Net receivable from Automotive, Communications Services, and Other Operations 1,582 1,971 1,182 ------- ------- ------- Total Financing and Insurance Operations assets 169,925 169,744 158,514 ------- ------- ------- Total assets $303,663 $303,100 $291,349 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Automotive, Communications Services, and Other Operations Accounts payable (principally trade) $19,177 $18,309 $17,329 Loans payable 2,430 2,208 2,554 Accrued expenses 34,512 33,252 32,527 Net payable to Financing and Insurance Operations 1,582 1,971 1,182 ------ ------ ------ Total current liabilities 57,701 55,740 53,592 Long-term debt 8,662 7,410 8,518 Postretirement benefits other than pensions 34,109 34,306 33,931 Pensions 3,111 3,480 3,338 Other liabilities and deferred income taxes 14,791 15,768 17,279 ------- ------- ------- Total Automotive, Communications Services, and Other Operations liabilities 118,374 116,704 116,658 Financing and Insurance Operations Accounts payable 6,348 7,416 4,611 Debt 133,088 135,037 128,164 Other liabilities and deferred income taxes 15,494 12,922 12,161 ------- ------- ------- Total Financing and Insurance Operations liabilities 154,930 155,375 144,936 Minority interests 699 707 647 General Motors - obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of General Motors (Note 4) Series G - 139 139 Stockholders' equity $1-2/3 par value common stock (issued, 549,606,968; 548,181,757; and 536,912,451 shares) (Note 8) 916 914 895 Class H common stock (issued, 876,465,865; 875,286,559 and 873,646,596 shares) (Notes 5 and 8) 88 88 87 Capital surplus (principally additional paid-in capital) 21,114 21,020 19,668 Retained earnings 10,233 10,119 9,816 ------ ------ ------- Subtotal 32,351 32,141 30,466 Accumulated foreign currency translation adjustments (2,814) (2,502) (2,252) Net unrealized loss on derivatives (Note 7) (187) - - Net unrealized gains on securities 355 581 876 Minimum pension liability adjustment (45) (45) (121) ------- ------- ------ Accumulated other comprehensive loss (2,691) (1,966) (1,497) ------- ------- ------- Total stockholders' equity 29,660 30,175 28,969 ------- ------- ------- Total liabilities and stockholders' equity $303,663 $303,100 $291,349 ======= ======= ======= Reference should be made to the notes to consolidated financial statements - 5 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ------------------------- 2001 2000 ---- ---- Automotive, Financing Automotive, Financing Comm.Serv. and Comm.Serv. and and Other Insurance and Other Insurance --------- --------- --------- --------- (dollars in millions) Net cash provided by operating activities $3,455 $1,278 $6,235 $3,283 Cash flows from investing activities Expenditures for property (4,220) (42) (3,791) (213) Investments in marketable securities - acquisitions (773) (15,691) (1,399) (11,823) Investments in marketable securities - liquidations 1,139 14,734 2,204 11,836 Mortgage servicing rights - acquisitions - (813) - (398) Mortgage servicing rights - liquidations - 18 - - Finance receivables - acquisitions - (107,883) - (108,780) Finance receivables - liquidations - 68,560 - 73,835 Proceeds from sales of finance receivables - 41,156 - 28,906 Operating leases - acquisitions (3,182) (6,448) (3,967) (8,883) Operating leases - liquidations 3,576 5,138 3,507 4,602 Investments in companies, net of cash acquired (612) (119) (1,554) - Net investing activity with Financing and Insurance Operations - - (998) - Other (351) 129 (371) 151 ----- ----- ----- ------ Net cash used in investing activities (4,423) (1,261) (6,369) (10,767) ----- ----- ----- ------ Cash flows from financing activities Net increase (decrease) in loans payable 222 (21,634) 488 2,127 Long-term debt - borrowings 3,451 28,904 3,417 12,619 Long-term debt - repayments (2,225) (7,703) (3,337) (8,098) Net financing activity with Automotive, Communications Services, and Other Operations - - - 998 Repurchases of common and preference stocks (264) - (417) - Proceeds from issuing common stocks 71 - 356 - Cash dividends paid to stockholders (600) - (679) - --- --- --- ----- Net cash provided by (used in) financing activities 655 (433) (172) 7,646 --- --- --- ----- Effect of exchange rate changes on cash and cash equivalents (47) 1 (164) (1) Net transactions with Automotive/ Financing Operations (389) 389 181 (181) --- --- --- --- Net decrease in cash and cash equivalents (749) (26) (289) (20) Cash and cash equivalents at beginning of the period 9,119 1,165 9,730 712 ----- ----- ----- --- Cash and cash equivalents at end of the period $8,370 $1,139 $9,441 $692 ===== ===== ===== === Reference should be made to the notes to consolidated financial statements.
- 6 - 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 accounting principles generally accepted in the U.S. for interim financial information. 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, 2000 consolidated financial statements and notes thereto included in General Motors Corporation's (the "Corporation" or "GM") 2000 Annual Report on Form 10-K, and all other GM, Hughes Electronics Corporation (Hughes), and General Motors Acceptance Corporation (GMAC) filings with the Securities and Exchange Commission. GM presents separate supplemental consolidating statements of income and other financial information for the following businesses: (1) Automotive, Communications Services, 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-based lending. Transactions between businesses have been eliminated in the Corporation's consolidated statements of income. Certain amounts for 2000 were reclassified to conform with the 2001 classifications. New Accounting Standards On July 20, 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations. Also on July 20, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued by the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on January 1, 2002 and it has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations. Note 2. Inventories Inventories included the following for Automotive, Communications Services, and Other Operations (dollars in millions): June 30, Dec. 31, June 30, 2001 2000 2000 -------- --------- -------- Productive material, work in process, and supplies $5,542 $5,555 $5,954 Finished product, service parts, etc. 7,377 7,319 7,609 ------- ------- ------- Total inventories at FIFO 12,919 12,874 13,563 Less LIFO allowance 1,847 1,929 1,883 ------- ------- ------- Total inventories (less allowances) $11,072 $10,945 $11,680 ====== ====== ====== Note 3. Contingent Matters Litigation is subject to uncertainties and the outcome of individual litigated matters is not predictable with assurance. Various legal actions, governmental investigations, claims, and proceedings are pending against the Corporation, including those arising out of alleged product defects; employment-related matters; governmental regulations relating to safety, emissions, and fuel economy; product warranties; financial services; dealer, supplier, and other contractual relationships; and environmental matters. In connection with the disposition by Hughes of its defense electronics business to Raytheon Company in 1997 and its satellite systems manufacturing businesses to The Boeing Company in 2000, there are disputes regarding the purchase price and other matters that may result in payments by Hughes to the acquiring companies that could be material to Hughes. GM has established reserves for matters in which losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or other treble damage claims, or demands for recall campaigns, environmental remediation programs, or sanctions, that if granted, could require the Corporation to pay damages or make other expenditures in amounts that could not be estimated at June 30, 2001. 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. - 7 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 4. Preferred Securities of Subsidiary Trusts On April 2, 2001, GM redeemed the Series G Trust's sole assets causing the Series G Trust to redeem the approximately 5 million outstanding Series G 9.87% Trust Originated Preferred Securitiessm (TOPrSsm). The Series G TOPrS were redeemed at a price of $25 per share plus accrued and unpaid dividends of $0.42 per share. Also on April 2, 2001, GM redeemed the approximately 5 million outstanding Series G depositary shares, each of which represents a one-fourth interest in a GM Series G 9.12% Preference Share, at a price of $25 per share plus accrued and unpaid dividends of $0.59 per share. The securities together had a total face value of approximately $252 million. - ------------------ sm "Trust Originated Preferred Securities" and "TOPrS" are service trademarks of Merrill Lynch & Co. Note 5. Capital Stock Transactions During the second quarter of 2000, GM completed an exchange offer in which GM repurchased 86 million shares of GM $1-2/3 par value common stock and issued 92 million shares of GM Class H common stock. In addition, on June 12, 2000, GM contributed approximately 54 million shares and approximately 7 million shares of GM Class H common stock to the U.S. Hourly-Rate Employees Pension Plan and Voluntary Employees' Beneficiary Association (VEBA) trust, respectively. The total value of the contributions was approximately $5.6 billion. As a result of the exchange offer and employee benefit plan contributions, the economic interest in Hughes attributable to GM $1-2/3 par value common stock decreased from approximately 62% to approximately 30% and the economic interest in Hughes attributable to GM Class H common stock increased from approximately 38% to 70% on a fully diluted basis. On June 6, 2000, the GM Board of Directors declared a three-for-one stock split of the GM Class H common stock. The stock split was in the form of a 200% stock dividend, paid on June 30, 2000 to GM Class H common stockholders of record on June 13, 2000. All GM Class H common stock per share amounts and numbers of shares for all periods presented have been adjusted to reflect the stock split. Furthermore, as a result of this stock split, the voting and liquidation rights of the GM Class H common stock were reduced from 0.6 votes per share and 0.6 liquidation units per share, to 0.2 votes per share and 0.2 liquidation units per share in order to avoid dilution in the aggregate voting or liquidation rights of any class. The voting and liquidation rights of the GM $1-2/3 par value common stock were not changed. The voting and liquidation rights of GM $1-2/3 par value common stock are one vote per share and one liquidation unit per share. Note 6. Comprehensive Income GM's total comprehensive income (loss) was as follows (dollars in millions): Three Months Ended Six Months Ended June 30, June 30, -------- -------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income $477 $1,751 $714 $3,534 Other comprehensive income (loss) 167 (425) (725) (339) --- ------ --- ------ Total $644 $1,326 $(11) $3,195 === ===== == ===== Note 7. Derivative Financial Instruments Effective January 1, 2001, GM adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which requires that all derivatives be recorded at fair value on the balance sheet and establishes criteria for designation and effectiveness of derivative transactions for which hedge accounting is applied. GM assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its documented policies. As a result of the adoption of this standard as of January 1, 2001, GM recorded a transition adjustment representing a one-time after-tax charge to income totaling $23 million, as well as an after-tax unrealized gain of $4 million to other comprehensive income. GM is exposed to market risk from changes in foreign currency exchange rates, interest rates, and certain commodity and equity security prices. In the normal course of business, GM enters into a variety of foreign exchange, interest rate, and commodity forward contracts, swaps, and options, with the objective of minimizing exposure arising from these risks. A risk management control system is utilized to monitor foreign exchange, interest rate, commodity and equity price risks, and related hedge positions. - 8 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 8. Earnings Per Share Attributable to Common Stocks Earnings per share (EPS) 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 EPS 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 (dollars in millions): Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ---- ---- ---- ---- Earnings (losses) attributable to common stocks Earnings attributable to $1-2/3 par value $574 $1,762 $870 $3,549 (Losses) attributable to Class H $(120) $(38) $(207) $(71) Earnings attributable to GM $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 Available Separate Consolidated Net Income (ASCNI) of Hughes for the respective period. Losses attributable to GM Class H common stock represent the ASCNI of Hughes, excluding the effects of GM purchase accounting adjustments arising from GM's acquisition of Hughes Aircraft Company (HAC), 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). The calculated losses used for computation of the ASCNI of Hughes are 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 (876 million and 563 million during the three months ended June 30, 2001 and 2000, respectively, and 876 million and 488 million during the six months ended June 30, 2001 and 2000, 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 1.3 billion for the second quarters of 2001 and 2000, and for the six month periods ended June 30, 2001 and 2000. The reconciliation of the amounts used in the basic and diluted earnings per share computations was as follows (dollars in millions except per share amounts): - 9 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 8. Earnings Per Share Attributable to Common Stocks (concluded) $1-2/3 Par Value Common Stock Class H Common Stock ----------------------------- -------------------- Per Share Per Share Income Shares Amount ASCNI Shares Amount ------ ------ ------ ----- ------ ------ Three Months Ended June 30, 2001 Net income (loss) $582 $(105) Less:Dividends on preference stocks 8 15 --- --- Basic EPS Income (loss) attributable to common stocks 574 549 $1.05 (120) 876 $(0.14) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 10 - - --- --- --- --- Diluted EPS Adjusted income (loss) attributable to common stocks $574 559 $1.03 $(120) 876 $(0.14) === === ==== === === ==== Three Months Ended June 30, 2000 Net income (loss) $1,779 $(28) Less:Dividends on preference stocks 17 10 ----- -- Basic EPS Income (loss) attributable to common stocks 1,762 590 $2.99 (38) 563 $(0.07) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 12 - - ----- --- -- --- Diluted EPS Adjusted income (loss) attributable to common stocks $1,762 602 $2.93 $(38) 563 $(0.07) ===== === ==== == === ==== Six Months Ended June 30, 2001 Net income (loss) $889 $(175) Less:Dividends on preference stocks 19 32 --- --- Basic EPS Income (loss) attributable to common stocks 870 549 $1.59 (207) 876 $(0.24) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 10 - - --- --- --- --- Diluted EPS Adjusted income (loss) attributable to common stocks $870 559 $1.56 $(207) 876 $(0.24) === === ==== === === ==== Six Months Ended June 30, 2000 Net income (loss) $3,587 $(53) Less:Dividends on preference stocks 38 18 ----- -- Basic EPS Income (loss) attributable to common stocks 3,549 605 $5.87 (71) 488 $(0.15) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 13 - - ----- --- -- --- Diluted EPS Adjusted income (loss) attributable to common stocks $3,549 618 $5.74 $(71) 488 $(0.15) ===== === ==== == === ====
Note 9. Depreciation and Amortization Depreciation and amortization included in cost of sales and other expenses for Automotive, Communications Services, and Other Operations was as follows (dollars in millions): Three Months Ended Six Months Ended June 30, June 30, -------- -------- 2001 2000 2001 2000 ---- ---- ---- ---- Depreciation $1,137 $972 $2,168 $1,962 Amortization of special tools 573 661 1,138 1,315 Amortization of intangible assets 85 81 158 152 ----- ----- ----- ----- Total $1,795 $1,714 $3,464 $3,429 ===== ===== ===== ===== - 10 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 10. Segment Reporting GM's reportable operating segments within its Automotive, Communications Services, and Other Operations (ACO) business consist of General Motors Automotive (GMA) (which is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM), and GM Asia Pacific (GMAP)), Hughes, and Other. GM's reportable operating segments within its Financing and Insurance Operations (FIO) business consist of GMAC and Other. Selected information regarding GM's reportable operating segments were as follows (dollars in millions):
Total Other Total GMNA GME GMLAAM GMAP GMA Hughes Other ACO GMAC Financing FIO ---- --- ------ ---- --- ------ ----- --- ---- --------- --- For the Three Months Ended June 30, 2001 Net sales and revenues: External customers $28,609 $5,987 $1,692 $927 $37,215 $1,997 $519 $39,731 $6,422 $67 $6,489 Intersegment (492) 244 47 201 - 6 (6) - - - - ------ ----- ----- ----- ------ ----- --- ------ ----- -- ----- Total net sales and revenues $28,117 $6,231 $1,739 $1,128 $37,215 $2,003 $513 $39,731 $6,422 $67 $6,489 ====== ===== ===== ===== ====== ===== === ====== ===== == ===== Interest income (a) $293 $101 $(1) $4 $397 $19 $(250) $166 $666 $(113) $553 Interest expense $350 $79 $15 $2 $446 $42 $(337) $151 $2,050 $58 $2,108 Net income (loss) $521 $(154) $31 $(121) $277 $(156)(b) $(82) $39 $449 $(11) $438 Segment assets $90,185 $19,186 $4,472 $903 $114,746 $19,081 (c) $(89) $133,738 $168,850 $1,075 $169,925 For the Three Months Ended June 30, 2000 Net sales and revenues: External customers $30,799 $6,908 $1,422 $740 $39,869 $2,251 $750 $42,870 $5,755 $118 $5,873 Intersegment (230) 234 (54) 50 - 9 (9) - - - - ------ ----- ----- ---- ------ ----- --- ------ ----- --- ----- Total net sales and revenues $30,569 $7,142 $1,368 $790 $39,869 $2,260 $741 $42,870 $5,755 $118 $5,873 ====== ===== ===== === ====== ===== === ====== ===== === ===== Interest income (a) $139 $114 $8 $3 $264 $19 $(126) $157 $539 $(126) $413 Interest expense $290 $107 $41 $1 $439 $58 $(275) $222 $2,027 $109 $2,136 Net income (loss) $1,411 $166 $10 $(123) $1,464 $(64)(b) $(69) $1,331 $395 $25 $420 Segment assets $87,397 $22,387 $4,463 $1,084 $115,331 $19,940 (c) $(2,436) $132,835 $157,482 $1,032 $158,514 (a) Interest income is included in net sales and revenues from external customers. (b) The amount reported for Hughes excludes amortization of GM purchase accounting adjustments related to GM's acquisition of HAC of $1 million and $5 million for 2001 and 2000, respectively. (c) The amount reported for Hughes excludes the unamortized GM purchase accounting adjustments of approximately $387 million and $395 million, at June 30, 2001 and 2000, respectively, related to GM's acquisition of HAC.
- 11- GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - concluded (Unaudited) Note 10. Segment Reporting (concluded)
Total Other Total GMNA GME GMLAAM GMAP GMA Hughes Other ACO GMAC Financing FIO ---- --- ------ ---- --- ------ ----- --- ---- --------- --- For the Six Months Ended June 30, 2001 Net sales and revenues: External customers $54,189 $11,987 $3,053 $1,765 $70,994 $3,908 $993 $75,895 $12,791 $149 $12,940 Intersegment (966) 512 81 373 - 12 (12) - - - - ------ ------ ----- ----- ------ ----- --- ------ ------ --- ------ Total net sales and revenues $53,223 $12,499 $3,134 $2,138 $70,994 $3,920 $981 $75,895 $12,791 $149 $12,940 ====== ====== ===== ===== ====== ===== === ====== ====== === ====== Interest income (a) $562 $184 $- $8 $754 $43 $(475) $322 $1,304 $(231) $1,073 Interest expense $705 $139 $39 $3 $886 $93 $(666) $313 $4,039 $118 $4,157 Net income (loss) $627 $(238) $36 $(142) $283 $(260)(b) $(201) $(178) $914 $(22) $892 For the Six Months Ended June 30, 2000 Net sales and revenues: External customers $60,528 $13,478 $2,671 $1,523 $78,200 $4,358 $1,507 $84,065 $11,376 $160 $11,536 Intersegment (715) 498 87 130 - 20 (20) - - - - ------ ------ ----- ----- ------ ----- ----- ------ ------ --- ------ Total net sales and revenues $59,813 $13,976 $2,758 $1,653 $78,200 $4,378 $1,487 $84,065 $11,376 $160 $11,536 ====== ====== ===== ===== ====== ===== ===== ====== ====== === ====== Interest income (a) $262 $214 $14 $5 $495 $37 $(214) $318 $1,022 $(236) $786 Interest expense $556 $193 $62 $1 $812 $103 $(477) $438 $3,937 $211 $4,148 Net income (loss) $2,700 $387 $11 $(116) $2,982 $(141)(b) $(105) $2,736 $792 $6 $798 (a) Interest income is included in net sales and revenues from external customers. (b) The amount reported for Hughes excludes amortization of GM purchase accounting adjustments related to GM's acquisition of HAC of $2 million and $11 million for 2001 and 2000, respectively.
* * * * * * - 12- 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 December 31, 2000 consolidated financial statements and notes thereto along with the MD&A included in General Motors Corporation's (the "Corporation" or "GM") 2000 Annual Report on Form 10-K, and all other GM, Hughes Electronics Corporation (Hughes), and General Motors Acceptance Corporation (GMAC) filings with the Securities and Exchange Commission. All earnings per share amounts included in the MD&A are reported as diluted. GM presents separate financial information for the following businesses: Automotive, Communications Services, and Other Operations and Financing and Insurance Operations. GM's reportable operating segments within its Automotive, Communications Services, and Other Operations business consist of: . GM Automotive (GMA), which is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM), and GM Asia Pacific (GMAP); . Hughes, which includes activities relating to digital entertainment, information and communications services, and satellite-based private business networks; and . Other, which includes the design, manufacturing, and marketing of locomotives and heavy-duty transmissions, the elimination of intersegment transactions, certain non-segment specific revenues and expenditures, and certain corporate activities. GM's reportable operating segments within its Financing and Insurance Operations business consist of GMAC and Other Financing, which includes financing entities operating in the U.S., Canada, Brazil, Germany, Sweden, and Mexico that are not associated with GMAC. 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 purpose of assisting in making internal operating decisions. In this regard, certain common expenses were allocated among regions less precisely than would be required for stand-alone financial information prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) and certain expenses (primarily certain U.S. taxes related to non-U.S. operations) were included in the Automotive, Communications Services, 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. RESULTS OF OPERATIONS For the second quarter of 2001, consolidated net income for the Corporation was $477 million, or $1.03 per share of GM $1-2/3 par value common stock, compared with $1.8 billion, or $2.93 per share of GM $1-2/3 par value common stock for the second quarter of 2000. GM's consolidated net income for the six months ended June 30, 2001 was $714 million, or $1.56 per share of GM $1-2/3 par value common stock, compared with $3.5 billion, or $5.74 per share of GM $1-2/3 par value common stock for the six months ended June 30, 2000. Effective January 1, 2001, GM adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which requires that all derivatives be recorded at fair value on the balance sheet and establishes criteria for designation and effectiveness of derivative transactions for which hedge accounting is applied. As a result of the adoption of this standard as of January 1, 2001, GM recorded a transition adjustment representing a one-time after-tax charge to income totaling $23 million, as well as an after-tax unrealized gain of $4 million to other comprehensive income. For the first quarter of 2001, the net effect of the initial adoption of SFAS No. 133 resulted in an increase to income for the Corporation of $12 million after-tax (GMNA $(14) million, GME $2 million, GMLAAM $(1) million, GMAP $(1) million, Hughes $(8) million, and GMAC $34 million). This amount represents the initial transition adjustment recorded as a charge to income of $23 million and the amount of the initial transition adjustment originally recorded in other comprehensive income which was reclassified into earnings during the first quarter. These amounts were primarily recorded in cost of sales for Automotive, Communications Services, and Other Operations and in operating and other expenses and interest expense for Financing and Insurance Operations. - 13 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Vehicle Unit Deliveries of Cars and Trucks Three Months Ended June 30, ------------------------------------------------------ 2001 2000 GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- --- -------- -------- --- -------- (units in thousands) GMNA United States Cars 2,324 609 26.2% 2,450 695 28.4% Trucks 2,343 666 28.4% 2,417 660 27.3% ----- ----- ----- ----- Total United States 4,667 1,275 27.3% 4,867 1,355 27.8% Canada, Mexico, and Other 742 186 25.0% 741 196 26.5% ----- ----- ----- ----- Total GMNA 5,409 1,461 27.0% 5,608 1,551 27.7% GME 5,275 502 9.5% 5,386 516 9.6% GMLAAM 980 174 17.8% 901 143 15.9% GMAP 3,143 116 3.7% 3,063 118 3.8% ------ ----- ------ ----- Total Worldwide 14,807 2,253 15.2% 14,958 2,328 15.6% ====== ===== ====== ===== Six Months Ended June 30, ------------------------------------------------------ 2001 2000 GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- --- -------- -------- --- -------- (units in thousands) GMNA United States Cars 4,413 1,213 27.5% 4,677 1,339 28.6% Trucks 4,460 1,258 28.2% 4,682 1,299 27.7% ----- ----- ----- ----- Total United States 8,873 2,471 27.8% 9,359 2,638 28.2% Canada, Mexico, and Other 1,373 348 25.3% 1,360 355 26.1% ----- ------ ----- ------ Total GMNA 10,246 2,819 27.5% 10,719 2,993 27.9% GME 10,521 999 9.5% 10,962 1,038 9.5% GMLAAM 1,960 338 17.3% 1,783 282 15.8% GMAP 6,565 245 3.7% 6,518 233 3.6% ------ ----- ------ ----- Total Worldwide 29,292 4,401 15.0% 29,982 4,546 15.2% ====== ===== ====== ===== Wholesale Sales Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- (units in thousands) GMNA Cars 646 806 1,239 1,537 Trucks 716 770 1,348 1,528 ----- ----- ----- ----- Total GMNA 1,362 1,576 2,587 3,065 ----- ----- ----- ----- GME Cars 473 505 914 965 Trucks 22 34 49 73 --- --- --- ----- Total GME 495 539 963 1,038 --- --- --- ----- GMLAAM Cars 127 105 238 197 Trucks 60 49 108 92 --- --- --- --- Total GMLAAM 187 154 346 289 --- --- --- --- GMAP Cars 57 42 104 81 Trucks 43 53 135 130 --- -- --- --- Total GMAP 100 95 239 211 --- -- --- --- Total Worldwide 2,144 2,364 4,135 4,603 ===== ===== ===== ===== - 14 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review GMA's income and net margin, adjusted to exclude a net charge of $133 million which represents General Motors' share of severance payments and asset impairments that were part of the previously announced restructuring of its affiliate Isuzu Motors Ltd. (the Isuzu restructuring charges), was $410 million and 1.1% on net sales and revenues of $37.2 billion for the second quarter of 2001. This compares with income of $1.5 billion and a net margin of 3.7% on net sales and revenues of $39.9 billion for the prior year quarter. For the six months ended June 30, 2001 income and net margin, adjusted to exclude the Isuzu restructuring charges and the net effect of the initial adoption of SFAS No. 133 during the first quarter of 2001, decreased to $430 million and 0.6% on net sales and revenues of $71.0 billion compared with income of $3.0 billion and a net margin of 3.8% on net sales and revenues of $78.2 billion for the prior year six-month period. The decrease in adjusted second quarter and year-to-date 2001 income and net sales and revenues was primarily due to a decrease in wholesale sales volumes and pricing pressures in North America and Europe. These unfavorable conditions were partially offset by cost structure improvements, also primarily in North America and Europe. GMNA's income was $521 million for the second quarter of 2001, compared with $1.4 billion for the prior year quarter. Income for the six months ended June 30, 2001, adjusted to exclude the net effect of the initial adoption of SFAS No. 133 during the first quarter of 2001, totaled $641 million compared with $2.7 billion for the prior year six-month period. The decrease in GMNA's second quarter and year-to-date 2001 income was primarily the result of lower wholesale sales volumes and unfavorable net price, partially offset by improvements in manufacturing costs due to performance efficiencies and material cost savings. Net price, which 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, was unfavorable for the quarter at (0.8)% year-over-year. GME's loss was $154 million for the second quarter of 2001, compared with income of $166 million for the prior year quarter. Losses for the six months ended June 30, 2001, adjusted to exclude the net effect of the initial adoption of SFAS No. 133 during the first quarter of 2001, totaled $240 million compared with income of $387 million for the prior year six-month period. The decrease in second quarter and year-to-date 2001 earnings was partially due to a continued shift in sales mix from larger, more profitable vehicles to the smaller, less profitable entries, as well as a decrease in wholesale sales volume from the continued weakening of the European industry and a continued increase in competitive pricing pressure. GMLAAM's income was $31 million for the second quarter of 2001, compared with income of $10 million for the prior year quarter. Income for the six months ended June 30, 2001, adjusted to exclude the net effect of the initial adoption of SFAS No. 133 during the first quarter of 2001, totaled $37 million compared with $11 million for the prior year six-month period. The increase in second quarter and year-to-date 2001 earnings was primarily due to an increase in wholesale sales volumes and nominal price increases, partially offset by increases in material and manufacturing costs. GMAP's income for the second quarter of 2001, adjusted to exclude the Isuzu restructuring charges, was $12 million compared with a loss of $123 million for the prior year quarter. Losses for the six months ended June 30, 2001, adjusted to exclude the Isuzu restructuring charges and the net effect of the initial adoption of SFAS No. 133 during the first quarter of 2001, totaled $8 million compared with a loss of $116 million for the prior year six-month period. The increase in second quarter and year-to-date 2001 earnings was primarily due to equity income improvements from several joint ventures in the region as well as an increase in wholesale volumes and prices, partially offset by increases in material costs. Hughes Financial Review Hughes' net sales and revenues decreased to $2.0 billion and $3.9 billion in the second quarter and first six months of 2001, respectively, compared with $2.3 billion and $4.4 billion in the comparable periods in 2000. The decrease in second quarter and year-to-date 2001 net sales and revenues resulted from decreased revenues at Hughes Network Systems (HNS) and PanAmSat Corporation (PanAmSat), as well as the sale of the satellite systems manufacturing businesses (Satellite Businesses) to The Boeing Company on October 6, 2000. The decrease in net sales and revenues at HNS was primarily due to decreased shipments of DIRECTV receiving equipment due primarily to DIRECTV completing the conversion of PRIMESTAR By DIRECTV customers to the high-power DIRECTV service in 2000 and a decrease in manufacturing subsidiaries. The decrease in net sales and revenues at PanAmSat was primarily due to new outright sales and sales-type lease transactions executed during the second quarter and first six months of 2000 for which there were no comparable transactions in the second quarter and first six months of 2001. These decreases were partially offset by an increase in net sales and revenues at the Direct-To-Home businesses that resulted from the addition of approximately 1.7 million net new subscribers in the United States and Latin America since June 30, 2000. - 15 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes Financial Review (concluded) Hughes' loss was $156 million for the second quarter of 2001, compared with a loss of $64 million for the prior year quarter. Losses for the six months ended June 30, 2001, adjusted to exclude the net effect of the initial adoption of SFAS No. 133 during the first quarter of 2001, totaled $252 million compared with a loss of $141 million for the prior year six-month period. The increase in the second quarter and year-to-date 2001 losses was primarily due to higher marketing costs at the Direct-To-Home businesses, increased depreciation and amortization expense due to capital expenditures for property and satellites since the second quarter of 2000 and a change in the useful life of the Galaxy VIII-i satellite that resulted from the failure of its primary propulsion system during the third quarter of 2000, and the sale of the Satellite Businesses in October 2000. These increases were partially offset by the write-off of the discontinued DIRECTV Japan business in 2000. The increase in adjusted loss for the first six months of 2001 was also impacted by a decrease in income tax benefit of $152 million due to lower pre-tax losses in 2001 as well as the additional tax benefit in 2000 associated with the write-off of Hughes' investment in DIRECTV Japan. Due to rapid consolidation in the media and telecommunications industries, GM is now considering alternative strategic transactions involving Hughes and other participants in those industries. Any such transaction might involve the separation of Hughes from GM. GM's objective in this effort is to maximize the enterprise value of Hughes for the long-term benefit of the holders of GM's Class H common stock and GM $1-2/3 par value common stock through a structure that maintains the financial strength of GM. No assurance can be given that any transaction will be agreed upon with any party or that other conditions, including any stockholder or regulatory approvals will be satisfied. GMAC Financial Review GMAC's income was $449 million on net sales and revenues of $6.4 billion for the second quarter of 2001, compared with $395 million on net sales and revenues of $5.8 billion for the prior year quarter. Income for the first six months of 2001, adjusted to exclude the net effect of the initial adoption of SFAS No. 133 during the first quarter of 2001, was $880 million on net sales and revenues of $12.8 billion, compared with $792 million on net sales and revenues of $11.4 billion for the prior year period. Income from automotive and other financing operations totaled $360 million for the second quarter of 2001, compared with $278 million for the prior year quarter. The strong results can be attributed to higher asset levels, increased securitization activity, and the positive impact of lower short term interest rates, partially offset by higher credit losses and lower off-lease residual values. Income from insurance operations totaled $41 million for the second quarter of 2001, compared with $57 million for the prior year quarter. The decrease was primarily due to lower capital gains. Income from mortgage operations totaled $48 million for the second quarter of 2001, compared with $60 million for the prior year quarter. The decrease in earnings from mortgage operations was primarily due to the lower interest rate environment, which led to an acceleration of loan prepayments as more customers refinanced their mortgages requiring a write-down of mortgage servicing rights, partially offset by the effect of a significant increase in mortgage originations. LIQUIDITY AND CAPITAL RESOURCES Automotive, Communications Services, and Other Operations - --------------------------------------------------------- At June 30, 2001, cash, marketable securities, and $3.0 billion of assets of the Voluntary Employees' Beneficiary Association (VEBA) trust invested in fixed-income securities totaled $12.2 billion, compared with $13.3 billion at December 31, 2000 and June 30, 2000, respectively. The decrease from December 31, 2000 was primarily due to an increase in accounts receivable and inventory levels, partially offset by an increase in accounts payable. In addition, GM's purchase of an additional 10% equity stake in Suzuki, an increase in net capital expenditures, and the redemption of preferred securities contributed to the decrease in cash. Total assets in the VEBA trust used to pre-fund part of GM's other postretirement benefits liability approximated $5.2 billion at June 30, 2001, compared with $6.7 billion at December 31, 2000 and $6.9 billion at June 30, 2000. 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 $8.7 billion at June 30, 2001, compared with $7.4 billion at December 31, 2000 and $8.5 billion at June 30, 2000. The ratio of long-term debt to long-term debt and GM's net assets of Automotive, Communications Services, and Other Operations was 36.1% at June 30, 2001, compared with 30.8% at December 31, 2000 and 34.5% at June 30, 2000. The ratio of long-term debt and short-term loans payable to the total of this debt and GM's net assets of Automotive, Communications Services, and Other Operations was 41.9% at June 30, 2001, compared with 36.6% at December 31, 2000 and 40.6% at June 30, 2000. - 16 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive, Communications Services, and Other Operations (concluded) - --------------------------------------------------------- Net liquidity, calculated as cash and marketable securities less the total of loans payable and long-term debt, was $(1.9) billion at June 30, 2001, compared with $662 million at December 31, 2000 and $(738) million at June 30, 2000. Financing and Insurance Operations - ---------------------------------- At June 30, 2001, GMAC owned assets and serviced automotive receivables totaling $193.0 billion, compared with $185.6 billion at December 31, 2000 and $173.3 billion at June 30, 2000. The increase from December 31, 2000 was primarily the result of increases in serviced retail receivables, other assets, real-estate mortgages held for sale, commercial and other loan receivables, investments in securities, due and deferred from receivable sales, mortgage servicing rights, and mortgage lending receivables. These increases were partially offset by a decline in net operating lease assets, serviced wholesale receivables, mortgage loans held for investment, and factored receivables. Consolidated automotive and commercial finance receivables serviced by GMAC, including sold receivables, totaled $116.8 billion at June 30, 2001, compared with $112.5 billion at December 31, 2000 and $104.5 billion at June 30, 2000. The increase from December 31, 2000 was primarily the result of a $4.8 billion increase in serviced retail receivables, a $1.3 billion increase in commercial and other loan receivables, partially offset by a $2.0 billion decrease in serviced wholesale receivables. Continued GM-sponsored retail financing incentives contributed to the rise in serviced retail receivables. The increase in commercial and other loan receivables was primarily attributable to increases in secured notes as well as continued growth at Commercial Credit LLC and GMAC Business Credit LLC. The decrease in serviced wholesale receivables was due to reduced dealer inventory levels at June 30, 2001 compared with December 31, 2000. At June 30, 2001, GMAC's total borrowings were $131.4 billion, compared with $133.4 billion at December 31, 2000 and $126.7 billion at June 30, 2000. GMAC's ratio of total debt to total stockholder's equity at June 30, 2001 was 8.9:1, compared with 9.5:1 at December 31, 2000 and 9.6:1 at June 30, 2000. Book Value Per Share Book value per share is determined based on the liquidation rights of the various classes of common stock. Book value per share of GM $1-2/3 par value common stock was $38.85 at June 30, 2001, compared with $39.36 at December 31, 2000 and $38.44 at June 30, 2000. Book value per share of GM Class H common stock, adjusted to reflect the GM Class H common stock split, was $7.77 at June 30, 2001, compared with $7.87 at December 31, 2000 and $7.69 at June 30, 2000. Dividends Dividends may be paid on common stocks only when, as, and if declared by the GM Board in its sole discretion. The amount available for the payment of dividends on each class of common stock will be reduced on occasion by dividends paid on that class and will be adjusted on occasion for changes to the amount of surplus attributed to the class resulting from the repurchase or issuance of shares of that class. 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 May 1, 2001, the GM Board declared a quarterly cash dividend of $0.50 per share on GM $1-2/3 par value common stock, paid June 9, 2001, to holders of record on May 11, 2001. 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 business. A quarterly dividend of $8.7793 per share for the GM Series H 6.25% Automatically Convertible Preference Stock was paid on August 1, 2001, to the sole holder of record on July 2, 2001. - 17 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Employment and Payrolls Worldwide employment at June 30, (in thousands) 2001 2000 ---- ---- GMNA 207 218 GME 76 90 GMLAAM 25 24 GMAP 11 11 GMAC 29 27 Hughes 11 18 Other 13 13 ---- ---- Total employees 372 401 === === Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Worldwide payrolls - (in billions) $5.2 $5.8 $10.2 $11.4 === === ==== ==== New Accounting Standards On July 20, 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations. Also on July 20, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued by the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on January 1, 2002 and it has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations. * * * * * * * 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 June 30, 2001, or subsequent thereto, but before the filing of this report are summarized below: With respect to the previously reported putative class actions alleging defects in vehicle paint, the Corporation was served with another putative class action on May 24, 2001, filed in the Circuit Court, Third Judicial Circuit, Madison County, Illinois (Rose Ann Hayes v General Motors Corporation and Albrecht-Hamlin Chevrolet, Inc). The named plaintiff purports to represent a class of "all person in the United states who (a) are the original and current owner or lessee of a 1989-1997 model year GM vehicle that currently exhibits topcoat delamination; or (b) are the original and current owner or lessee of a 1989-1997 model year GM vehicle, and paid to repair topcoat delamination on that vehicle; or (c) were the original owner or lessee of a 1989-1997 model year GM vehicle, and paid to repair topcoat delamination on that vehicle." The Complaint alleges that GM failed to disclose the possibility that vehicles would experience "topcoat delamination" and asserts claims for common law and statutory "fraud by omission" based on that factual predicate The case is in its most preliminary stage and no determination has been made as to whether the case may proceed as a class action. - 18- GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 1. LEGAL PROCEEDINGS (concluded) On May 18, 2001, in Oklahoma State Court, plaintiffs Cable Connection, Inc., TV Options, Inc., Swartzel Electronics, Inc. and Orbital Satellite, Inc. filed a class action complaint against DIRECTV and Hughes. All four plaintiffs are DIRECTV dealers (three residential and one commercial), who allege claims ranging from breach of contract to fraud, promissory estoppel, antitrust and unfair competition claims. The plaintiffs seek unspecified damages and unjunctive relief. They claim to be bringing the complaint on behalf of all DIRECTV dealers, including former PRIMESTAR and USSB dealers. DIRECTV and Hughes have filed a motion to stay and compel arbitration with each of the individual plaintiffs pursuant to the arbitration clause in each of the dealer's contracts with DIRECTV, and will vigorously defend against these allegations. From August 6 through 9, 2001, five purported class actions (Wurzel v. Cornelius, et al.; Selden Realty Association, Inc.v. Hughes Electronics Corporation, et al.; Weilheimer v. Cornelius, et al, Kopelman v. Cornelius, et al, and Lerner v. Cornelius, et al.) were filed on behalf of owners of GM Class H shares against Hughes Electronics Corporation, General Motors Corporation and the Hughes directors in Delaware Chancery Court. A sixth purported class action was filed against Hughes and the Hughes directors only in Superior Court in Los Angeles, California (Salamone v. Hughes Electronics Corporation, et al.). The lawsuits allege that News Corp has been favored as a bidder to purchase Hughes over EchoStar to benefit GM in violation of alleged fiduciary duties. GM, Hughes and the director defendants believe these actions are without merit and intend to vigorously defend the lawsuits. As previously reported, General Electric Capital Corporation ("GECC") and DIRECTV 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(R) programming. Under the contract, GECC also agreed to provide certain related services to DIRECTV, including credit risk scoring, billing and collections services. DIRECTV agreed to act as a surety for loans complying with the terms of the contract. Hughes guaranteed DIRECTV's performance under the contract. A complaint and counterclaim were filed by the parties in the U.S. District Court for the District of Connecticut concerning GECC's performance and DIRECTV's obligation to act as a surety. A trial commenced on June 12, 2000 with GECC presenting evidence to the jury for damages of $157 million. DIRECTV sought damages from GECC of $45 million. On July 21, 2000, the jury returned a verdict in favor of GECC and awarded contract damages in the amount of $133.0 million. The trial judge issued an order granting GECC $48.5 million in interest under Connecticut's offer-of-judgment statute. With this order, the total judgment entered in GECC's favor was $181.5 million. Hughes and DIRECTV filed a notice of appeal on December 29, 2000. The appeal briefs have been submitted and oral argument is expected in mid-September 2001. Hughes and DIRECTV believe that it is reasonably possible that the jury verdict will be overturned and a new trial granted. However, if Hughes were not to prevail in this matter, Hughes could be required to make a cash payment to GECC that would be material to Hughes' consolidated financial statements. (b) Previously reported legal proceedings which have been terminated, either during the quarter ended June 30, 2001, or subsequent thereto, but before the filing of this report are summarized below: On June 16, 2000 the Michigan Department of Environmental Quality ("MDEQ") proposed a settlement payment in excess of $100,000 for alleged violations of Federal and State air regulations at the Powertrain Saginaw Metal Casting Operations plant in Saginaw, Michigan. The alleged violations involved the lack of proper approvals and are not related to any degradation of the environment. GM has entered into a Consent Order with MDEQ providing for a settlement payment of $113,551 and GM's agreement to retire certain emission credits. * * * * * * * - 19 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The annual meeting of stockholders of the Registrant was held on June 5, 2001. At that meeting, the following matters were submitted to a vote of the stockholders of General Motors Corporation: 2001 General Motors Annual Meeting Final Voting Results (All classes of common stock) Proposal Voting Results - -------- -------------- Votes* Percent** ------- --------- Item No. 1 Nomination and Election of Directors The Judges subscribed and delivered a certificate reporting that the following nominees for directors had received the number of votes* set opposite their respective names. Percy N. Barnevik For 573,168,914 97.9% Withheld 12,401,942 2.1 John H. Bryan For 572,996,632 97.9 Withheld 12,574,224 2.1 Thomas E. Everhart For 572,850,898 97.8 Withheld 12,719,958 2.2 George M. C. Fisher For 573,075,562 97.9 Withheld 12,495,294 2.1 Nobuyuki Idei For 573,157,584 97.9 Withheld 12,413,272 2.1 Karen Katen For 573,177,514 97.9 Withheld 12,393,342 2.1 J. Willard Marriott, Jr. For 567,606,022 96.9 Withheld 17,964,834 3.1 Eckhard Pfeiffer For 573,023,176 97.9 Withheld 12,547,680 2.1 John F. Smith, Jr. For 572,937,961 97.9 Withheld 12,632,895 2.1 G. Richard Wagoner, Jr. For 573,081,090 97.8 Withheld 12,489,766 2.2 Lloyd D. Ward For 572,947,661 97.8 Withheld 12,623,195 2.2 Item No. 2 A proposal of the Board of For 568,018,041 97.0% Directors that the stockholders Against 13,318,842 2.3 ratify the selection of Abstain 4,233,973 0.7 Deloitte & Touche LLP as independent public accountants for the year 2001. Item No. 3 A stockholder proposal that For 25,578,653 5.3% GM provide each year a detailed Against 401,971,911 82.5 report of accidents caused by Abstain 59,527,914 12.2 driver distraction due to driver use of the internet or cell phones in General Motors cars. Item No. 4 A stockholder proposal that For 24,688,891 5.1% the Board of Directors take Against 453,473,021 93.1 necessary steps to nominate Abstain 8,916,568 1.8 at least two candidates for each open board position. Item No. 5 A stockholder proposal to For 31,809,541 6.5% establish policies on slave or Against 428,942,430 88.1 forced labor in China. Abstain 26,326,507 5.4 - 20 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - continued Proposal Voting Results - -------- -------------- Votes* Percent** ------- --------- Item No. 6 A stockholder proposal that For 25,943,416 5.3% stockholders have the Against 452,051,417 92.8 opportunity for an advisory Abstain 9,083,646 1.9 vote on the members of the board audit committee. Item No. 7 A stockholder proposal that For 56,150,087 11.5% GM's spin-off companies retain Against 420,258,198 86.3 GM's good corporate governance Abstain 10,670,193 2.2 standards. Item No. 8 A stockholder proposal to For 198,659,893 40.8% request stockholder vote to Against 280,523,112 57.6 be required to adopt or Abstain 7,895,473 1.6 maintain a poison pill. Item No. 9 A stockholder proposal to For 26,960,559 5.5% double director compensation Against 450,673,710 92.5 in years when market share Abstain 9,444,211 2.0 increases. Item No. 10 A stockholder proposal For 63,533,448 13.0% requesting a transition to Against 408,266,011 83.8 independent directors Abstain 15,279,019 3.2 for each key board committee seat as openings occur. Item No. 11 A stockholder proposal For 92,301,920 19.0% requesting opportunity to Against 379,684,312 78.0 vote on Golden Parachutes. Abstain 15,092,248 3.0 Item No. 12 A stockholder proposal that GM For 19,844,604 4.1% engage the services of a Against 459,623,016 94.4 nationally recognized Abstain 7,610,859 1.5 investment banker. * Numbers represent the aggregate voting power of all votes cast as of June 5, 2001 with holders of GM $1-2/3 par value common stock casting one vote per share and holders of GM Class H common stock casting 0.2 vote per share, which represents the applicable voting power after the three-for-one stock split of the GM Class H common stock in the form of a 200% stock dividend, paid on June 30, 2000 to GM Class H common stockholders of record on June 13, 2000. ** Percentages represent the aggregate voting power of both classes of GM common stock cast for each item. * * * * * * - 21- GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 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 23 (b) REPORTS ON FORM 8-K. Ten reports on Form 8-K, dated April 3, 2001 (2), April 6, 2001, April 18, 2001 (2), April 20, 2001, May 1, 2001, May 25, 2001 (2), and June 1, 2001 were filed during the quarter ended June 30, 2001 reporting matters under Item 5, Other Events. Two reports on Form 8-K dated April 17, 2001 and June 11, 2001 were submitted to the Securities and Exchange Commission under Item 9, Regulation FD Disclosure. Pursuant to General Instruction B of Form 8-K the report submitted under Item 9 on June 11, 2001 is not deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 and we are not subject to the liabilities of that section. We are not incorporating, and will not incorporate by reference that report into a filing under the Securities Act or the Exchange Act. * * * * * * 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: August 14, 2001 /s/Peter R. Bible - --------------------- ------------------------------------------ (Peter R. Bible, Chief Accounting Officer) - 22- EX-99 3 june01-ex99081401.txt HUGHES SECOND QUARTER 2001 INFORMATION EXHIBIT 99 HUGHES ELECTRONICS CORPORATION FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS CONSOLIDATED STATEMENTS OF OPERATIONS AND AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS) (Unaudited) Three Months Six Months Ended Ended June 30, June 30, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- (Dollars in Millions) Revenues Direct broadcast, leasing and other services............................ $1,738.6 $1,565.4 $3,436.8 $3,037.8 Product sales........................ 246.5 271.6 441.3 502.3 -------- -------- -------- -------- Total Revenues..................... 1,985.1 1,837.0 3,878.1 3,540.1 -------- -------- -------- -------- Operating Costs and Expenses Broadcast programming and other costs............................... 786.6 686.7 1,525.3 1,354.5 Cost of products sold................ 189.2 245.9 343.7 434.4 Selling, general and administrative expenses............................ 927.3 724.8 1,813.9 1,418.9 Depreciation and amortization........ 305.0 224.6 570.7 434.8 -------- -------- -------- -------- Total Operating Costs and Expenses.......................... 2,208.1 1,882.0 4,253.6 3,642.6 -------- -------- -------- -------- Operating Loss......................... (223.0) (45.0) (375.5) (102.5) Interest income........................ 19.0 4.3 42.8 8.2 Interest expense....................... (42.8) (57.8) (93.4) (102.7) Other, net............................. (10.9) (43.3) (3.7) (282.5) -------- -------- -------- -------- Loss From Continuing Operations Before Income Taxes, Minority Interests and Cumulative Effect of Accounting Change................................ (257.7) (141.8) (429.8) (479.5) Income tax benefit..................... 74.8 54.8 124.7 276.6 Minority interests in net losses of subsidiaries.......................... 26.4 4.5 50.7 12.1 -------- -------- -------- -------- Loss from continuing operations before cumulative effect of accounting change................................ (156.5) (82.5) (254.4) (190.8) Income from discontinued operations, net of taxes.......................... -- 13.4 -- 39.8 -------- -------- -------- -------- Loss before cumulative effect of accounting change..................... (156.5) (69.1) (254.4) (151.0) Cumulative effect of accounting change, net of taxes.......................... -- -- (7.4) -- -------- -------- -------- -------- Net Loss............................... (156.5) (69.1) (261.8) (151.0) Adjustment to exclude the effect of GM purchase accounting................... 0.8 5.3 1.6 10.6 -------- -------- -------- -------- Loss excluding the effect of GM purchase accounting adjustment........ (155.7) (63.8) (260.2) (140.4) Preferred stock dividends.............. (24.1) (24.1) (48.2) (48.8) -------- -------- -------- -------- Loss Used for Computation of Available Separate Consolidated Net Income (Loss)................................ $ (179.8) $ (87.9) $ (308.4) $ (189.2) ======== ======== ======== ======== Available Separate Consolidated Net Income (Loss) Average number of shares of General Motors Class H Common Stock outstanding (in millions) (Numerator)........................... 875.9 562.7 875.7 488.0 Average Class H dividend base (in millions) (Denominator)............... 1,299.6 1,297.0 1,299.4 1,295.8 Available Separate Consolidated Net Income (Loss)......................... $ (121.2) $ (38.1) $ (207.8) $ (71.3) ======== ======== ======== ======== - -------- Reference should be made to the Notes to the Consolidated Financial Statements. - 23 - HUGHES ELECTRONICS CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31, 2001 2000 --------- ------------ (Dollars in Millions) ASSETS Current Assets Cash and cash equivalents............................ $ 1,052.3 $ 1,508.1 Accounts and notes receivable (less allowances)...... 1,235.1 1,253.0 Contracts in process................................. 154.6 186.0 Inventories.......................................... 396.1 338.0 Deferred income taxes................................ 114.3 89.9 Prepaid expenses and other........................... 881.9 778.7 --------- --------- Total Current Assets............................. 3,834.3 4,153.7 Satellites, net........................................ 4,540.2 4,230.0 Property, net.......................................... 2,027.9 1,707.8 Net Investment in Sales-type Leases.................... 196.8 221.1 Intangible Assets, net................................. 7,354.9 7,151.3 Investments and Other Assets........................... 1,514.1 1,815.4 --------- --------- Total Assets..................................... $19,468.2 $19,279.3 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts payable..................................... $ 1,367.6 $ 1,224.2 Deferred revenues.................................... 176.2 137.6 Short-term borrowings and current portion of long- term debt........................................... 908.5 24.6 Accrued liabilities and other........................ 1,257.8 1,304.5 --------- --------- Total Current Liabilities........................ 3,710.1 2,690.9 Long-Term Debt......................................... 953.1 1,292.0 Other Liabilities and Deferred Credits................. 1,580.7 1,647.3 Deferred Income Taxes.................................. 666.8 769.3 Commitments and Contingencies Minority Interests..................................... 540.2 553.7 Stockholder's Equity Capital stock and additional paid-in capital......... 10,130.1 9,973.8 Preferred stock...................................... 1,497.1 1,495.7 Retained earnings.................................... 321.6 631.6 --------- --------- Subtotal Stockholder's Equity.......................... 11,948.8 12,101.1 --------- --------- Accumulated Other Comprehensive Income (Loss) Minimum pension liability adjustment............... (16.1) (16.1) Accumulated unrealized gains on securities and derivatives....................................... 103.3 257.0 Accumulated foreign currency translation adjustments....................................... (18.7) (15.9) --------- --------- Accumulated other comprehensive income............... 68.5 225.0 --------- --------- Total Stockholder's Equity....................... 12,017.3 12,326.1 --------- --------- Total Liabilities and Stockholder's Equity....... $19,468.2 $19,279.3 ========= ========= - -------- Reference should be made to the Notes to the Consolidated Financial Statements. - 24 - HUGHES ELECTRONICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, -------------------- 2001 2000 --------- --------- (Dollars in Millions) Cash Flows from Operating Activities Net Cash Provided by (Used in) Operating Activities...... $ (97.5) $ 147.3 --------- --------- Cash Flows from Investing Activities Investment in companies, net of cash acquired............ (209.4) (103.4) Expenditures for property................................ (393.3) (405.1) Expenditures for satellites.............................. (468.1) (374.3) Proceeds from disposal of property....................... 0.2 12.0 Proceeds from sale of investments........................ 67.8 36.6 Proceeds from insurance claims........................... 132.4 36.2 --------- --------- Net Cash Used in Investing Activities.................. (870.4) (798.0) --------- --------- Cash Flows from Financing Activities Net increase in short-term borrowings.................... 437.4 295.4 Long-term debt borrowings................................ 1,144.4 3,426.5 Repayment of long-term debt.............................. (1,036.8) (3,096.0) Stock options exercised.................................. 13.9 47.9 Preferred stock dividends paid to General Motors......... (46.8) (46.8) --------- --------- Net Cash Provided by Financing Activities.............. 512.1 627.0 --------- --------- Net cash used in continuing operations................... (455.8) (23.7) Net cash provided by discontinued operations............. -- 63.1 --------- --------- Net increase (decrease) in cash and cash equivalents..... (455.8) 39.4 Cash and cash equivalents at beginning of the period..... 1,508.1 238.2 --------- --------- Cash and cash equivalents at end of the period........... $ 1,052.3 $ 277.6 ========= ========= - -------- Reference should be made to the Notes to the Consolidated Financial Statements. - 25 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 consolidated financial statements and footnotes thereto included in the Hughes Electronics Corporation ("Hughes") Annual Report on Form 10-K for the year ended December 31, 2000 and the Hughes Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, filed with the Securities and Exchange Commission ("SEC") on March 6, 2001 and May 10, 2001, respectively, and all other Hughes filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report. Certain prior period amounts have been reclassified to conform to the June 30, 2001 presentation. Revenues, operating costs and expenses, and other non-operating results for the discontinued operations of the satellite systems manufacturing businesses ("Satellite Businesses"), which were sold to The Boeing Company ("Boeing") on October 6, 2000, are excluded from Hughes' results from continuing operations for 2000. Alternatively, the financial results of the Satellite Businesses for 2000 are presented in Hughes' Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) in a single line item entitled "Income from discontinued operations, net of taxes," and the net cash flows are presented in the Condensed Consolidated Statements of Cash Flows as "Net cash provided by discontinued operations." See further discussion in Note 8. The accompanying consolidated financial statements include the applicable portion of intangible assets, including goodwill, and related amortization resulting from the purchase accounting adjustment associated with General Motors Corporation's ("GM") purchase of Hughes in 1985, of which a substantial portion is allocated to the Satellite Businesses. Note 2. Accounting Policies Accounting Change Hughes adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities on January 1, 2001. In accordance with the transition provisions of SFAS No. 133, Hughes recorded a one-time after-tax charge of $7.4 million on January 1, 2001 as a cumulative effect of accounting change in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) and an after- tax unrealized gain of $0.4 million in Other Comprehensive Income (Loss) ("OCI"). SFAS No. 133 requires Hughes to carry all derivative financial instruments on the balance sheet at fair value. Hughes uses derivative contracts to minimize the financial impact of changes in the fair value of recognized assets, liabilities, and unrecognized firm commitments, or the variability of cash flows associated with forecasted transactions in accordance with internal risk management policies. Changes in fair value of designated, qualified and effective fair value hedges are recognized in earnings as offsets to the changes in fair value of the related hedged items. Changes in fair value of designated, qualified and effective cash flow hedges are deferred and recorded as a component of OCI until the hedged transactions occur and are recognized in earnings. The ineffective portion and changes related to amounts excluded from the effectiveness assessment of a hedging derivative's change in fair value are immediately recognized in "Other, net." Hughes assesses, both - 26 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) at the inception of the hedge and on an on-going basis, whether the derivatives are highly effective. Hedge accounting is prospectively discontinued when hedge instruments are no longer highly effective. In addition to derivative contracts entered into for hedging purposes, Hughes holds financial instruments obtained in connection with supplier contracts, such as stock purchase warrants, which are also accounted for as derivatives under SFAS No. 133. Adjustments to the fair value of these non-hedging derivative instruments are reflected in "Other, net." The net deferred loss from effective cash flow hedges in OCI of $1.1 million at June 30, 2001 is expected to be recognized in earnings during the next twelve months. New Accounting Standards In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after July 1, 2001 be accounted for using the purchase method. SFAS No. 142 requires that existing and future goodwill and intangible assets with indefinite lives not be amortized, but written down, as needed, based upon an impairment analysis that must occur at least annually. All other intangible assets are amortized over their estimated useful lives. Hughes will be required to adopt SFAS No. 142 on January 1, 2002 which will require an assessment of goodwill and intangible assets acquired prior to July 1, 2001. Intangible assets that no longer qualify for separate accounting, if any, will be combined with goodwill, while certain intangible assets not previously identified, if any, may be prospectively accounted for separately from goodwill. Management is currently assessing the impact of these standards on Hughes' results of operations and financial position. Goodwill amortization for the six months ended June 30, 2001 was $101.7 million. These statements will have no impact on Hughes' consolidated cash flows. Note 3. Inventories Major Classes of Inventories June 30, December 31, 2001 2000 -------- ------------ (Dollars in Millions) Productive materials and supplies...................... $ 75.2 $ 89.5 Work in process........................................ 149.3 128.3 Finished goods......................................... 171.6 120.2 ------ ------ Total................................................ $396.1 $338.0 ====== ====== - 27 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 4. Comprehensive Income (Loss) Hughes' total comprehensive income (loss) was as follows: Three Months Six Months Ended June 30, Ended June 30, ---------------- ---------------- 2001 2000 2001 2000 ------- ------- ------- ------- (Dollars in Millions) Net loss............................... $(156.5) $ (69.1) $(261.8) $(151.0) Other comprehensive income (loss): Foreign currency translation adjustments......................... (4.0) 6.2 (2.8) (19.1) Cumulative effect of accounting change.............................. -- -- 0.4 -- Unrealized gains (losses) on securities and derivatives: Unrealized holding gains (losses).. 19.4 (189.2) (130.5) (18.2) Less: reclassification adjustment for gains recognized during the period............................ (1.3) -- (23.6) -- ------- ------- ------- ------- Other comprehensive income (loss).. 14.1 (183.0) (156.5) (37.3) ------- ------- ------- ------- Total comprehensive loss......... $(142.4) $(252.1) $(418.3) $(188.3) ======= ======= ======= ======= Note 5. Available Separate Consolidated Net Income (Loss) GM Class H common stock is a "tracking stock" of GM designed to provide holders with financial returns based on the financial performance of Hughes. Holders of GM Class H common stock have no direct rights in the equity or assets of Hughes, but rather have rights in the equity and assets of GM (which includes 100% of the stock of Hughes). Amounts available for the payment of dividends on GM Class H common stock are based on the Available Separate Consolidated Net Income (Loss) ("ASCNI") of Hughes. The ASCNI of Hughes is determined quarterly and is equal to the net income (loss) of Hughes, excluding the effects of the GM purchase accounting adjustment arising from GM's acquisition of Hughes and reduced by the effects of preferred stock dividends paid and/or payable to GM (earnings (loss) used for computation of ASCNI), multiplied by a fraction, the numerator of which is equal to the weighted-average number of shares of GM Class H common stock outstanding during the period (875.9 million and 562.7 million during the second quarters of 2001 and 2000, respectively) and the denominator of which is a number equal to the weighted-average number of shares of GM Class H common stock which, if issued and outstanding, would represent 100% of the tracking stock interest in the earnings of Hughes (Average Class H dividend base). The Average Class H dividend base was 1,299.6 million and 1,297.0 million during the second quarters of 2001 and 2000, respectively. 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. During the second quarter of 2000, GM completed an exchange offer in which GM repurchased 86 million shares of GM $1 2/3 par value common stock and issued 92 million shares (prior to giving effect to the stock split during 2000) of GM Class H common stock. In addition, on June 12, 2000, GM contributed approximately 54 million shares (prior to giving effect to the stock split during 2000) and approximately 7 million shares (prior to the stock split during 2000) of GM Class H common stock to its U.S. Hourly-Rate Employees Pension Plan and VEBA trust, respectively. - 28 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On June 6, 2000, the GM Board declared a three-for-one stock split of the GM Class H common stock. The stock split was in the form of a 200% stock dividend, paid on June 30, 2000 to GM Class H common stockholders of record on June 13, 2000. As a result, the number of shares of GM Class H common stock presented for all periods have been adjusted to reflect the stock split, unless otherwise noted. Since 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, 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 may purchase Class H common stock on the open market. Upon purchase, these shares are retired and therefore decrease the numerator and denominator of the fraction referred to above. Note 6. Hughes Series A Preferred Stock On June 24, 1999, as part of a strategic alliance with Hughes, America Online, Inc. ("AOL") invested $1.5 billion in shares of GM Series H preference stock. The GM Series H preference stock will automatically convert on June 24, 2002 into GM Class H common stock based upon a variable conversion factor linked to the GM Class H common stock price at the time of conversion, and accrues quarterly dividends at a rate of 6.25% per year. It may be converted earlier in certain limited circumstances. GM immediately invested the $1.5 billion received from AOL in shares of Hughes Series A Preferred Stock designed to correspond to the financial terms of the GM Series H preference stock. Dividends on the Hughes Series A Preferred Stock are payable to GM quarterly at an annual rate of 6.25%. The underwriting discount on the Hughes Series A Preferred Stock is amortized over three years. Upon conversion of the GM Series H preference stock into GM Class H common stock, Hughes will redeem the Hughes Series A Preferred Stock through a cash payment to GM equal to the fair market value of the GM Class H common stock issuable upon the conversion. Simultaneous with GM's receipt of the cash redemption proceeds, GM will make a capital contribution to Hughes of the same amount. Note 7. Short-Term Borrowings and Long-Term Debt Short-Term Borrowings and Current Portion of Long-Term Debt Interest Rates at June 30, June 30, December 31, 2001 2001 2000 ----------- -------- ------------ (Dollars in Millions) Revolving credit facility................. 4.96% $450.0 Other short-term borrowings............... 10.00% 3.4 $ 3.4 Current portion of long-term debt......... 4.92%-9.36% 455.1 21.2 ------ ----- Total short-term borrowings and current portion of long-term debt.............. $908.5 $24.6 ====== ===== - 29 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Long-Term Debt Interest Rates at June 30, June 30, December 31, 2001 2001 2000 ------------ -------- ------------ (Dollars in Millions) Notes payable............................. 4.92%-6.88% $ 796.5 $ 817.7 Revolving credit facilities............... 6.39%-6.57% 583.3 464.9 Other debt................................ 9.36%-12.37% 28.4 30.6 -------- -------- Total debt.............................. 1,408.2 1,313.2 Less current portion...................... 455.1 21.2 -------- -------- Total long-term debt.................... $ 953.1 $1,292.0 ======== ======== Note 8. Acquisitions, Investments and Divestitures Acquisitions and Investments On May 1, 2001, DIRECTV Latin America, LLC ("DLA"), which operates the Latin America DIRECTV business, acquired from Grupo Clarin S.A. ("Clarin") a 51% ownership interest in Galaxy Entertainment Argentina S.A. ("GEA"), a local operating company in Argentina that provides direct-to-home broadcast services, and other assets, consisting primarily of programming and advertising rights. The purchase price, valued at $169 million, consisted of a 3.98% ownership interest in DLA and a put option that will allow Clarin to sell in November 2003 its 3.98% interest back to DLA for $195 million in cash. As a result of the transaction, Hughes' interest in DLA decreased from 77.8% to 74.7% and Hughes' ownership in GEA increased from 20% to 58.1%. Hughes' portion of the purchase price, which amounted to about $130 million, was recorded as an increase to additional paid in capital with the offset allocated to the net assets acquired, including goodwill. On April 3, 2001, Hughes acquired Telocity Delaware, Inc. ("Telocity"), a company that provides land-based digital subscriber line ("DSL") services, through the completion of a tender offer and merger. Telocity is now operating as DIRECTV Broadband, Inc., and is included as part of the Direct-To-Home Broadcast segment. The purchase price, which totaled $197.8 million in cash, will be allocated to the net assets acquired (primarily goodwill) prior to year end. The June 30, 2001 consolidated financial statements reflect a preliminary allocation of the purchase price for the Telocity transaction based upon information currently available. Adjustments relating to tangible and intangible assets and accrued liabilities are estimates pending the completion of independent appraisals currently in process. Additionally, the preliminary purchase price allocation assumes that Hughes will make an election to treat the transaction as an asset acquisition for income tax purposes, pending further analysis by Hughes management. The purchase price allocation is expected to be completed by December 31, 2001. - 30 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following selected unaudited pro forma information is being provided to present a summary of the combined results of Hughes and Telocity for 2001 and 2000 as if the acquisition had occurred as of the beginning of the respective periods, giving effect to purchase accounting adjustments. The pro forma data is presented for informational purposes only and may not necessarily reflect the results of operations of Hughes had Telocity operated as part of Hughes for each of the periods presented, nor are they necessarily indicative of the results of future operations. The pro forma information excludes the effect of non-recurring charges. Six Months Ended June 30, ------------------ 2001 2000 -------- -------- (Dollars in Millions) Total revenues........................................... $3,886.2 $3,541.9 Net loss................................................. (309.5) (219.2) On January 1, 2001, DLA acquired from Bavaria S.A. an additional 14.2% ownership interest in Galaxy Entretenimiento de Colombia ("GEC"), a DLA local operating company located in Colombia. As a result of the transaction, Hughes' ownership interest in GEC increased from 44.2% to 55.2%. The purchase price consisted of prior capital contributions of $4.4 million made by DLA during 2000 on behalf of Bavaria S.A. The above acquisitions were accounted for using the purchase method of accounting and resulted in their consolidation from their respective dates of acquisition. Accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair values of the net assets acquired has been recorded as goodwill, resulting in goodwill additions of $341.9 million for the six months ended June 30, 2001. Divestitures On October 6, 2000, Hughes completed the sale of its Satellite Businesses for $3.75 billion in cash, plus the estimated book value of the closing net assets of the businesses sold in excess of a target amount. The transaction resulted in the recognition of a pre-tax gain of $2,036.0 million, or $1,132.3 million after-tax. Included in this gain is a net after-tax curtailment loss of $42 million related to pension and other postretirement benefit plan assets and liabilities associated with the Satellite Businesses. The purchase price is subject to adjustment based upon the final closing net assets as discussed in Note 10. Summarized financial information for the discontinued operations (excluding intercompany transactions) follows: Six Months Ended June 30, 2000 ---------------- (Dollars in Millions) Revenues.................................................... $801.2 Income tax provision........................................ 23.8 Net income.................................................. 39.8 In a separate, but related transaction, Hughes also sold to Boeing its 50% interest in HRL Laboratories LLC ("HRL") for $38.5 million, which represented the net book value of HRL at October 6, 2000. On March 1, 2000, Hughes announced that the operations of DIRECTV Japan Management, Inc., DIRECTV Japan, Inc., and certain related companies (collectively "DIRECTV Japan") would be discontinued. Pursuant to an agreement with Japan Digital Broadcasting Services Inc. (now named Sky Perfect - 31 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Communications, Inc. or "Sky Perfect"), qualified subscribers to the DIRECTV Japan service were offered the opportunity to migrate to the Sky Perfect service, for which DIRECTV Japan was paid a commission for each subscriber who actually migrated and Hughes acquired a 6.6% interest in Sky Perfect. As a result, Hughes wrote-off its net investment in DIRECTV Japan of $164.6 million and accrued exit costs of $403.7 million and involuntary termination benefits of $14.5 million. Accrued exit costs consist of claims arising out of contracts with dealers, manufacturers, programmers and others, satellite transponder and facility and equipment leases, subscriber migration and termination costs, and professional service fees and other. The write-off and accrual were partially offset by the difference between the cost of the Sky Perfect shares acquired and the estimated fair value of the shares ($428.8 million), as determined by an independent appraisal, and by $40.2 million for anticipated contributions from other DIRECTV Japan shareholders. The net effect of the transaction was a charge to "Other, net" of $170.6 million at March 31, 2000. In the fourth quarter of 2000, $106.6 million of accrued exit costs were reversed and $0.6 million of involuntary termination benefits were added, resulting in a net credit adjustment to "Other, net" of $106.0 million. The adjustments made to the exit cost accrual were primarily attributable to earlier than anticipated cessation of the DIRECTV Japan broadcasting service, greater than anticipated commission payments for subscriber migration and favorable settlements of various contracts and claims. About $22.4 million was paid for accrued exit costs and no payments were made for involuntary termination benefits during the second quarter of 2001. The balances remaining at June 30, 2001 for accrued exit costs and involuntary termination benefits were $78.7 million and $0.9 million, respectively. DIRECTV Japan employed approximately 290 personnel as of March 31, 2000, of which 244 were terminated during 2000. All remaining personnel were terminated in the first quarter of 2001. In the fourth quarter of 2000, Sky Perfect completed an initial public offering, at which date the fair value of Hughes' interest (diluted by the public offering to approximately 5.3%) in Sky Perfect was approximately $343 million. In the fourth quarter of 2000, a portion of the decline in the value of the Sky Perfect investment was determined to be "other than temporary" based on investment research analysis, resulting in a write-down of the carrying value of the investment by $86 million from $428.8 million to $342.8 million. At June 30, 2001, the market value of the investment was $123.5 million, or $219.3 million less than the carrying value at that date. Hughes believes that this decrease represents a temporary decline in value, and as a result, has recorded this change as an unrealized loss, net of taxes, as part of OCI. If the market value of the Sky Perfect investment does not recover significantly, Hughes may be required to record an additional adjustment for an "other than temporary" decline as a charge to earnings prior to year-end. Note 9. Segment Reporting Hughes' segments, which are differentiated by their products and services, include Direct-To-Home Broadcast, Satellite Services, and Network Systems. Direct-To-Home Broadcast is engaged in acquiring, promoting, selling and/or distributing digital entertainment programming via satellite to residential and commercial customers and providing land-based DSL services. Satellite Services is engaged in the selling, leasing and operating of satellite transponders and providing services for cable television systems, news companies, Internet service providers and private business networks. The Network Systems segment is a provider of satellite-based private business networks and broadband Internet access, and a supplier of DIRECTV(TM) receiving equipment (set-top boxes and dishes). Other includes the corporate office and other entities. - 32 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Selected information for Hughes' operating segments are reported as follows:
Direct-To- Home Satellite Network Broadcast Services Systems Other Eliminations Total ---------- --------- ------- ------ ------------ -------- (Dollars in Millions) For the Three Months Ended: June 30, 2001 External Revenues....... $1,524.1 $168.4 $ 284.3 $ 8.3 -- $1,985.1 Intersegment Revenues... 3.6 39.9 17.9 -- $ (61.4) -- -------- ------ ------- ------ ------- -------- Total Revenues.......... $1,527.7 $208.3 $ 302.2 $ 8.3 $ (61.4) $1,985.1 ======== ====== ======= ====== ======= ======== Operating Profit (Loss)................. $ (182.9) $ 32.8 $ (56.5) $(22.9) $ 6.5 $ (223.0) June 30, 2000 External Revenues....... $1,241.3 $286.1 $ 304.8 $ 4.8 -- $1,837.0 Intersegment Revenues... 10.9 36.2 67.0 2.2 $(116.3) -- -------- ------ ------- ------ ------- -------- Total Revenues.......... $1,252.2 $322.3 $ 371.8 $ 7.0 $(116.3) $1,837.0 ======== ====== ======= ====== ======= ======== Operating Profit (Loss)................. $ (134.8) $139.8 $ (17.1) $(31.2) $ (1.7) $ (45.0) For the Six Months Ended: June 30, 2001 External Revenues....... $3,010.1 $334.9 $ 517.6 $ 15.5 -- $3,878.1 Intersegment Revenues... 7.5 78.6 32.8 0.1 $(119.0) -- -------- ------ ------- ------ ------- -------- Total Revenues.......... $3,017.6 $413.5 $ 550.4 $ 15.6 $(119.0) $3,878.1 ======== ====== ======= ====== ======= ======== Operating Profit (Loss)................. $ (328.4) $ 73.9 $(109.1) $(21.4) $ 9.5 $ (375.5) June 30, 2000 External Revenues....... $2,408.0 $550.5 $ 573.8 $ 7.8 -- $3,540.1 Intersegment Revenues... 18.0 70.9 162.5 2.8 $(254.2) -- -------- ------ ------- ------ ------- -------- Total Revenues.......... $2,426.0 $621.4 $ 736.3 $ 10.6 $(254.2) $3,540.1 ======== ====== ======= ====== ======= ======== Operating Profit (Loss)................. $ (260.8) $267.1 $ (17.0) $(60.7) $ (31.1) $ (102.5)
Note 10. Contingencies In connection with the sale by Hughes of the Satellite Businesses to Boeing, the terms of the stock purchase agreement provide for an adjustment to the purchase price based upon the final closing net assets of the Satellite Businesses compared to the estimated closing net assets. The stock purchase agreement also provides a process for resolving any disputes that might arise in connection with the final determination of the final closing net assets. Boeing has submitted proposed changes to the closing net assets, and Hughes is currently in discussions with Boeing to achieve a resolution. Although Hughes believes it has adequately provided for an adjustment to the purchase price, the total amount of any such adjustment cannot be determined at this time. It is possible that the ultimate resolution of this matter could result in Hughes making a cash payment to Boeing that would be material to Hughes' consolidated financial statements. Additionally, as part of the sale of the Satellite Businesses, Hughes retained limited liability for certain possible fines and penalties and the financial consequences of debarment associated with potential criminal - 33 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) violations of U.S. export control laws, which are currently being investigated, related to the businesses now owned by Boeing, should such sanctions be imposed by either the Department of Justice or State Department against the Satellite Businesses. Hughes does not expect any sanctions imposed to have a material adverse effect on its consolidated financial statements. In connection with the 1997 spin-off of Hughes' defense electronics business and the subsequent merger of that business with Raytheon, the terms of the merger agreement provided processes for resolving disputes that might arise in connection with post-closing financial adjustments that were also called for by the terms of the merger agreement. These financial adjustments might require a cash payment from Raytheon to Hughes or vice versa. A dispute currently exists regarding the post-closing adjustments which Hughes and Raytheon have proposed to one another and related issues regarding the adequacy of disclosures made by Hughes to Raytheon in the period prior to consummation of the merger. Hughes and Raytheon are proceeding with the dispute resolution process. It is possible that the ultimate resolution of the post- closing financial adjustment and of related disclosure issues may result in Hughes making a payment to Raytheon that would be material to Hughes. However, the amount of any payment that either party might be required to make to the other cannot be determined at this time. Hughes intends to vigorously pursue resolution of the disputes through the arbitration processes, opposing the adjustments proposed by Raytheon, and seeking the payment from Raytheon that Hughes has proposed. General Electric Capital Corporation ("GECC") and DIRECTV 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(R) programming. Under the contract, GECC also agreed to provide certain related services to DIRECTV, including credit risk scoring, billing and collections services. DIRECTV agreed to act as a surety for loans complying with the terms of the contract. Hughes guaranteed DIRECTV's performance under the contract. A complaint and counterclaim were filed by the parties in the U.S. District Court for the District of Connecticut concerning GECC's performance and DIRECTV's obligation to act as a surety. A trial commenced on June 12, 2000 with GECC presenting evidence to the jury for damages of $157 million. DIRECTV sought damages from GECC of $45 million. On July 21, 2000, the jury returned a verdict in favor of GECC and awarded contract damages in the amount of $133.0 million. The trial judge issued an order granting GECC $48.5 million in interest under Connecticut's offer-of-judgment statute. With this order, the total judgment entered in GECC's favor was $181.5 million. Hughes and DIRECTV filed a notice of appeal on December 29, 2000. The appeal briefs have been submitted and oral argument is expected in mid-September 2001. Hughes and DIRECTV believe that it is reasonably possible that the jury verdict will be overturned and a new trial granted. However, if Hughes were not to prevail in this manner, Hughes could be required to make a cash payment to GECC that would be material to Hughes' consolidated financial statements. Hughes Communications Galaxy, Inc. ("HCGI") filed a lawsuit on March 22, 1991 against the U.S. Government based upon the National Aeronautics and Space Administration's breach of contract to launch ten satellites on the Space Shuttle. The U.S. Court of Federal Claims granted HCGI's motion for summary judgment on the issue of liability on November 30, 1995. A trial was held on May 1, 1998 on the issue of damages. On June 30, 2000, a final judgment was entered in favor of HCGI in the amount of $103 million. On July 13, 2000, HCGI filed a notice to appeal the judgment with the U.S. Court of Appeals for the Federal Circuit and is requesting a greater amount than was previously awarded to HCGI. On August 4, 2000, the Government filed its cross appeal. As a result of the uncertainty regarding the outcome of this matter, no amount has been recorded in - 34 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Concluded) the consolidated financial statements to reflect the award. Oral arguments were heard on July 11, 2001. Final resolution of this issue could result in a gain that would be material to Hughes. Litigation is subject to uncertainties and the outcome of individual litigated matters is not predictable with assurance. In addition to the above items, various legal actions, claims, and proceedings are pending against Hughes, including those arising out of alleged breaches of contractual relationships; antitrust and patent infringement matters; and other items arising in the ordinary course of business. Hughes has established reserves for matters in which losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or other treble damage claims, or sanctions, that if granted, could require Hughes to pay damages or make other expenditures in amounts that are not currently estimable. After discussion with counsel, it is the opinion of management that such liability is not expected to have a material adverse effect on Hughes' consolidated financial statements. Hughes purchases in-orbit and launch insurance for its satellite fleet to mitigate the potential financial impact of in-orbit and launch failures. The insurance generally does not compensate for business interruption or loss of future revenues or customers. Certain of Hughes' insurance policies contain exclusions related to known anomalies and Hughes is self-insured for certain other satellites. The portion of the book value of satellites that were self- insured or with coverage exclusions amounted to approximately $964.9 million at June 30, 2001. Note 11. Subsequent Event On July 31, 2001, Hughes sold a 3% interest in Thomson Multimedia S. A. for approximately $132 million in cash, resulting in a pre-tax gain of approximately $108 million that will be recognized in the third quarter of 2001. - 35 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY DATA Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- (Dollars in Millions) (Unaudited) Consolidated Statements of Operations Data: Total revenues........................ $1,985.1 $1,837.0 $3,878.1 $3,540.1 Total operating costs and expenses.... 2,208.1 1,882.0 4,253.6 3,642.6 -------- -------- -------- -------- Operating loss........................ (223.0) (45.0) (375.5) (102.5) Other expenses, net................... (34.7) (96.8) (54.3) (377.0) Income tax benefit.................... 74.8 54.8 124.7 276.6 Minority interests in net losses of subsidiaries......................... 26.4 4.5 50.7 12.1 -------- -------- -------- -------- Loss from continuing operations before cumulative effect of accounting change............................... (156.5) (82.5) (254.4) (190.8) Income from discontinued operations, net of taxes......................... -- 13.4 -- 39.8 Cumulative effect of accounting change, net of taxes................. -- -- (7.4) -- -------- -------- -------- -------- Net loss.............................. (156.5) (69.1) (261.8) (151.0) Adjustment to exclude the effect of GM purchase accounting.................. 0.8 5.3 1.6 10.6 Preferred stock dividends............. (24.1) (24.1) (48.2) (48.8) -------- -------- -------- -------- Loss Used for Computation of Available Separate Consolidated Net Income (Loss)............................... $ (179.8) $ (87.9) $ (308.4) $ (189.2) ======== ======== ======== ======== Other Data: EBITDA(1)............................. $ 82.0 $ 179.6 $ 195.2 $ 332.3 EBITDA Margin(1)...................... 4.1% 9.8% 5.0% 9.4% Depreciation and amortization......... $ 305.0 $ 224.6 $ 570.7 $ 434.8 Capital expenditures.................. 510.2 365.1 861.4 779.4 June 30, 2001 December 31, (Unaudited) 2000 ----------- ------------ (Dollars in Millions) Consolidated Balance Sheet Data: Cash and cash equivalents.............................. $ 1,052.3 $ 1,508.1 Total current assets................................... 3,834.3 4,153.7 Total assets........................................... 19,468.2 19,279.3 Total current liabilities.............................. 3,710.1 2,690.9 Long-term debt......................................... 953.1 1,292.0 Minority interests..................................... 540.2 553.7 Total stockholder's equity............................. 12,017.3 12,326.1 - -------- (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 accounting principles generally accepted in the United States of America. Hughes management believes it is a meaningful measure of performance and is commonly used by other communications, entertainment and media service providers. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect funds available for investment in the business of Hughes, dividends or other discretionary uses. EBITDA margin is calculated by dividing EBITDA by total revenues. EBITDA and EBITDA margin as presented herein may not be comparable to similarly titled measures reported by other companies. - 36 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) SUMMARY DATA--Concluded Selected Segment Data (Unaudited) Direct- To-Home Satellite Network Eliminations Broadcast Services Systems and Other Total --------- --------- ------- ------------ -------- (Dollars in Millions) For the Three Months Ended: June 30, 2001 Total Revenues........... $1,527.7 $208.3 $ 302.2 $ (53.1) $1,985.1 -------- ------ ------- ------- -------- Operating Profit (Loss).. $ (182.9) $ 32.8 $ (56.5) $ (16.4) $ (223.0) Operating Profit Margin.. N/A 15.7% N/A N/A N/A EBITDA................... $ (1.3) $134.5 $ (36.8) $ (14.4) $ 82.0 EBITDA Margin............ N/A 64.6% N/A N/A 4.1% -------- ------ ------- ------- -------- Depreciation and Amortization............ $ 181.6 $101.7 $ 19.7 $ 2.0 $ 305.0 Capital Expenditures..... 226.3 94.2 167.1 22.6 510.2 -------- ------ ------- ------- -------- June 30, 2000 Total Revenues........... $1,252.2 $322.3 $ 371.8 $(109.3) $1,837.0 -------- ------ ------- ------- -------- Operating Profit (Loss).. $ (134.8) $139.8 $ (17.1) $ (32.9) $ (45.0) Operating Profit Margin.. N/A 43.4% N/A N/A N/A EBITDA................... $ (14.0) $221.4 $ 0.8 $ (28.6) $ 179.6 EBITDA Margin............ N/A 68.7% 0.2% N/A 9.8% -------- ------ ------- ------- -------- Depreciation and Amortization............ $ 120.8 $ 81.6 $ 17.9 $ 4.3 $ 224.6 Capital Expenditures..... 219.1 50.2 94.2 1.6 365.1 -------- ------ ------- ------- -------- For the Six Months Ended: June 30, 2001 Total Revenues........... $3,017.6 $413.5 $ 550.4 $(103.4) $3,878.1 -------- ------ ------- ------- -------- Operating Profit (Loss).. $ (328.4) $ 73.9 $(109.1) $ (11.9) $ (375.5) Operating Profit Margin.. N/A 17.9% N/A N/A N/A EBITDA................... $ 4.7 $274.5 $ (75.1) $ (8.9) $ 195.2 EBITDA Margin............ 0.2% 66.4% N/A N/A 5.0% -------- ------ ------- ------- -------- Depreciation and Amortization............ $ 333.1 $200.6 $ 34.0 $ 3.0 $ 570.7 Capital Expenditures..... 353.9 161.4 345.3 0.8 861.4 -------- ------ ------- ------- -------- June 30, 2000 Total Revenues........... $2,426.0 $621.4 $ 736.3 $(243.6) $3,540.1 -------- ------ ------- ------- -------- Operating Profit (Loss).. $ (260.8) $267.1 $ (17.0) $ (91.8) $ (102.5) Operating Profit Margin.. N/A 43.0% N/A N/A N/A EBITDA................... $ (23.2) $422.4 $ 17.6 $ (84.5) $ 332.3 EBITDA Margin............ N/A 68.0% 2.4% N/A 9.4% -------- ------ ------- ------- -------- Depreciation and Amortization............ $ 237.6 $155.3 $ 34.6 $ 7.3 $ 434.8 Capital Expenditures..... 387.1 208.2 161.8 22.3 779.4 -------- ------ ------- ------- -------- - 37 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) The following management's discussion and analysis should be read in conjunction with the Hughes management's discussion and analysis included in the Hughes Electronics Corporation ("Hughes") Annual Report on Form 10-K for the year ended December 31, 2000 and the Hughes Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 filed with the Securities and Exchange Commission ("SEC") on March 6, 2001 and May 10, 2001, respectively, and all other Hughes filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report. This Quarterly Report may contain certain statements that Hughes believes are, or may be considered to be, "forward-looking statements," within the meaning of various provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as we "believe," "expect," "anticipate," "intend," "plan," "foresee" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause Hughes' actual results to differ materially from those contemplated by the relevant forward- looking statement. The principal important risk factors which could cause actual performance and future actions to differ materially from forward-looking statements made herein include economic conditions, product demand and market acceptance, government action, local political or economic developments in or affecting countries where Hughes has operations, ability to obtain export licenses, competition, ability to achieve cost reductions, ability to timely perform material contracts, technological risk, limitations on access to distribution channels, the success and timeliness of satellite launches, in- orbit performance of satellites, ability of customers to obtain financing, Hughes' ability to access capital to maintain its financial flexibility and the effects of any strategic transactions involving Hughes that General Motors Corporation ("GM"), the parent company of Hughes, may enter into as noted below. Additionally, the in-orbit satellites of Hughes and its 81% owned subsidiary, PanAmSat Corporation ("PanAmSat"), are subject to the risk of failing prematurely due to, among other things, mechanical failure, collision with objects in space or an inability to maintain proper orbit. Satellites are subject to the risk of launch delay and failure, destruction and damage while on the ground or during launch and failure to become fully operational once launched. Delays in the production or launch of a satellite or the complete or partial loss of a satellite, in-orbit or during launch, could have a material adverse impact on the operations of Hughes' businesses. With respect to both in-orbit and launch problems, insurance carried by Hughes and PanAmSat generally does not compensate for business interruption or loss of future revenues or customers. Hughes has, in the past, experienced technical anomalies on some of its satellites. Service interruptions caused by these anomalies, depending on their severity, could result in claims by affected customers for termination of their transponder agreements, cancellation of other service contracts or the loss of other customers. Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report and Hughes undertakes no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances. Due to rapid consolidation in the media and telecommunications industries, GM has announced that it is now considering alternative strategic transactions involving Hughes and other participants in those industries. Any such transaction might involve the separation of Hughes from GM. GM's objective in this effort is to maximize the enterprise value of Hughes for the long-term benefit of the holders of GM's Class H common stock and GM $1 2/3 par value common stock through a structure that maintains the financial strength of GM. No assurance can be given that any transaction will be agreed upon with any party or that other conditions, including any stockholder or regulatory approvals, will be satisfied. On June 6, 2000, the GM Board declared a three-for-one stock split of the GM Class H common stock. The stock split was in the form of a 200% stock dividend, paid on June 30, 2000 to GM Class H common stockholders of record on June 13, 2000. As a result, the numbers of shares of GM Class H common stock presented for all periods have been adjusted to reflect the stock split, unless otherwise noted. - 38 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) General Business Overview The continuing operations of Hughes are comprised of the following segments: Direct-To-Home Broadcast, Satellite Services and Network Systems. The satellite systems manufacturing businesses ("Satellite Businesses"), which Hughes sold to The Boeing Company ("Boeing") on October 6, 2000, are reported as discontinued operations for 2000. While 2000 includes the operating results of the Satellite Businesses through the date of sale, there are no comparable results in 2001. This transaction is discussed more fully in Note 8 to the consolidated financial statements and below in "Liquidity and Capital Resources-- Acquisitions, Investments and Divestitures." The Direct-To-Home Broadcast segment consists primarily of the DIRECTV digital multi-channel entertainment businesses located in the United States and Latin America and DIRECTV Broadband, Inc. ("DIRECTV Broadband"), formerly know as Telocity Delaware, Inc. ("Telocity"), which was acquired in April 2001. DIRECTV Broadband is a provider of digital subscriber line ("DSL") services purchased from wholesale providers. This transaction is discussed more fully in Note 8 to the consolidated financial statements and "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures," below. Since DIRECTV Broadband was purchased in April 2001, no comparative financial data is provided for 2000. The Latin America DIRECTV businesses are comprised of DIRECTV Latin America, LLC ("DLA"), which provides DIRECTV services in Latin America and the Caribbean Basin; SurFin Ltd. ("SurFin"), a company that provides financing of subscriber receiver equipment to certain DLA operating companies; Grupo Galaxy Mexicana, S.R.L. de C.V. ("GGM"), the exclusive distributor of DIRECTV in Mexico; Galaxy Brasil, Ltda. ("GLB"), the exclusive distributor of DIRECTV in Brazil; Galaxy Entretenimiento de Colombia ("GEC"), the exclusive distributor of DIRECTV in Colombia, which was acquired by DLA in January 2001; and Galaxy Entertainment Argentina S.A. ("GEA"), the exclusive distributor of DIRECTV in Argentina, which was acquired by DLA in May 2001. The results of operations for GEC and GEA have been included in Hughes' financial information since their respective dates of acquisition. See Note 8 to the consolidated financial statements and "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures," below, for further discussion. Also included as part of the 2000 non-operating results of the Direct-To- Home Broadcast segment is DIRECTV Japan Management, Inc., DIRECTV Japan, Inc., and certain related companies (collectively "DIRECTV Japan"), Hughes affiliates that provided DIRECTV services in Japan. DIRECTV Japan's operations were discontinued and ceased broadcasting on September 30, 2000. See Note 8 to the consolidated financial statements and "Liquidity and Capital Resources-- Acquisitions, Investments and Divestitures," below, for further discussion. The Satellite Services segment consists of PanAmSat, Hughes' 81% owned subsidiary. PanAmSat is a leading provider of global video and data broadcasting services via satellite. PanAmSat builds, owns and operates satellite-based networks that deliver entertainment and information to cable television systems, television broadcast affiliates, direct-to-home satellite television operators, Internet Service Providers, telecommunications companies and other corporations. PanAmSat provides satellite services to its customers primarily through long-term operating lease contracts for the full or partial use of satellite transponder capacity. The Network Systems segment consists of Hughes Network Systems ("HNS"), which is a provider of satellite-based private business networks and broadband Internet access to consumers, and a supplier of DIRECTV(TM) receiving equipment (set-top boxes and dishes). - 39 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) Satellite Fleet Hughes has a fleet of 26 satellites, five owned by DIRECTV and 21 owned and operated by PanAmSat. PanAmSat expects to add additional satellites as part of its comprehensive satellite expansion and restoration plan. The additional satellites are intended to meet the expected demand for additional satellite capacity, replace capacity affected by satellite anomalies, and provide added backup to existing capacity. In connection with this plan, six satellites have been successfully launched since December 1999 and PanAmSat expects to launch four additional satellites, currently under construction. Three of these satellites are scheduled to be launched in 2002 and the remaining satellite is scheduled to be launched in late 2002 or early 2003. DIRECTV U.S.' 4S satellite, a high-power spot-beam satellite, is currently under construction and is expected to be launched in October 2001. DIRECTV expects to use DIRECTV 4S to provide additional capacity for new local channel service or other new services beginning in 2002. Also, the high-power DIRECTV 5 satellite is expected to be launched in late 2001 as a replacement to DIRECTV 6, which will then serve as a back-up. Results of Operations Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 Revenues. Revenues for the second quarter of 2001 increased 8.1% to $1,985.1 million, compared with $1,837.0 million in the second quarter of 2000. The increased revenues resulted primarily from $275.5 million of higher revenues at the Direct-To-Home Broadcast segment over the second quarter of 2000 that resulted from the addition of 1.7 million net new subscribers in the United States and Latin America since June 30, 2000. The increased revenues from the Direct-To-Home Broadcast segment were partially offset by a decrease in revenues of $114.0 million at the Satellite Services segment and $69.6 million at the Network Systems segment. The decrease in revenues from the Satellite Services segment was principally due to $123.4 million of new outright sales and sales-type lease transactions executed during the second quarter of 2000 for which there were no comparable transactions in the second quarter of 2001. The decrease in revenues from the Network Systems segment was principally due to decreased shipments of DIRECTV receiving equipment due primarily to DIRECTV completing the conversion of the PRIMESTAR By DIRECTV customers to the high-power DIRECTV(R) service in 2000 and a decrease in manufacturing subsidies. Operating Costs and Expenses. Operating costs and expenses increased to $2,208.1 million in the second quarter of 2001 from $1,882.0 million in the second quarter of 2000. Broadcast programming and other costs increased by $99.9 million in the second quarter of 2001 from the same period in 2000 due to higher costs at the Direct-To-Home Broadcast segment resulting from the increase in subscribers and the added costs from DIRECTV Broadband. This increase was partially offset by decreased costs at the Satellite Services segment associated with the new outright sales and sales-type lease transactions executed during the second quarter of 2000 for which there were no comparable transactions in the second quarter of 2001. Costs of products sold decreased by $56.7 million in the second quarter of 2001 from the second quarter of 2000 due to the decreased shipments of DIRECTV receiving equipment. Selling, general and administrative expenses increased by $202.5 million during the second quarter of 2001 compared to the same period in 2000 due primarily to higher marketing costs at the Direct-To-Home Broadcast segment resulting from increased subscriber growth in both the United States and Latin America, added costs from DIRECTV Broadband and higher expenses at the Satellite Services segment to support the continued satellite fleet expansion and costs associated with new service initiatives. Depreciation and amortization increased by $80.4 million during the second quarter of 2001 compared to the second quarter of 2000 due to capital expenditures for property and satellites since June 30, 2000, a change in the useful life of the Galaxy VIII-i satellite that resulted from the failure of its primary propulsion system during the third quarter of 2000, and goodwill amortization and added depreciation that resulted from DIRECTV Broadband. - 40 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) 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 flows from operations, as determined in accordance with accounting principles generally accepted in the United States of America. Hughes management believes it is a meaningful measure of performance and is commonly used by other communications, entertainment and media service providers. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect funds available for investment in the business of Hughes, dividends or other discretionary uses. EBITDA margin is calculated by dividing EBITDA by total revenues. EBITDA and EBITDA margin as presented herein may not be comparable to similarly titled measures reported by other companies. EBITDA for the second quarter of 2001 was $82.0 million and EBITDA margin was 4.1%, compared to EBITDA of $179.6 million and EBITDA margin of 9.8% in the second quarter of 2000. The change in EBITDA resulted from decreased EBITDA at the Satellite Services segment principally due to the new outright sales and sales-type lease transactions executed during the second quarter of 2000 for which there were no comparable transactions in the second quarter of 2001 and higher direct operating and selling, general and administrative expenses; and lower EBITDA at the Network Systems segment primarily due to decreased shipments of DIRECTV receiving equipment and increased costs associated with the rollout of new DirecPC(R) services. These decreases were partially offset by the Direct-To-Home Broadcast segment's improved EBITDA in the second quarter of 2001 compared to 2000 that resulted from the increase in revenues discussed above, partially offset by higher marketing costs and negative EBITDA associated with DIRECTV Broadband. The change in EBITDA margin resulted primarily from losses at the Network Systems segment and DIRECTV Broadband. Operating Loss. The operating loss for the second quarter of 2001 was $223.0 million compared to an operating loss of $45.0 million in 2000. The increased operating loss resulted from the decrease in EBITDA and the higher depreciation and amortization expense. Interest Income and Expense. Interest income increased to $19.0 million for the second quarter of 2001 compared to interest income of $4.3 million for the same period of 2000 due to increased cash and cash equivalents that resulted from the sale of the Satellite Businesses in October 2000. Interest expense decreased to $42.8 million for the second quarter of 2001 from $57.8 million for the second quarter of 2000. The lower interest expense resulted primarily from lower average outstanding borrowings. The changes in cash and cash equivalents and debt are discussed in more detail below under "Liquidity and Capital Resources." Other, Net. Other, net decreased to an expense of $10.9 million for the second quarter of 2001 from an expense of $43.3 million in the same period of 2000. Other, net expense for the second quarter of 2001 and 2000 resulted primarily from equity method losses. The higher expense in 2000 resulted primarily from equity method losses for the DIRECTV Japan business, which ceased operations in the third quarter of 2000. Income Taxes. Hughes recognized an income tax benefit of $74.8 million for the second quarter of 2001, compared to $54.8 million in the second quarter of 2000. The higher tax benefit in the second quarter of 2001 is due to higher pre-tax losses in 2001, partially offset by favorable tax settlements. Loss From Continuing Operations. Hughes reported a loss from continuing operations before cumulative effect of accounting change of $156.5 million for the 2001 second quarter, compared to $82.5 million for the same period of 2000. Discontinued Operations. Revenues for the Satellite Businesses for the second quarter of 2000 were $556.6 million. Revenues, excluding intercompany transactions, for the second quarter of 2000 were $412.1 million. The Satellite Businesses reported operating profit of $35.4 million for the second quarter of 2000. Operating profit, excluding intercompany transactions, amounted to $21.3 million for the second quarter of 2000. - 41 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) Income from discontinued operations, net of taxes was $13.4 million for the second quarter of 2000. Direct-To-Home Broadcast Segment Direct-To-Home Broadcast segment second quarter 2001 revenues increased 22.0% to $1,527.7 million from $1,252.2 million in the second quarter of 2000. The Direct-To-Home Broadcast segment had negative EBITDA of $1.3 million in the second quarter of 2001 compared with negative EBITDA of $14.0 million in the second quarter of 2000. The operating loss for the segment increased to $182.9 million in the second quarter of 2001 from $134.8 million in the second quarter of 2000. United States. The DIRECTV U.S. businesses were the biggest contributors to the segment's revenue growth with revenues of $1,345 million for the second quarter of 2001, a 19% increase over second quarter 2000 revenues of $1,129 million. The large increase in revenues resulted primarily from an increased number of DIRECTV subscribers since June 30, 2000. As of June 30, 2001, DIRECTV had more than 10 million high-power subscribers compared to about 8.3 million high-power and 0.4 million PRIMESTAR By DIRECTV medium-power subscribers at June 30, 2000. DIRECTV added 175,000 net new subscribers in the second quarter of 2001, compared to 452,000 net new subscribers in the second quarter of 2000. Average monthly revenue per subscriber for the high-power business was $59 and $58 at June 30, 2001 and June 30, 2000, respectively. DIRECTV completed the conversion of the medium-power subscribers to the high-power service on September 30, 2000. EBITDA was $75 million for the second quarter of 2001 compared to EBITDA of $26 million for the second quarter of 2000. The operating loss for the second quarter of 2001 for the DIRECTV U.S. businesses was $39 million compared to $67 million in the second quarter of 2000. The increased EBITDA was due to the increased revenues discussed above, which more than offset higher programming costs that resulted from the increased number of subscribers, and higher subscriber acquisition costs. The lower operating loss resulted from the increase in EBITDA, partially offset by higher depreciation expense that resulted from an increase in customer leased DIRECTV receiving equipment. Latin America. Revenues for the Latin America DIRECTV businesses increased 43% to $175 million for the second quarter of 2001 from $122 million for the second quarter of 2000. The increase in revenues was primarily due to continued subscriber growth. Subscribers grew to about 1,431,000 at June 30, 2001 compared to about 1,010,000 at June 30, 2000. Latin America DIRECTV added about 25,000 net subscribers in the second quarter of 2001 compared to about 101,000 net new subscribers in the second quarter of 2000. Average monthly revenue per subscriber was $36 and $34 at June 30, 2001 and June 30, 2000, respectively. EBITDA was a negative $35 million in the second quarter of 2001 compared to negative EBITDA of $40 million in the second quarter of 2000. The change in EBITDA was due to the increased revenues discussed above, offset by higher marketing costs. The Latin America DIRECTV businesses incurred an operating loss of $87 million for the second quarter of 2001 compared to an operating loss of $68 million in the second quarter of 2000. The increased operating loss was primarily due to higher depreciation expense that resulted from an increase in customer leased DIRECTV receiving equipment. DIRECTV Broadband. Revenues and EBITDA for DIRECTV Broadband were $7 million and negative $41 million for the second quarter of 2001, respectively. DIRECTV Broadband added about 4,000 net subscribers in the second quarter of 2001. Net subscriber additions were negatively impacted by customer churn that resulted from the bankruptcy of a wholesale provider of DSL services. At June 30, 2001, DIRECTV Broadband had more than 68,000 residential subscribers in the United States. Satellite Services Segment Revenues for the Satellite Services segment in the second quarter of 2001 decreased $114.0 million to $208.3 million from $322.3 million in the same period in the prior year. The decrease was primarily due to new outright sales and sales-type lease transactions of $123.4 million executed during the second quarter of 2000 for which there were no comparable transactions in the - 42 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) second quarter of 2001. Revenues associated with outright sales and sales-type leases of transponders were $5.3 million for the second quarter of 2001 compared to $129.6 million for the second quarter of 2000. Revenues from operating leases of transponders, satellite services and other were 97.5% of total revenues for the second quarter of 2001 and increased by 5.3% to $203.0 million from $192.7 million in the second quarter of 2000. EBITDA was $134.5 million for the second quarter of 2001, a 39.3% decrease from the second quarter 2000 EBITDA of $221.4 million. The decrease in EBITDA was due to the decreased revenues discussed above and higher direct operating and selling, general and administrative expenses associated with new service initiatives. EBITDA margin for the second quarter of 2001 was 64.6% compared to 68.7% in the second quarter of 2000. The decrease in EBITDA margin was due to the higher direct operating and selling, general and administrative expenses, partially offset by lower margins associated with the new outright sales and sales-type lease transactions executed in the second quarter of 2000. Excluding the new outright sales and sales-type lease transaction, EBITDA for the second quarter of 2000 was $138.5 million or 69.6% of corresponding revenues. Operating profit was $32.8 million for the second quarter of 2001 compared to $139.8 million for the second quarter of 2000. The decrease in operating profit resulted from the decrease in EBITDA and higher depreciation expense related to additional satellites placed into service since June 30, 2000 and increased depreciation expense that resulted from a change in the useful life of the Galaxy VIII-i satellite due to the failure of its primary propulsion system during the third quarter of 2000. Network Systems Segment Revenues for the Network Systems segment for the second quarter of 2001 decreased by 18.7% to $302.2 million, compared to $371.8 million in the second quarter of 2000. The lower revenues resulted from decreased shipments of DIRECTV receiving equipment due primarily to DIRECTV completing the conversion of PRIMESTAR By DIRECTV customers to the high-power DIRECTV service in 2000 and a decrease in manufacturing subsidies. The Network Systems segment reported negative EBITDA of $36.8 million for the second quarter of 2001, compared to EBITDA of $0.8 million in second quarter of 2000. The Network Systems segment had an operating loss of $56.5 million in the second quarter of 2001, compared to an operating loss of $17.1 million in the second quarter of 2000. The change in EBITDA and operating profit resulted from the decreased revenues discussed above and increased costs associated with the rollout of new DirecPC services, including AOL Plus Powered by DirecPC. Eliminations and Other The elimination of revenues decreased to $53.1 million in the second quarter of 2001 from $109.3 million in the second quarter of 2000 due primarily to a decline in intercompany purchases of DIRECTV receiving equipment and lower manufacturing subsidies paid by DIRECTV to HNS. Operating losses for "eliminations and other" decreased to $16.4 million for the second quarter of 2001 from $32.9 million for the second quarter of 2000. The change resulted primarily from the decreased elimination of revenues discussed above, partially offset by one-time severance charges of $22 million. Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 Revenues. Revenues for the six months ended June 30, 2001 increased 9.5% to $3,878.1 million compared with $3,540.1 million for the six months ended June 30, 2000. The increase in revenues resulted primarily from $591.6 million of higher revenues at the Direct-To-Home Broadcast segment over the first six months of 2000 that resulted from the addition of about 1.7 million net new subscribers in the United States and Latin America since June 30, 2000. The increased revenues from the Direct-To-Home Broadcast segment were partially offset by a decrease in revenues of $207.9 million at the Satellite Services segment and $185.9 million at the Network Systems segment. The decrease in - 43 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) revenues from the Satellite Services segment was principally due to $217.2 million of new outright sales and sales-type lease transactions executed during the first six months of 2000 for which there were no comparable transactions in the first six months of 2001. The decrease in revenues from the Network Systems segment was principally due to decreased shipments of DIRECTV receiving equipment that resulted from DIRECTV completing the conversion of PRIMESTAR By DIRECTV customers to the high-power DIRECTV service in 2000 and a decrease in manufacturing subsidies. Operating Costs and Expenses. Operating costs and expenses increased to $4,253.6 million in the first six months of 2001 from $3,642.6 million in the first six months of 2000. Broadcast programming and other costs increased by $170.8 million in the first six months of 2001 from the same period in 2000 due to higher costs at the Direct-To-Home segment resulting from the increase in subscribers and the added costs from DIRECTV Broadband. This increase was partially offset by decreased costs at the Satellite Services segment associated with the new outright sales and sales-type lease transactions executed during the first six months of 2000 for which there were no comparable transactions in the first six months of 2001. Costs of products sold decreased by $90.7 million for the first six months of 2001 from the first six months of 2000 due to the decreased shipments of DIRECTV receiving equipment. Selling, general and administrative expenses increased by $395.0 million during the first six months of 2001 compared to the same period in 2000 due primarily to higher marketing costs at the Direct-To-Home Broadcast segment resulting from increased subscriber growth in both the United States and Latin America, added costs from DIRECTV Broadband and higher expenses at the Satellite Services segment to support the continued satellite fleet expansion and costs associated with new service initiatives. Depreciation and amortization increased by $135.9 million during the first six months of 2001 compared to the first six months of 2000 primarily due to capital expenditures for property and satellites since June 30, 2000, a change in the useful life of the Galaxy VIII-i satellite due to the failure of its primary propulsion system during the third quarter of 2000, and goodwill amortization and added depreciation that resulted from DIRECTV Broadband. EBITDA. EBITDA for the first six months of 2001 was $195.2 million and EBITDA margin was 5.0%, compared to EBITDA of $332.3 million and EBITDA margin of 9.4% in the same period of 2000. The change in EBITDA resulted from decreased EBITDA at the Satellite Services segment principally due to the new outright sales and sales-type lease transactions executed during the first six months of 2000 for which there were no comparable transactions in the first six months of 2001 and higher direct operating and selling, general and administrative expenses; and, lower EBITDA at the Network Systems segment primarily due to decreased shipments of DIRECTV receiving equipment and increased costs associated with the rollout of new DirecPC services. These decreases were partially offset by the Direct-To-Home Broadcast segment's positive EBITDA in the first six months of 2001 compared to negative EBITDA in the first six months of 2000 that resulted from the increase in revenues discussed above, partially offset by higher marketing costs and negative EBITDA associated with DIRECTV Broadband. The change in EBITDA margin resulted primarily from losses at the Network Systems segment and DIRECTV Broadband. Operating Loss. The operating loss for the first six months of 2001 was $375.5 million compared to an operating loss of $102.5 million in 2000. The increased operating loss resulted from the decrease in EBITDA and the higher depreciation and amortization expense. Interest Income and Expense. Interest income increased to $42.8 million for the first six months of 2001 compared to interest income of $8.2 million for the same period of 2000 due to increased cash and cash equivalents that resulted from the sale of the Satellite Businesses in October 2000. Interest expense decreased to $93.4 million for the first six months of 2001 from $102.7 million for the first six months of 2000. The lower interest expense resulted primarily from lower average outstanding borrowings. Changes in cash and cash equivalents and debt are discussed in more detail below under "Liquidity and Capital Resources." Other, Net. Other, net decreased to an expense of $3.7 million for the first nine months of 2001 from a net expense of $282.5 million in the same period of 2000. Other, net expense for the first six months of 2001 resulted primarily from equity method losses of $23.0 million, partially offset by gains from the sale of investments. Other, net expense for the first six months of 2000 - 44 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) included $111.9 million of equity method losses and a $170.6 million charge related to the exit of the DIRECTV Japan business, which is discussed below in "Liquidity and Capital Resources-Acquisitions, Investments and Divestitures." Income Taxes. Hughes recognized an income tax benefit of $124.7 million for the first six months of 2001, compared to $276.6 million in the first six months of 2000. The lower tax benefit in the first six months of 2001 is due to lower pre-tax losses in 2001 as well as the additional tax benefit in 2000 associated with the write-off of Hughes' historical investment in DIRECTV Japan. Loss from Continuing Operations. Hughes reported a loss from continuing operations before cumulative effect of accounting change of $254.4 million for the six months ended June 30, 2001, compared to $190.8 million for the same period of 2000. Discontinued Operations. Revenues for the Satellite Businesses for the six months ended June 30, 2000 were $1,071.6 million. Revenues, excluding intercompany transactions, for the first six months of 2000 were $801.2 million. The Satellite Businesses reported operating profit of $78.9 million for the first six months of 2000. Operating profit, excluding intercompany transactions, amounted to $63.5 million for the first six months of 2000. Income from discontinued operations, net of taxes, was $39.8 million for the first six months of 2000. Cumulative Effect of Accounting Change. Hughes adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities on January 1, 2001. SFAS No.133 requires Hughes to carry all derivative financial instruments on the balance sheet at fair value. In accordance with the transition provisions of SFAS No. 133, Hughes recorded a one-time after-tax charge of $7.4 million on January 1, 2001 as a cumulative effect of accounting change in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) and an after- tax unrealized gain of $0.4 million in Other Comprehensive Income (Loss). Direct-To-Home Broadcast Segment Direct-To-Home Broadcast segment revenues for the first six months of 2001 increased 24.4% to $3,017.6 million from $2,426.0 million for the first six months of 2000. The Direct-To-Home Broadcast segment had positive EBITDA of $4.7 million in the first six months of 2001 compared with negative EBITDA of $23.2 million in the first six months of 2000. The operating loss for the segment increased to $328.4 million in the first six months of 2001 from $260.8 million in the first six months of 2000. United States. The DIRECTV U.S. businesses were the biggest contributors to the segment's revenue growth with revenues of $2,669 million for the first six months of 2001, a 22% increase over last year's revenues for the same period of $2,188 million. The large increase in revenues resulted primarily from an increased number of DIRECTV subscribers since June 30, 2000. As of June 30, 2001, DIRECTV had more than 10 million high-power subscribers compared to about 8.3 million high-power and 0.4 million PRIMESTAR By DIRECTV medium-power subscribers at June 30, 2000. DIRECTV added 515,000 net new subscribers in the first six months of 2001, compared to 857,000 net new subscribers in the first six months of 2000. In addition, 705,000 customers were transitioned from the PRIMESTAR By DIRECTV medium-power service to the high-power service in the first six months of 2000. Average monthly revenue per subscriber for the high- power business was $59 and $58 at June 30, 2001 and June 30, 2000, respectively. DIRECTV completed the conversion of the medium-power subscribers to the high-power service on September 30, 2000. EBITDA was $125 million for the first six months of 2001 compared to EBITDA of $57 million for the first six months of 2000. The operating loss for the first six months of 2001 for the DIRECTV U.S. businesses was $92 million compared to $133 million in the first six months of 2000. The change in EBITDA and operating loss was due to the increased revenues discussed above, - 45 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) which more than offset higher programming costs, which resulted from the increased number of subscribers, and higher subscriber acquisition costs. Latin America. Revenues for the Latin America DIRECTV businesses increased 44% to $340 million in the first six months of 2001 from $236 million in the first six months of 2000. The increase in revenues was primarily due to continued subscriber growth. Subscribers grew to about 1,431,000 at June 30, 2001 compared to about 1,010,000 at June 30, 2000. Latin America DIRECTV added about 126,000 net subscribers in the first six months of 2001 compared to about 206,000 net new subscribers in the first six months of 2000. Average monthly revenue per subscriber was $36 and $34 at June 30, 2001 and June 30, 2000, respectively. EBITDA was a negative $79 million in the first six months of 2001 compared to negative EBITDA of $78 million in the first six months of 2000. The change in EBITDA was due to the increased revenues discussed above, offset by higher marketing costs. The Latin America DIRECTV businesses incurred an operating loss of $179 million for the first six months of 2001 compared to an operating loss of $127 million in the first six months of 2000. The increased operating loss was primarily due to higher depreciation expense that resulted from an increase in customer leased DIRECTV receiving equipment. DIRECTV Broadband. Revenues and EBITDA for DIRECTV Broadband were $7 million and negative $41 million for the first six months of 2001, respectively. DIRECTV Broadband added about 4,000 net subscribers in the first six months of 2001. Net subscriber additions were negatively impacted by customer churn that resulted from the bankruptcy of a wholesale provider of DSL services. At June 30, 2001, DIRECTV Broadband had more than 68,000 residential broadband subscribers in the United States. Satellite Services Segment Revenues for the Satellite Services segment in the first six months of 2001 decreased $207.9 million to $413.5 million from $621.4 million in the same period in the prior year. The decrease was primarily due to new outright sales and sales-type lease transactions of $217.2 million executed during the first six months of 2000 for which there were no comparable transactions in the first six months of 2001. Revenues associated with outright sales and sales-type leases of transponders were $11.0 million for the first six months of 2001 compared to $228.7 million for the first six months of 2000. Revenues from operating leases of transponders, satellite services and other were 97.3% of total revenues for the first six months of 2001 and increased by 2.5% to $402.5 million from $392.7 million in the first six months of 2000. EBITDA was $274.5 million for the first six months of 2001, a 35.0% decrease over the first six months of 2000 EBITDA of $422.4 million. The decrease in EBITDA was due to the decreased revenues discussed above and higher direct operating and selling, general and administrative expenses to support the continued satellite fleet expansion and costs associated with new service initiatives. EBITDA margin for the first six months of 2001 was 66.4% compared to 68.0% in the first six months of 2000. The decrease in EBITDA margin was due to higher direct operating and selling, general and administrative expenses associated with new service initiatives, partially offset by lower margins associated with the new outright sales and sales-type lease transactions executed in the first six months of 2000. Excluding the new outright sales and sales-type lease transactions, EBITDA for the first six months of 2000 was $291.0 million or 72.0% of corresponding revenues. Operating profit was $73.9 million for the first six months of 2001 compared to $267.1 million for the first six months of 2000. The decrease in operating profit resulted from the decrease in EBITDA and higher depreciation expense related to additional satellites placed into service since June 30, 2000 and increased depreciation expense that resulted from a change in the useful life of the Galaxy VIII-i satellite due to the failure of its primary propulsion system during the third quarter of 2000. Network Systems Segment Revenues for the Network Systems segment for the first six months of 2001 decreased by 25.2% to $550.4 million from $736.3 million in the first six months of 2000. The lower revenues resulted from decreased shipments of DIRECTV receiving equipment due primarily to DIRECTV completing the conversion of - 46 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) PRIMESTAR By DIRECTV customers to the high-power DIRECTV service in 2000 and decreased manufacturing subsidies. The Network Systems segment reported negative EBITDA of $75.1 million for the first six months of 2001, compared to EBITDA of $17.6 million in the first six months of 2000. The Network Systems segment had an operating loss of $109.1 million in the first six months of 2001, compared to an operating loss of $17.0 million in the first six months of 2000. The change in EBITDA and operating profit resulted from the decreased revenues discussed above and increased costs associated with the rollout of new DirecPC services, including AOL Plus Powered by DirecPC. Eliminations and Other The elimination of revenues decreased to $103.4 million in the first six months of 2001 from $243.6 million in the first six months of 2000 due primarily to a decline in intercompany purchases of DIRECTV receiving equipment and lower manufacturing subsidies paid by DIRECTV to HNS. Operating losses from "eliminations and other" decreased to $11.9 million in the first six months of 2001 from $91.8 million in the first six months of 2000. The change in operating loss resulted primarily from the decrease in the elimination of revenues discussed above and decreased corporate expenditures, partially offset by one-time severance charges of $22 million. Liquidity and Capital Resources Cash and cash equivalents were $1,052.3 million at June 30, 2001 compared to $1,508.1 million at December 31, 2000. Cash used in operating activities was $97.5 million in the first six months of 2001, compared to cash provided by operating activities of $147.3 million in the first six months of 2000. The decrease in 2001 resulted primarily from the change in EBITDA and higher cash requirements for the change in operating assets and liabilities. Cash used in investing activities was $870.4 million in the six months ended June 30, 2001, and $798.0 million for the same period in 2000. The higher 2001 use of cash for investing activities resulted primarily from increased investments in companies and increased expenditures for satellites, partially offset by $96.2 million of incremental proceeds received from satellite insurance claims in 2001 compared with 2000. Cash provided by financing activities was $512.1 million in the first six months of 2001, compared to $627.0 million in the same period of 2000. The lower 2001 financing activities resulted from decreased net borrowings due to the cash received from the sale of the Satellite Businesses in the fourth quarter of 2000. Cash provided by discontinued operations was $63.1 million in the first six months ended June 30, 2000. Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) at June 30, 2001 and December 31, 2000 was 1.03 and 1.54, respectively. Working capital decreased by $1,338.6 million to $124.2 million at June 30, 2001 from $1,462.8 million at December 31, 2000. Common Stock Dividend Policy and Use of Cash. The GM Board has not paid, and does not currently intend to pay in the foreseeable future, cash dividends on its Class H common stock. Similarly, 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 cash requirements for the remainder of 2001 of up to about $2 billion primarily due to capital expenditures for satellites and property, planned increases in subscriber acquisition costs for the Direct-To-Home businesses, working capital, debt service and preferred stock dividends. In addition, Hughes expects to increase its investment in affiliated companies. These cash requirements are expected to be funded from a combination of existing cash balances, cash provided - 47 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) from operations, amounts available under credit facilities, and additional borrowings and equity offerings, as needed. Debt and Credit Facilities. Notes Payable. In July 1999, in connection with the early buy-out of satellite sale-leasebacks, PanAmSat assumed $124.1 million of variable rate notes of which $46.5 million was outstanding at June 30, 2001. The weighted average interest rate on the notes was 4.92% at June 30, 2001. The notes mature in January 2002. PanAmSat issued five, seven, ten and thirty-year fixed rate notes totaling $750.0 million in January 1998. The outstanding principal balances and interest rates for these notes as of June 30, 2001 were $200 million at 6.0%, $275 million at 6.125%, $150 million at 6.375% and $125 million at $6.875%, respectively. Principal on the notes is payable at maturity, while interest is payable semi-annually. Revolving Credit Facilities. On January 5, 2001, DLA entered into a $450.0 million revolving credit facility. This facility provides for a commitment through the earlier of July 5, 2002 or the date of receipt of the cash proceeds from the issuance of any debt or equity security of DLA. Borrowings under the credit facility bear interest at a rate based on the London Interbank Offer Rate ("LIBOR") plus an indicated spread. As of June 30, 2001, $450.0 million was outstanding under the revolving credit facility, bearing a weighted average interest rate of 4.96%. As of June 30, 2001, Hughes had a $750.0 million multi-year unsecured revolving credit facility. Borrowings under the facility bear interest based on a spread to the then-prevailing LIBOR. The multi-year credit facility provides for a commitment of $750.0 million through December 5, 2002. The facility also provides backup capacity for Hughes' $1.0 billion commercial paper program. Commercial paper outstanding under the program bears interest at various rates, based on market rates prevailing at the time each commercial paper instrument is placed. No amounts were outstanding under the multi-year credit facility or commercial paper program at June 30, 2001. PanAmSat maintains a $500.0 million multi-year revolving credit facility that provides for short-term and long-term borrowings and a $500.0 million commercial paper program. Borrowings under the credit facility bear interest at a rate equal to LIBOR plus a spread based on PanAmSat's credit rating. The multi-year revolving credit facility provides for a commitment through December 24, 2002. Borrowings under the credit facility and commercial paper program are limited to $500.0 million in the aggregate. No amounts were outstanding under either the multi-year revolving credit facility or the commercial paper program at June 30, 2001. At June 30, 2001, SurFin had unsecured revolving credit facilities of $400.0 million and $212.5 million that expire in June 2002 and September 2003, respectively. Borrowings under the credit facilities bear interest at various rates based on LIBOR plus an indicated spread. $400.0 million was outstanding under the $400.0 million credit facility at June 30, 2001, with borrowings bearing a weighted average interest rate of 6.39%. $183.3 million was outstanding under the $212.5 million credit facility at June 30, 2001. The weighted average interest rate on these borrowings was 6.57% at June 30, 2001. Other short-term and long-term debt outstanding at June 30, 2001 included $23.2 million of notes bearing fixed rates of interest of 9.61% to 12.37% and $8.6 million of variable rate notes, bearing a weighted average interest rate of 9.36%. Principal on the fixed rate notes is payable in varying amounts at maturity through April 2007. Principal on the variable rate notes is payable in varying amounts at maturity in April and May 2002. Hughes has filed a shelf registration statement with the SEC with respect to an issuance of up to $2.0 billion of debt securities from time to time. No amounts have been issued as of June 30, 2001. - 48 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) Acquisitions, Investments and Divestitures. Acquisitions and Investments. On May 1, 2001, DLA acquired from Grupo Clarin S.A. ("Clarin") a 51% ownership interest in GEA, a local operating company located in Argentina that provides direct-to-home broadcast services, and other assets, consisting primarily of programming and advertising rights. The purchase price, valued at $169 million, consisted of a 3.98% ownership interest in DLA and a put option that will allow Clarin to sell in November 2003 its 3.98% interest back to DLA for $195 million in cash. As a result of the transaction, Hughes' interest in DLA decreased from 77.8% to 74.7% and Hughes' ownership in GEA increased from 20% to 58.1%. Hughes' portion of the purchase price, which amounted to about $130 million, was recorded as an increase to additional paid in capital with the offset allocated to the net assets acquired, including goodwill. On April 3, 2001, Hughes acquired Telocity, a company that provides land- based DSL services, through the completion of a tender offer and merger. Telocity is now operating as DIRECTV Broadband. The purchase price, which totaled $197.8 million in cash, will be allocated to the net assets acquired (primarily goodwill) prior to year end. See Note 8 to the consolidated financial statements for further discussion. On January 1, 2001, DLA acquired from Bavaria S.A. ("Bavaria") an additional 14.2% ownership interest in GEC, a DLA local operating company located in Colombia. As a result of the transaction, Hughes' ownership interest in GEC increased from 44.2% to 55.2%. The purchase price consisted of prior capital contributions of $4.4 million made by DLA during 2000 on behalf of Bavaria. The above acquisitions were accounted for using the purchase method of accounting and resulted in their consolidation from their respective dates of acquisition. Divestitures. On July 31, 2001, Hughes sold a 3% interest in Thomson Multimedia S. A. for approximately $132 million in cash, resulting in a pre-tax gain of approximately $108 million that will be recognized in the third quarter of 2001. On October 6, 2000, Hughes completed the sale of its Satellite Businesses for $3.75 billion in cash, plus the estimated book value of the closing net assets of the businesses sold in excess of a target amount. The transaction resulted in the recognition of a pre-tax gain of $2,036.0 million, or $1,132.3 million after-tax. Included in this gain is a net after-tax curtailment loss of $42 million related to pension and other postretirement benefit plan assets and liabilities associated with the Satellite Businesses. The purchase price is subject to adjustment based upon the final closing net assets as discussed in Note 10 to the consolidated financial statements. In a separate, but related transaction, Hughes also sold to Boeing its 50% interest in HRL Laboratories LLC ("HRL") for $38.5 million, which represented the net book value of HRL at October 6, 2000. On March 1, 2000, Hughes announced that the operations of DIRECTV Japan Management, Inc., DIRECTV Japan, Inc., and certain related companies (collectively "DIRECTV Japan") would be discontinued. Pursuant to an agreement with Japan Digital Broadcasting Services Inc. (now named Sky Perfect Communications, Inc. or "Sky Perfect"), qualified subscribers to the DIRECTV Japan service were offered the opportunity to migrate to the Sky Perfect service, for which DIRECTV Japan was paid a commission for each subscriber who actually migrated and Hughes acquired a 6.6% interest in Sky Perfect. As a result, Hughes wrote-off its net investment in DIRECTV Japan of $164.6 million and accrued exit costs of $403.7 million and involuntary termination benefits of $14.5 million. Accrued exit costs consist of claims arising out of contracts with dealers, manufacturers, programmers and others, satellite transponder and facility and equipment leases, subscriber migration and termination costs, and professional service fees and other. The write-off and accrual were partially offset by the difference between the cost of the Sky Perfect shares acquired and the estimated fair value of the shares ($428.8 million), as determined by an independent appraisal, and by $40.2 million for anticipated contributions from other DIRECTV Japan shareholders. The net effect of the transaction was a charge to "Other, net" of $170.6 million at March 31, 2000. - 49 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) In the fourth quarter of 2000, $106.6 million of accrued exit costs were reversed and $0.6 million of involuntary termination benefits were added, resulting in a net credit adjustment to "Other, net" of $106.0 million. The adjustments made to the exit cost accrual were primarily attributable to earlier than anticipated cessation of the DIRECTV Japan broadcasting service, greater than anticipated commission payments for subscriber migration and favorable settlements of various contracts and claims. About $22.4 million was paid for accrued exit costs and no payments were made for involuntary termination benefits during the second quarter of 2001. The balances remaining at June 30, 2001 for accrued exit costs and involuntary termination benefits were $78.7 million and $0.9 million, respectively. DIRECTV Japan employed approximately 290 personnel as of March 31, 2000, of which 244 were terminated during 2000. All remaining personnel were terminated in the first quarter of 2001. In the fourth quarter of 2000, Sky Perfect completed an initial public offering, at which date the fair value of Hughes' interest (diluted by the public offering to approximately 5.3%) in Sky Perfect was approximately $343 million. In the fourth quarter of 2000, a portion of the decline in the value of the Sky Perfect investment was determined to be "other than temporary" based on investment research analysis, resulting in a write-down of the carrying value of the investment by $86 million from $428.8 million to $342.8 million. At June 30, 2001, the market value of the investment was $123.5 million, or $219.3 million less than the carrying value at that date. Hughes believes that this decrease represents a temporary decline in value, and as a result, has recorded this change as an unrealized loss, net of taxes, as part of OCI. If the market value of the Sky Perfect Investment does not recover significantly, Hughes may be required to record an additional adjustment for an "other than temporary" decline as a charge to earnings prior to year-end. New Accounting Standards In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after July 1, 2001 be accounted for using the purchase method. SFAS No. 142 requires that existing and future goodwill and intangible assets with indefinite lives not be amortized, but written down, as needed, based upon an impairment analysis that must occur at least annually. All other intangible assets are amortized over their estimated useful lives. Hughes will be required to adopt SFAS No. 142 on January 1, 2002 which will require an assessment of goodwill and intangible assets acquired prior to July 1, 2001. Intangible assets that no longer qualify for separate accounting, if any, will be combined with goodwill, while certain intangible assets not previously identified, if any, may be prospectively accounted for separately from goodwill. Management is currently assessing the impact of these standards on Hughes' results of operations and financial position. Goodwill amortization for the six months ended June 30, 2001 was $101.7 million. These statements will have no impact on Hughes' consolidated cash flows. Security Ratings Hughes' current long-term credit ratings are Baa2 and BBB-, with its short- term credit and commercial paper ratings at P-2 and A-3, as rated by Moody's Investor Services ("Moody's") and Standard and Poor's Rating Services ("S&P"), respectively. On May 2, 2001, subsequent to the announcement that the GM Board authorized further discussions with The News Corporation Limited regarding a proposal to combine Hughes with Sky Global Networks, Inc., S&P re-affirmed its ratings on Hughes and PanAmSat and placed them on credit watch with negative implications. Moody's most recent action occurred in January 2000, subsequent to the announced sale of Hughes' Satellite Businesses at which time Moody's affirmed its debt ratings for Hughes while maintaining its negative outlook but ending its review for possible downgrade. Debt ratings by the various rating agencies reflect each agency's opinion of the ability of issuers to repay debt obligations as they come due. With respect to Moody's, the Baa2 rating for senior debt indicates adequate likelihood of interest and principal payment and principal security. The P-2 short-term rating, the second highest rating available, indicates that the issuer has a strong ability for repayment relative to other issuers. For S&P, the BBB- - 50 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Concluded) rating indicates the issuer has adequate capacity to pay interest and repay principal. In general, lower ratings result in higher borrowing costs. A security rating is not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating. Market Risk Disclosure Foreign Exchange Risk Management Hughes generally conducts its business in U.S. dollars with some business conducted in a variety of foreign currencies and therefore is exposed to fluctuations in foreign currency exchange rates. Hughes' objective in managing its exposure to foreign currency changes is to reduce earnings and cash flow volatility associated with foreign exchange rate fluctuations. Accordingly, Hughes enters into foreign exchange contracts to mitigate risks associated with foreign currency denominated assets, liabilities, commitments and anticipated foreign currency transactions. By policy, Hughes maintains coverage between minimum and maximum percentages of its anticipated foreign exchange exposures. The gains and losses on derivative foreign exchange contracts offset changes in value of the related exposures. Hughes enters into derivative foreign exchange contracts only to the extent considered necessary to meet its risk management objectives, and does not enter into foreign currency derivative contracts for speculative purposes. Other Derivatives Hughes holds financial instruments obtained in connection with supplier contracts, such as stock purchase warrants in public and private companies. These instruments are deemed derivatives because they contain net-share settlement provisions, but are not designated as hedging instruments. Hughes records changes in the fair value of these instruments to current earnings. At June 30, 2001, the fair value of these instruments was not significant. * * * * * * - 51 - -----END PRIVACY-ENHANCED MESSAGE-----