-----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, D2SLEq1epvvs1o+0kK6sP68ki2mcyuYcEwOjr5iFpG8K0Q8nPzjZF4ScjFNlreg6 ymCt4Imid87hIKDVz2zNMQ== 0000040730-01-500150.txt : 20020410 0000040730-01-500150.hdr.sgml : 20020410 ACCESSION NUMBER: 0000040730-01-500150 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 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: 1783785 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 september01-10q111301.txt GMC 3RD QUARTER 10-Q 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF - -- 1934 For the quarterly period ended September 30, 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 October 31, 2001, there were outstanding 555,504,137 shares of the issuer's $1-2/3 par value common stock and 877,316,752 shares of GM Class H $0.10 par value common stock. - 1 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES INDEX Page No. ------- Part I - Financial Information (Unaudited) Item 1. Financial Statements Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2001 and 2000 3 Consolidated Balance Sheets as of September 30, 2001, December 31, 2000, and September 30, 2000 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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 14 Part II - Other Information (Unaudited) Item 1. Legal Proceedings 21 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 23 Exhibit 99 Hughes Electronics Corporation Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) 24 - 2 - PART I GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (dollars in millions except per share amounts) GENERAL MOTORS CORPORATION AND SUBSIDIARIES Total net sales and revenues $42,475 $42,690 $131,310 $138,291 ------ ------ ------- ------- Cost of sales and other expenses (Note 7) 34,866 33,678 106,557 108,888 Selling, general, and administrative expenses 5,926 5,266 17,171 15,604 Interest expense 1,968 2,480 6,438 7,066 ------ ------ ------- ------- Total costs and expenses 42,760 41,424 130,166 131,558 ------ ------ ------- ------- Income (loss) before income taxes and minority interests (285) 1,266 1,144 6,733 Income tax expense 76 436 588 2,148 Equity income/(loss) and minority interests (7) (1) (210) (222) ---- ---- ---- ----- Net income (loss) (368) 829 346 4,363 Dividends on preference stocks (25) (27) (76) (83) ---- ---- ---- ----- Earnings attributable to common stocks $(393) $802 $270 $4,280 === === === ===== Basic earnings (losses) per share attributable to common stocks (Note 6) Earnings per share attributable to $1-2/3 par value $(0.41) $1.57 $1.18 $7.51 ==== ==== ==== ==== Earnings per share attributable to Class H $(0.19) $(0.09) $(0.43) $(0.23) ==== ==== ==== ==== Earnings (losses) per share attributable to common stocks assuming dilution (Note 6) Earnings per share attributable to $1-2/3 par value $(0.41) $1.55 $1.16 $7.37 ==== ==== ==== ==== Earnings per share attributable to Class H $(0.19) $(0.09) $(0.43) $(0.23) ==== ==== ==== ==== Reference should be made to the notes to consolidated financial statements. - 3 - CONSOLIDATED STATEMENTS OF INCOME - concluded (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (dollars in millions) AUTOMOTIVE, COMMUNICATIONS SERVICES, AND OTHER OPERATIONS Total net sales and revenues $36,297 $36,602 $112,192 $120,667 ------ ------ ------- ------- Cost of sales and other expenses (Note 7) 32,861 31,827 100,537 103,408 Selling, general, and administrative expenses 4,107 3,765 11,837 11,304 ------ ------ ------- ------- Total costs and expenses 36,968 35,592 112,374 114,712 ------ ------ ------- ------- Interest expense 216 210 529 648 Net expense from transactions with Financing and Insurance Operations 97 197 315 508 --- --- ----- ----- Income (loss) before income taxes and minority interests (984) 603 (1,026) 4,799 Income tax (benefit) expense (181) 193 (194) 1,433 Equity income/(loss) and minority interests (1) 13 (150) (207) --- --- --- ----- Net income (loss) - Automotive, Communications Services, and Other Operations $(804) $423 $(982) $3,159 === === === ===== FINANCING AND INSURANCE OPERATIONS Total revenues $6,178 $6,088 $19,118 $17,624 ----- ----- ------ ------ Interest expense 1,752 2,270 5,909 6,418 Depreciation and amortization expense 1,477 1,474 4,429 4,480 Operating and other expenses 1,774 1,450 5,220 4,147 Provision for financing and insurance losses 573 428 1,705 1,153 ----- ----- ------ ------ Total costs and expenses 5,576 5,622 17,263 16,198 ----- ----- ------ ------ Net income from transactions with Automotive, Communications Services, and Other Operations 97 197 315 508 --- --- --- ----- Income before income taxes and minority interests 699 663 2,170 1,934 Income tax expense 257 243 782 715 Equity income/(loss) and minority interests (6) (14) (60) (15) --- --- ----- ----- Net income - Financing and Insurance Operations $436 $406 $1,328 $1,204 === === ===== ===== 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 Sept.30, Sept.30, 2001 Dec. 31, 2000 GENERAL MOTORS CORPORATION AND SUBSIDIARIES (Unaudited) 2000 (Unaudited) --------- ----- --------- ASSETS (dollars in millions) Automotive, Communications Services, and Other Operations Cash and cash equivalents $7,899 $9,119 $9,351 Marketable securities 829 1,161 1,176 ----- ------ ------ Total cash and marketable securities 8,728 10,280 10,527 Accounts and notes receivable (less allowances) 6,200 5,835 5,975 Inventories (less allowances) (Note 2) 10,508 10,945 11,300 Equipment on operating leases (less accumulated depreciation) 4,974 5,699 5,980 Deferred income taxes and other current assets 8,751 8,388 9,489 ------ ------ ------ Total current assets 39,161 41,147 43,271 Equity in net assets of nonconsolidated associates 4,913 3,497 3,301 Property - net 34,555 33,977 34,036 Intangible assets - net 7,675 7,622 8,651 Deferred income taxes 15,930 14,870 13,202 Other assets 30,984 32,243 33,015 ------- ------- ------- Total Automotive, Communications Services, and Other Operations assets 133,218 133,356 135,476 Financing and Insurance Operations Cash and cash equivalents 10,530 1,165 912 Investments in securities 9,598 9,595 9,309 Finance receivables - net 90,190 92,415 87,534 Investment in leases and other receivables 36,441 36,752 37,551 Other assets 33,624 27,846 24,864 Net receivable from Automotive, Communications Services, and Other Operations 1,243 1,971 1,599 ------- ------- ------- Total Financing and Insurance Operations assets 181,626 169,744 161,769 ------- ------- ------- Total assets $314,844 $303,100 $297,245 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Automotive, Communications Services, and Other Operations Accounts payable (principally trade) $19,335 $18,309 $18,190 Loans payable 1,744 2,208 3,321 Accrued expenses 35,417 33,252 31,997 Net payable to Financing and Insurance Operations 1,243 1,971 1,599 ------ ------ ------ Total current liabilities 57,739 55,740 55,107 Long-term debt 9,320 7,410 8,245 Postretirement benefits other than pensions 34,276 34,306 34,376 Pensions 3,443 3,480 3,226 Other liabilities and deferred income taxes 14,183 15,768 16,088 ------- ------- ------- Total Automotive, Communications Services, and Other Operations liabilities 118,961 116,704 117,042 Financing and Insurance Operations Accounts payable 6,936 7,416 5,316 Debt 144,846 135,037 129,325 Other liabilities and deferred income taxes 14,577 12,922 13,238 ------- ------- ------- Total Financing and Insurance Operations liabilities 166,359 155,375 147,879 Minority interests 700 707 670 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, 554,439,259; 548,181,757; and 565,371,465 shares) (Note 6) 924 914 943 Class H common stock (issued, 877,032,955; 875,286,559; and 874,807,080 shares) (Note 6) 88 88 87 Capital surplus (principally additional paid-in capital) 21,330 21,020 21,818 Retained earnings 9,565 10,119 10,335 ------ ------ ------ Subtotal 31,907 32,141 33,183 Accumulated foreign currency translation adjustments (2,825) (2,502) (2,480) Net unrealized loss on derivatives (392) - - Net unrealized gains on securities 179 581 933 Minimum pension liability adjustment (45) (45) (121) ----- ----- ----- Accumulated other comprehensive loss (3,083) (1,966) (1,668) ----- ----- ----- Total stockholders' equity 28,824 30,175 31,515 ------- ------- ------- Total liabilities and stockholders' equity $314,844 $303,100 $297,245 ======= ======= ======= Reference should be made to the notes to consolidated financial statements. - 5 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 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 (used in) operating activities $5,509 $(651) $9,066 $4,746 Cash flows from investing activities Expenditures for property (6,287) (53) (6,314) (335) Investments in marketable securities - acquisitions (840) (25,071) (2,425) (18,198) Investments in marketable securities - liquidations 1,172 25,205 2,947 17,998 Mortgage servicing rights - acquisitions - (884) - (698) Mortgage servicing rights - liquidations - 17 - - Finance receivables - acquisitions - (166,597) - (140,295) Finance receivables - liquidations - 103,919 - 88,560 Proceeds from sales of finance receivables - 63,798 - 43,407 Operating leases - acquisitions (4,480) (10,586) (5,342) (12,147) Operating leases - liquidations 4,783 9,239 4,615 7,313 Investments in companies, net of cash acquired (679) (446) (3,911) - Net investing activity with Financing and Insurance Operations - - (998) - Other (146) 110 (558) 356 ----- ----- ------ ------ Net cash used in investing activities (6,477) (1,349) (11,986) (14,039) ----- ----- ------ ------ Cash flows from financing activities Net (decrease) increase in loans payable (464) (18,332) 1,255 1,121 Long-term debt - borrowings 4,533 42,791 4,130 19,450 Long-term debt - repayments (2,673) (13,817) (4,213) (11,482) Net financing activity with Automotive, Communications Services, and Other Operations - - - 998 Repurchases of common and preference stocks (264) - (652) - Proceeds from issuing common stocks 91 - 2,778 - Proceeds from sales of treasury stocks 222 - - - Cash dividends paid to stockholders (900) - (989) - --- ------ ----- ------ Net cash provided by financing activities 545 10,642 2,309 10,087 --- ------ ----- ------ Effect of exchange rate changes on cash and cash equivalents (69) (5) (365) 3 Net transactions with Automotive/ Financing Operations (728) 728 597 (597) ----- ----- --- --- Net (decrease) increase in cash and cash equivalents (1,220) 9,365 (379) 200 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 $7,899 $10,530 $9,351 $912 ===== ====== ===== ===
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 In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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. This statement specifies that certain acquired intangible assets in a business combination be recognized as assets separately from goodwill and existing intangible assets and goodwill be evaluated for these new separation requirements. Goodwill and intangible assets determined to have indefinite useful lives will not be amortized. The Corporation is evaluating but has not yet determined the impact that this statement will have on its consolidated financial position or results of operations. In June 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 Corporation is required to implement SFAS No. 142 on January 1, 2002. The Corporation is evaluating but has not yet determined the impact that this statement will have on its consolidated financial position or results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Corporation is required to implement SFAS No. 143 on January 1, 2002. Management does not expect this statement to have a material impact on GM's consolidated financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. The Corporation is required to implement SFAS No. 144 on January 1, 2002. Management does not expect this statement to have a material impact on GM's consolidated financial position or results of operations. Note 2. Inventories Inventories included the following for Automotive, Communications Services, and Other Operations (dollars in millions): Sept. 30, Dec. 31, Sept. 30, 2001 2000 2000 -------- -------- -------- Productive material, work in process, and supplies $5,457 $5,555 $6,121 Finished product, service parts, etc. 6,898 7,319 7,062 ------ ------ ------ Total inventories at FIFO 12,355 12,874 13,183 Less LIFO allowance 1,847 1,929 1,883 ------ ------ ------ Total inventories (less allowances) $10,508 $10,945 $11,300 ====== ====== ====== - 7 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) 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 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 Boeing Company 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 September 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. 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. Comprehensive Income GM's total comprehensive income (loss) was as follows (dollars in millions): Three Months Ended Nine Months Ended September 30, September 30, --------------------- ------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income (loss) $(368) $829 $346 $4,363 Other comprehensive (loss) (392) (171) (1,117) (510) --- --- ----- ----- Total $(760) $658 $(771) $3,853 === === === ===== Note 6. 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 Nine Months Ended September 30, September 30, --------------------- ------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Earnings (losses) attributable to common stocks (Losses) earnings attributable to $1-2/3 par value $(223) $878 $647 $4,424 (Losses) attributable to Class H $(170) $(76) $(377) $(144) (Losses) 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. - 8 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 6. Earnings Per Share Attributable to Common Stocks (continued) (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 (877 million and 874 million during the three months ended September 30, 2001 and 2000, respectively, and 876 million and 618 million during the nine months ended September 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 third quarters of 2001 and 2000, and for the nine month periods ended September 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 6. 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 September 30, 2001 Net (loss) $(215) $(153) Less:Dividends on preference stocks 8 17 --- --- Basic EPS (Loss) attributable to common stocks (223) 551 $(0.41) (170) 877 $(0.19) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - - - - --- --- --- --- Diluted EPS Adjusted (loss) attributable to common stocks $(223) 551 $(0.41) $(170) 877 $(0.19) === === ==== === === ==== Three Months Ended September 30, 2000 Net income (loss) $889 $(60) Less:Dividends on preference stocks 11 16 --- -- Basic EPS Income (loss) attributable to common stocks 878 559 $1.57 (76) 874 $(0.09) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 8 - - --- --- -- --- Diluted EPS Adjusted income (loss) attributable to common stocks $878 567 $1.55 $(76) 874 $(0.09) === === ==== == === ==== Nine Months Ended September 30, 2001 Net income (loss) $674 $(328) Less:Dividends on preference stocks 27 49 --- --- Basic EPS Income (loss) attributable to common stocks 647 549 $1.18 (377) 876 $(0.43) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 7 - - --- --- --- --- Diluted EPS Adjusted income (loss) attributable to common stocks $647 556 $1.16 $(377) 876 $(0.43) === === ==== === === ==== Nine Months Ended September 30, 2000 Net income (loss) $4,472 $(109) Less:Dividends on preference stocks 48 35 ----- --- Basic EPS Income (loss) attributable to common stocks 4,424 589 $7.51 (144) 618 $(0.23) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 11 - - ----- --- --- --- Diluted EPS Adjusted income (loss) attributable to common stocks $4,424 600 $7.37 $(144) 618 $(0.23) ===== === ==== === === ====
Note 7. 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 Nine Months Ended September 30, September 30, -------------------- ------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Depreciation $1,123 $1,002 $3,291 $2,964 Amortization of special tools 609 537 1,747 1,852 Amortization of intangible assets 80 57 238 209 ----- ----- ----- ----- Total $1,812 $1,596 $5,276 $5,025 ===== ===== ===== ===== - 10 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 8. 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): Other GMNA GME GMLAAM GMAP GMA Hughes Other Total ACO GMAC Financing Total FIO ---- --- ------ ---- --- ------ ----- --------- ---- --------- --------- For the Three Months Ended September 30, 2001 Net sales and revenues: External customers $26,635 $4,987 $1,258 $818 $33,698 $2,108 $491 $36,297 $6,116 $62 $6,178 Intersegment (366) 130 54 182 - 5 (5) - - - - ------ ----- ----- ----- ------ ----- --- ------ ----- -- ----- Total net sales and revenues $26,269 $5,117 $1,312 $1,000 $33,698 $2,113 $486 $36,297 $6,116 $62 $6,178 ====== ===== ===== ===== ====== ===== === ====== ===== == ===== Interest income (a) $303 $95 $(4) $4 $398 $9 $(261) $146 $602 $(89) $513 Interest expense $311 $104 $27 $2 $444 $41 $(269) $216 $1,686 $66 $1,752 Net income (loss) $251 $(287) $(6) $60 $18 $(227)(b) $(595) $(804) $437 $(1) $436 Segment assets $91,767 $18,316 $4,139 $870 $115,092 $19,068 (c) $(942) $133,218 $180,384 $1,242 $181,626 For the Three Months Ended September 30, 2000 Net sales and revenues: External customers $26,566 $5,115 $1,471 $834 $33,986 $2,082 $534 $36,602 $6,067 $21 $6,088 Intersegment (395) 224 53 118 - 6 (6) - - - - ------ ----- ----- --- ------ ----- --- ------ ----- -- ----- Total net sales and revenues $26,171 $5,339 $1,524 $952 $33,986 $2,088 $528 $36,602 $6,067 $21 $6,088 ====== ===== ===== === ====== ===== === ====== ===== == ===== Interest income (a) $157 $105 $5 $3 $270 $21 $(153) $138 $587 $(87) $500 Interest expense $323 $100 $15 $1 $439 $66 $(295) $210 $2,158 $112 $2,270 Net income (loss) $728 $(181) $31 $(10) $568 $(88)(b) $(57) $423 $401 $5 $406 Segment assets $91,585 $18,596 $4,580 $1,060 $115,821 $20,248 (c) $(593) $135,476 $160,254 $1,515 $161,769
(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 $57 million and $390 million, at September 30, 2001 and 2000, respectively, related to GM's acquisition of HAC. - 11- GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 8. Segment Reporting (concluded)
Other GMNA GME GMLAAM GMAP GMA Hughes Other Total ACO GMAC Financing Total FIO ---- --- ------ ---- --- ------ ----- --------- ---- --------- --------- For the Nine Months Ended September 30, 2001 Net sales and revenues: External customers $80,824 $16,974 $4,311 $2,583 $104,692 $6,016 $1,484 $112,192 $18,907 $211 $19,118 Intersegment (1,332) 642 135 555 - 17 (17) - - - - ------ ------ ----- ----- ------- ----- ----- ------- ------ --- ------ Total net sales and revenues $79,492 $17,616 $4,446 $3,138 $104,692 $6,033 $1,467 $112,192 $18,907 $211 $19,118 ====== ====== ===== ===== ======= ===== ===== ======= ====== === ====== Interest income (a) $865 $279 $(4) $12 $1,152 $52 $(736) $468 $1,905 $(319) $1,586 Interest expense $1,016 $243 $66 $5 $1,330 $134 $(935) $529 $5,725 $184 $5,909 Net income (loss) $878 $(525) $30 $(82) $301 $(487)(b) $(796) $(982) $1,351 $(23) $1,328 For the Nine Months Ended September 30, 2000 Net sales and revenues: External customers $87,094 $18,593 $4,142 $2,357 $112,186 $6,440 $2,041 $120,667 $17,443 $181 $17,624 Intersegment (1,110) 722 140 248 - 26 (26) - - - - ------ ------ ----- ----- ------- ----- ----- ------- ------ --- ------ Total net sales and revenues $85,984 $19,315 $4,282 $2,605 $112,186 $6,466 $2,015 $120,667 $17,443 $181 $17,624 ====== ====== ===== ===== ======= ===== ===== ======= ====== === ====== Interest income (a) $418 $319 $19 $9 $765 $58 $(367) $456 $1,609 $(322) $1,287 Interest expense $879 $293 $77 $2 $1,251 $169 $(772) $648 $6,095 $323 $6,418 Net income (loss) $3,428 $206 $42 $(126) $3,550 $(229)(b) $(162) $3,159 $1,193 $11 $1,204
(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 $3 million and $16 million for 2001 and 2000, respectively. * * * * * * - 12- GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - concluded (Unaudited) Note 9. Subsequent Events On October 28, 2001, GM and its subsidiary Hughes together with EchoStar Communications Corporation (EchoStar) announced the signing of definitive agreements that provide for the spin-off of Hughes from GM and the merger of Hughes with EchoStar. The spin-off of Hughes from GM would result in current holders of GM Class H common stock receiving one share of new Hughes Class C common stock in exchange for each share of GM Class H common stock held prior to the spin-off. The merger of Hughes and EchoStar would result in Hughes being the surviving entity and taking the name EchoStar Communications Corp. Holders of Class A EchoStar common stock prior to the merger would receive about 1.3699 shares of stock of the merged entity in exchange for each share of Class A EchoStar common stock held prior to the merger. As part of the transaction, GM would receive up to $4.2 billion in cash for the reduction of its approximate 30% retained economic interest in Hughes to about 11% immediately preceding the merger. In addition GM plans to seek to exchange up to 100 million shares of GM Class H common stock (or after the transaction 100 million shares of new EchoStar common stock) for GM outstanding debt, which would further improve GM's net liquidity position. Following these transactions, GM expects to retain an approximate 3 to 5% interest in the merged entity. The transaction is subject to a number of conditions, including approval by a majority of each class of GM shareholders - GM $1-2/3 and GM Class H - voting both separately as distinct classes and also together as a single class. The proposed transaction also is subject to anti-trust clearance and approval by the Federal Communications Commission. The transaction is also contingent upon the receipt of a favorable ruling from the Internal Revenue Service that the separation of Hughes from GM will qualify as tax-free to GM and its stockholders for U.S. Federal Income Tax purposes. The transaction is currently expected to close in the second half of 2002. In connection with the disposition by Hughes of its defense electronics business to Raytheon Company in 1997, there were disputes regarding the purchase price adjustments. On October 16, 2001, Hughes reached a settlement of the dispute with Raytheon. GM's consolidated financial statements include a charge of $474 million for the quarter ended September 30, 2001 related to this settlement. -13- 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 (ACO) 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 third quarter of 2001, the Corporation's consolidated net loss was $368 million, or $(0.41) per share of GM $1-2/3 par value common stock, compared with consolidated net income of $829 million, or $1.55 per share of GM $1-2/3 par value common stock for the third quarter of 2000. GM's consolidated net income for the nine months ended September 30, 2001 was $346 million, or $1.16 per share of GM $1-2/3 par value common stock, compared with $4.4 billion, or $7.37 per share of GM $1-2/3 par value common stock for the nine months ended September 30, 2000. The consolidated net loss for the third quarter 2001 included special items on an after-tax basis. These items are detailed in the schedule on page 15 and represent the following: (1) The Ste. Therese charge at GMNA relates to the previously announced closing of the Ste. Therese, Quebec assembly plant. (2) The Raytheon settlement included in Other ACO relates to Hughes' settlement with the Raytheon Company on a purchase price adjustment related to Raytheon's 1997 merger with Hughes Defense. (3) The gain on sale of Thomson relates to Hughes' sale of 4.1 million shares of Thomson Multimedia common stock. (4) The SkyPerfecTV! writedown relates to Hughes' non-cash charge from the revaluation of its investment. (5) The severance charge relates to Hughes' 10% company-wide workforce reduction in the U.S. (6) The DIRECTV Japan adjustment relates to a favorable adjustment to the expected costs associated with the shutdown of Hughes' DIRECTV Japan business. GM's consolidated net income for the nine months ended September 30, 2001 also included special items related to GM's share of severance payments and asset impairments that were part of the restructuring of its affiliate Isuzu Motors Ltd. in the second quarter and the net impact of initially adopting SFAS No. 133, "Accounting for Derivatives and Hedging Activities" in the first quarter. There were no special items for the third quarter or first nine months of 2000. - 14 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES List of Special Items - After Tax (dollars in millions)
Total Other GMNA GME GMLAAM GMAP GMA Hughes Other Total ACO GMAC Financing Total GM ---- --- ------ ---- --- ------ ----- --------- ---- --------- -------- For the Three Months Ended September 30, 2001 Reported Net Income (Loss) $251 $(287) $(6) $60 $18 $(227) $(595) $(804) $437 $(1) $(368) Ste. Therese Charge 194 - - - 194 - - 194 - - 194 Raytheon Settlement - - - - - - 474 474 - - 474 Gain on Sale of Thomson - - - - - (67) - (67) - - (67) SkyPerfecTV! Writedown - - - - - 133 - 133 - - 133 Severance Charge - - - - - 40 - 40 - - 40 DIRECTV Japan Adjustment - - - - - (21) - (21) - - (21) --- --- --- --- --- ---- --- -- --- -- --- Adjusted Net Income (Loss) $445 $(287) $(6) $60 $212 $(142) $(121) $(51) $437 $(1) $385 === === = == === === === == === = === For the Nine Months Ended September 30, 2001 Reported Net Income (Loss) $878 $(525) $30 $(82) $301 $(487) $(796) $(982) $1,351 $(23) $346 Ste. Therese Charge 194 - - - 194 - - 194 - - 194 Raytheon Settlement - - - - - - 474 474 - - 474 Gain on Sale of Thomson - - - - - (67) - (67) - - (67) SkyPerfecTV! Writedown - - - - - 133 - 133 - - 133 Severance Charge - - - - - 40 - 40 - - 40 DIRECTV Japan Adjustment - - - - - (21) - (21) - - (21) Isuzu Restructuring - - - 133 133 - - 133 - - 133 SFAS No. 133 14 (2) 1 1 14 8 - 22 (34) - (12) ----- --- --- --- --- --- --- -- ----- --- ----- Adjusted Net Income(Loss) $1,086 $(527) $31 $52 $642 $(394) $(322) $(74) $1,317 $(23) $1,220 ===== === == == === === === == ===== == =====
See Results of Operations section on page 14 for further discussion of these items. - 15 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Vehicle Unit Deliveries of Cars and Trucks Three Months Ended September 30, ----------------------------------------------------- 2001 2000 ------------------------ ----------------------- GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- --- -------- -------- --- -------- (units in thousands) GMNA United States Cars 2,042 544 26.6% 2,297 670 29.2% Trucks 2,126 608 28.6% 2,257 579 25.7% ----- ----- ----- ----- Total United States 4,168 1,152 27.7% 4,554 1,249 27.4% Canada, Mexico, and Other 687 167 24.2% 695 186 26.8% ----- ----- ----- ----- Total GMNA 4,855 1,319 27.2% 5,249 1,435 27.3% GME 4,570 414 9.1% 4,697 413 8.8% GMLAAM 920 159 17.3% 950 159 16.8% GMAP 3,147 136 4.3% 3,260 125 3.8% ------ ----- ------ ----- Total Worldwide 13,492 2,028 15.0% 14,156 2,132 15.1% ====== ===== ====== ===== Nine Months Ended September 30, ----------------------------------------------------- 2001 2000 ------------------------ ----------------------- GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- --- -------- -------- --- -------- (units in thousands) GMNA United States Cars 6,455 1,757 27.2% 6,974 2,009 28.8% Trucks 6,584 1,866 28.3% 6,940 1,878 27.1% ------ ----- ------ ----- Total United States 13,039 3,623 27.8% 13,914 3,887 27.9% Canada, Mexico, and Other 2,060 515 25.0% 2,054 541 26.3% ------ ----- ------ ------ Total GMNA 15,099 4,138 27.4% 15,968 4,428 27.7% GME 15,150 1,415 9.3% 15,710 1,460 9.3% GMLAAM 2,878 497 17.3% 2,661 441 16.6% GMAP 9,748 381 3.9% 9,781 348 3.6% ------ ----- ------ ------ Total Worldwide 42,875 6,431 15.0% 44,120 6,677 15.1% ====== ===== ====== ===== Wholesale Sales Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2001 2000 2001 2000 -------- -------- -------- ------- (units in thousands) GMNA Cars 586 703 1,825 2,240 Trucks 651 625 1,999 2,153 ----- ----- ----- ----- Total GMNA 1,237 1,328 3,824 4,393 ----- ----- ----- ----- GME Cars 375 367 1,289 1,332 Trucks 21 29 70 102 --- --- ----- ----- Total GME 396 396 1,359 1,434 --- --- ----- ----- GMLAAM Cars 106 131 344 328 Trucks 48 50 156 142 --- --- --- --- Total GMLAAM 154 181 500 470 --- --- --- --- GMAP Cars 50 49 154 130 Trucks 71 85 206 215 --- --- --- --- Total GMAP 121 134 360 345 --- --- --- --- Total Worldwide 1,908 2,039 6,043 6,642 ===== ===== ===== ===== - 16 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review GMA's income and margin, adjusted to exclude special items (adjusted income and margin), was $212 million and 0.6% on net sales and revenues of $33.7 billion for the third quarter of 2001. This compares with income of $568 million and a net margin of 1.7% on net sales and revenues of $34.0 billion for the prior year quarter. The decrease in adjusted income from the prior year quarter was primarily due to a decrease in wholesale sales volume in North America and pricing pressures in both North America and Europe. These unfavorable conditions were partially offset by favorable mix and cost structure improvements. These factors, in addition to overall unfavorable mix for the nine months ended September 30, 2001, contributed to a decrease in adjusted income and margin to $642 million and 0.6% on net sales and revenues of $104.7 billion compared with income of $3.6 billion and a net margin of 3.2% on net sales and revenues of $112.2 billion for the prior year nine-month period. GMNA's adjusted income was $445 million for the third quarter of 2001, compared with $728 million for the prior year quarter. Adjusted income for the nine months ended September 30, 2001 totaled $1.1 billion compared with $3.4 billion for the prior year nine-month period. The decrease in GMNA's third quarter and year-to-date 2001 adjusted income was primarily the result of lower wholesale sales volumes and unfavorable net price, partially offset by favorable mix and aggressive cost containment due to manufacturing performance efficiencies, material cost savings, and engineering productivity. 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 (2.1)% year-over-year. This decrease includes a dealer stock adjustment of (0.6)% on units in dealer inventory on September 30, 2001 related to the Keep America Rolling sales incentive which offers interest-free automotive financing on U.S. models for retail vehicle customers. GME's loss was $287 million for the third quarter of 2001, compared with a loss of $181 million for the prior year quarter. This increase in the loss from the prior year quarter was primarily due to a continued unfavorable shift in sales mix from larger, more profitable vehicles to the smaller, less profitable entries and a continued increase in competitive pricing pressure. These factors, in addition to an overall decrease in wholesale sales volumes for the nine months ended September 30, 2001, contributed to an adjusted loss of $527 million compared with income of $206 million for the prior year nine-month period. GMLAAM's loss was $6 million for the third quarter of 2001, compared with income of $31 million for the prior year quarter. Adjusted income for the nine months ended September 30, 2001 totaled $31 million compared with $42 million for the prior year nine-month period. The decrease in third quarter and year-to-date 2001 adjusted earnings was primarily due to increases in material and manufacturing costs coupled with mix deterioration. These unfavorable items were partially offset by nominal price increases, as well as increases in wholesale sales volumes in the nine months ended September 30, 2001. GMAP's income for the third quarter of 2001 was $60 million compared with a loss of $10 million for the prior year quarter. The increase in third quarter earnings was primarily due to equity income improvements from several joint ventures in the region, as well as slightly favorable pricing and decreases in overall costs. These favorable conditions also contributed to adjusted income for the nine months ended September 30, 2001 totaling $52 million compared with a loss of $126 million for the prior year nine-month period. Hughes Financial Review Total net sales and revenues were $2.1 billion and $6.0 billion in the third quarter and first nine months of 2001, respectively, compared with $2.1 billion and $6.5 billion in the comparable periods in 2000. The decrease in year-to-date 2001 net sales and revenues resulted from decreased revenues at PanAmSat Corporation (PanAmSat) and Hughes Network Systems (HNS), 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 PanAmSat was primarily due to a decline of new outright sales and sales-type lease transactions executed during the first nine months of 2001 as compared to the first nine months of 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. 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 September 30, 2000. - 17 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes Financial Review (concluded) Hughes' adjusted loss was $142 million for the third quarter of 2001, compared with a loss of $88 million for the prior year quarter. The adjusted loss for the nine months ended September 30, 2001 totaled $394 million compared with a loss of $229 million for the prior year nine-month period. The increase in the third quarter and year-to-date 2001 adjusted losses was primarily due increased costs associated with the rollout of new DIRECTWAY services at HNS, increased depreciation and amortization expense due to capital expenditures for property and satellites since the third 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, the sale of the Satellite Businesses in October 2000, and the consolidation of Telocity Delaware, Inc. since its acquisition in April 2001. These increases in expenses were partially offset by a decrease in interest expense due to a net decrease in outstanding borrowings of $1.3 billion since September 30, 2000 and the write-off of the discontinued DIRECTV Japan business in 2000. The increase in adjusted loss for the first nine months of 2001 was also impacted by a decrease in income tax benefit of $137 million due to additional tax settlements and foreign tax credits received in 2000, as well as the additional tax benefit in 2000 associated with the write-off of Hughes' investment in DIRECTV Japan. On October 28, 2001, GM and its subsidiary Hughes together with EchoStar Communications Corporation (EchoStar) announced the signing of definitive agreements that, subject to stockholder approval and regulatory clearance, provide for the spin-off of Hughes from GM and the merger of Hughes with EchoStar. See Note 9 - Subsequent Events in the Notes of Consolidated Financial Statements for further details of this transaction. GMAC Financial Review GMAC's income was $437 million for the third quarter of 2001, compared with $401 million for the prior year quarter. Adjusted income for the nine months ended September 30, 2001 was $1.3 billion compared with $1.2 billion for the prior year nine-month period. Income from automotive and other financing operations totaled $310 million for the third quarter of 2001, compared with $273 million for the prior year quarter. The strong results can be attributed to higher asset levels 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 $49 million for the third quarter of 2001, compared with $50 million for the prior year quarter. The decrease was primarily due to lower investment income and capital gains reflecting general weakness in the equity markets partially offset by improved underwriting results. Income from mortgage operations totaled $78 million for the third quarter of 2001, virtually unchanged from the same quarter in 2000. This was primarily due to a significant increase in mortgage originations largely offset by intangibles impairment from higher levels of mortgage prepayments and the revaluation of retained interest securities from securitizations. LIQUIDITY AND CAPITAL RESOURCES Automotive, Communications Services, and Other Operations - --------------------------------------------------------- At September 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 $11.7 billion, compared with $13.3 billion at December 31, 2000 and $13.5 billion at September 30, 2000. The decrease from December 31, 2000 was primarily due to GM's purchase of an additional 10% equity stake in Suzuki, an increase in net capital expenditures, and the redemption of preferred securities. These items were partially offset by working capital improvements. Total assets in the VEBA trust used to pre-fund part of GM's other postretirement benefits liability approximated $4.9 billion at September 30, 2001, compared with $6.7 billion at December 31, 2000 and September 30, 2000, respectively. 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 $9.3 billion at September 30, 2001, compared with $7.4 billion at December 31, 2000 and $8.2 billion at September 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 39.5% at September 30, 2001, compared with 30.8% at December 31, 2000 and 30.9% at September 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 43.7% at September 30, 2001, compared with 36.6% at December 31, 2000 and 38.6% at September 30, 2000. Net liquidity, calculated as cash and marketable securities less the total of loans payable and long-term debt, was $(2.3) billion at September 30, 2001, compared with $662 million at December 31, 2000 and $(1.0) million at September 30, 2000. - 18 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive, Communications Services, and Other Operations (concluded) - --------------------------------------------------------------------- In October 2001, GM's credit rating was downgraded by Standard & Poor's, Fitch, Inc., and Moody's Investors Service. Although the downgrades diminish GM's access to the commercial paper market, the Corporation's overall financial flexibility continues to be strong as a result of the Corporation's cash position, ample contractually committed credit facilities and exceptional capital markets access. Financing and Insurance Operations - ---------------------------------- At September 30, 2001, GMAC owned assets and serviced automotive receivables totaling $205.5 billion, compared with $185.6 billion at December 31, 2000 and $174.9 billion at September 30, 2000. The increase from December 31, 2000 was primarily the result of increases in cash and cash equivalents, serviced retail receivables, real-estate mortgages held for sale, other assets, commercial and other loan receivables, mortgage lending receivables, and due and deferred from receivable sales. These increases were partially offset by a decline in serviced wholesale receivables, operating lease assets, receivables due from GM, mortgage loans held for investment, and factored receivables. Consolidated automotive and commercial finance receivables serviced by GMAC, including sold receivables, totaled $117.7 billion at September 30, 2001, compared with $112.5 billion at December 31, 2000 and $104.9 billion at September 30, 2000. The increase from December 31, 2000 was primarily the result of a $7.5 billion increase in serviced retail receivables, a $1.3 billion increase in commercial and other loan receivables, partially offset by a $3.4 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 September 30, 2001 compared with December 31, 2000. The on-balance sheet finance receivables decreased from $93.0 billion at December 30, 2000 to $90.6 billion at September 30, 2001 primarily due to an increase in securitization activity. At September 30, 2001, GMAC's total borrowings were $143.2 billion, compared with $133.4 billion at December 31, 2000 and $127.7 billion at September 30, 2000. GMAC's ratio of total debt to total stockholder's equity at both September 30, 2001 and December 31, 2000 was 9.5:1 compared with 9.4:1 at September 30, 2000. In October 2001, GMAC's credit rating was downgraded by Standard & Poor's and Fitch, Inc while Moody's Investors Service affirmed the company's rating. GMAC has proven its sound operating and financial position, the high quality and liquidity of its assets, the importance of its auto finance operations to GM, and the relatively strong position of the finance company's creditors. GMAC has operated with sound levels of alternative liquidity to support both its debt-paying ability and its ongoing business operations through market stresses. The company expects to remain positioned to operate as a prudent finance company, with more stable business metrics through economic cycles. 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 $37.44 at September 30, 2001, compared with $39.36 at December 31, 2000 and $40.39 at September 30, 2000. Book value per share of GM Class H common stock, was $7.49 at September 30, 2001, compared with $7.87 at December 31, 2000 and $8.08 at September 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 GM $1-2/3 par value common stock based on the outlook and indicated capital needs of the business. On August 7, 2001, the GM Board declared a quarterly cash dividend of $0.50 per share on GM $1-2/3 par value common stock, paid September 10, 2001, to holders of record on August 17, 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 November 1, 2001, to the sole holder of record on October 1, 2001. - 19 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Employment and Payrolls Worldwide employment at September 30, (in thousands) 2001 2000 ---- ---- GMNA 201 212 GME 74 90 GMLAAM 24 24 GMAP 11 11 GMAC 29 27 Hughes 11 18 Other 13 13 --- --- Total employees 363 395 === === Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Worldwide payrolls - (in billions) $4.9 $5.2 $15.0 $16.6 === === ==== ==== New Accounting Standards In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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. This statement specifies that certain acquired intangible assets in a business combination be recognized as assets separately from goodwill and existing intangible assets and goodwill be evaluated for these new separation requirements. Goodwill and intangible assets determined to have indefinite useful lives will not be amortized. The Corporation is evaluating but has not yet determined the impact that this statement will have on its consolidated financial position or results of operations. In June 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 Corporation is required to implement SFAS No. 142 on January 1, 2002. The Corporation is evaluating but has not yet determined the impact that this statement will have on its consolidated financial position or results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Corporation is required to implement SFAS No. 143 on January 1, 2002. Management does not expect this statement to have a material impact on GM's consolidated financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands on the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. The Corporation is required to implement SFAS No. 144 on January 1, 2002. Management does not expect this statement to have a material impact on GM's consolidated financial position or results of operations. * * * * * * * - 20 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES PART II ITEM 1. LEGAL PROCEEDINGS (a) Material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Corporation became, or was, a party during the quarter ended September 30, 2001, or subsequent thereto, but before the filing of this report are summarized below: Environmental Matters By letter dated August 16, 2001, U.S. EPA has alleged that General Motors Corporation violated the Resource Conservation and Recovery Act (RCRA) by failing to seek the reissuance of a permit within the time specified in the permit. The permit covers RCRA corrective action activities in the site of a former General Motors plant in Anderson, Indiana. U.S. EPA is seeking penalties in excess of $100,000. * * * Other Matters As previously reported six class actions were filed on behalf of owners of GM Class H shares alleging that in order to benefit GM in violation of alleged fiduciary duties, GM and Hughes have favored News Corp. over EchoStar as a bidder to merge with Hughes. Three additional class actions making essentially the same allegation having been filed in state courts in California (Brody v. Hughes Electronics Corp., et al, Lieberman v. Hughes Electronics Corp., et al) and New York (Krim v. General Motors Corporation, et. al). As indicated under Management's Discussion and Analysis in this report, GM, Hughes and EchoStar have entered into definitive agreements relating to a spin-off of Hughes from GM and the subsequent merger of Hughes and EchoStar. Management of News Corp. has notified GM that it has withdrawn its offer relating to a possible transaction involving Hughes. GM, Hughes and the Hughes directors intend to vigorously defend these actions. * * * With respect to the previously reported Oklahoma State Court action filed on May 18, 2001 by Cable Connections, Inc., TV Options, Inc., Swartzel Electronics, Inc. and Orbital Satellite, Inc., the Court granted DIRECTV's motion to stay and compel arbitration. * * * In April 2001, Robert Garcia doing business as Direct Satellite TV, a DIRECTV dealer, instituted arbitration proceedings with DIRECTV with the American Arbitration Association in Los Angeles, California regarding his commissions and certain chargeback disputes. The parties have been proceeding with the arbitration, though no hearing date has been set. On October 4, 2001, Mr. Garcia filed a class action complaint against DIRECTV and Hughes in Los Angeles Superior Court asserting the same chargeback/commissions claims and a Consumer Legal Remedies Act claim. Mr. Garcia alleges $300 million in class-wide damages and seeks certification of a class of plaintiffs to proceed in arbitration with court oversight. DIRECTV and Hughes do not believe that the court has jurisdiction to order or oversee the class-wide arbitration. DIRECTV and Hughes will vigorously defend against these allegations and seek to enforce the arbitration agreement. * * * On September 19, 2001, the National Rural Telecommunications Cooperation ("NRTC") filed a lawsuit against DIRECTV in the U.S. District Court of the Central District of California seeking a declaration from the Court that the NRTC is not required to defend and indemnify DIRECTV for the Pegasus Development Corporation and Personalized Media Communications v. DIRECTV, et al, lawsuit pending in the U.S. District Court for the District of Delaware. The NRTC has been paying and continues to pay DIRECTV's legal fees in that matter under protest. * * * - 21 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 1. LEGAL PROCEEDINGS (concluded) (b) Previously reported legal proceedings which have been terminated, either during the quarter ended September 30, 2001, or subsequent thereto, but before the filing of this report are summarized below: Environmental Matters As previously reported, on December 7, 2000, Federal and State (Indiana) environmental authorities made a settlement demand in excess of $100,000 against Guide Corporation (not affiliated with GM), Guide's parent corporation, a subcontractor of Guide and GM, relating to an alleged chemical release from the Guide operation which occurred more than a year after the Guide Corporation had acquired a vehicle lighting products operation from GM located in Anderson, Indiana. This matter has been resolved by a settlement in which GM was not required to make any contribution. * * * As previously reported, General Motors received two Notices of Violation dated May 25, 2000 and August 23, 2000 from the MDEQ alleging non-compliance at the Lansing Craft Centre with certain clean air regulations. General Motors received two additional Notices of Violation; one dated November 17, 2000 from the MDEQ and another dated October 27, 2000 from the U.S. Environmental Protection Agency. The facility has modified its air permit. GM has agreed to pay a penalty of $107,900 to MDEQ, and implemented three supplemental environmental projects, in settlement of these allegations. * * * Other Matters With regard to the previously reported EchoStar action filed on February 1, 2000 against DIRECTV, Hughes Network Systems and Thompson Consumer Electronics, Inc. and amended on April 5, 2001 to add Circuit City Stores, Inc., Best Buy Co., Inc. and Radio Shack Corporation as defendants, the matter was dismissed with prejudice against all DIRECTV companies and Hughes Network Systems on November 1, 2001. All the DIRECTV and Hughes' counterclaims against Echostar were dismissed with prejudice. * * * * * * * - 22 - 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 24 - ------------------ (b) REPORTS ON FORM 8-K. Eleven reports on Form 8-K, were filed on July 3, 2001, July 17, 2001, August 1, 2001, August 7, 2001, August 21, 2001, August 27, 2001, September 4, 2001, September 18, 2001, September 21, 2001, September 25, 2001 and September 26, 2001 during the quarter ended September 30, 2001 reporting matters under Item 5, Other Events. * * * * * * SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. GENERAL MOTORS CORPORATION -------------------------- (Registrant) Date: November 13, 2001 /s/Peter R. Bible - ----------------------- ------------------------------------------ (Peter R. Bible, Chief Accounting Officer) - 23 - EX-99 3 hughesex99-sept2001.txt GMC SUBSIDIARY HUGHES' 3RD 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 Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (Dollars in Millions) Revenues Direct broadcast, leasing and other services $1,830.9 $1,485.5 $5,267.7 $4,523.3 Product sales 272.4 203.0 713.7 705.3 ------- ------- ------- ------- Total Revenues 2,103.3 1,688.5 5,981.4 5,228.6 ------- ------- ------- ------- Operating Costs and Expenses Broadcast programming and other costs 830.1 681.4 2,355.4 2,035.9 Cost of products sold 246.7 146.2 590.4 580.6 Selling, general and administrative expenses 950.0 753.0 2,763.9 2,171.9 Depreciation and amortization 280.2 238.3 850.9 673.1 ------- ------- ------- ------- Total Operating Costs and Expenses 2,307.0 1,818.9 6,560.6 5,461.5 ------- ------- ------- ------- Operating Loss (203.7) (130.4) (579.2) (232.9) Interest income 9.4 7.1 52.2 15.3 Interest expense (40.6) (66.5) (134.0) (169.2) Other, net (86.3) (11.9) (90.0) (294.4) ------- ------- ------- ------- Loss From Continuing Operations Before Income Taxes, Minority Interests and Cumulative Effect of Accounting Change (321.2) (201.7) (751.0) (681.2) Income tax benefit 93.1 77.8 217.8 354.4 Minority interests in net losses of subsidiaries 0.9 19.6 51.6 31.7 ------- ------- ------- ------- Loss from continuing operations before cumulative effect of accounting change (227.2) (104.3) (481.6) (295.1) Income from discontinued operations, net of taxes -- 10.5 -- 50.3 ------- ------- ------- ------- Loss before cumulative effect of accounting change (227.2) (93.8) (481.6) (244.8) Cumulative effect of accounting change, net of taxes -- -- (7.4) -- ------- ------- ------- ------- Net Loss (227.2) (93.8) (489.0) (244.8) Adjustment to exclude the effect of GM purchase accounting 0.9 5.3 2.5 15.9 ------- ------- ------- ------- Loss excluding the effect of GM purchase accounting adjustment (226.3) (88.5) (486.5) (228.9) Preferred stock dividends (24.1) (24.1) (72.3) (72.9) ------- ------- ------- ------- Loss Used for Computation of Available Separate Consolidated Net Income (Loss) $(250.4) $(112.6) $(558.8) $(301.8) ======= ======= ======= ======= Available Separate Consolidated Net Income (Loss) Average number of shares of General Motors Class H Common Stock outstanding (in millions) (Numerator) 876.8 873.9 876.0 616.7 Average Class H dividend base (in millions) (Denominator) 1,300.5 1,297.8 1,299.7 1,296.5 Available Separate Consolidated Net Income (Loss) $(168.8) $(75.8) $(376.6) $(143.6) ====== ======= ====== ====== - ----------------- Reference should be made to the Notes to the Consolidated Financial Statements. - 24 -
HUGHES ELECTRONICS CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, December 31, 2001 2000 ---- ---- (Dollars in Millions) ASSETS Current Assets Cash and cash equivalents $ 698.5 $1,508.1 Accounts and notes receivable (less allowances) 1,275.5 1,253.0 Contracts in process 156.3 186.0 Inventories 374.8 338.0 Deferred income taxes 103.1 89.9 Prepaid expenses and other 1,054.5 778.7 ------- ------- Total Current Assets 3,662.7 4,153.7 Satellites, net 4,617.6 4,230.0 Property, net 2,097.4 1,707.8 Net Investment in Sales-type Leases 233.5 221.1 Intangible Assets, net 7,288.5 7,151.3 Investments and Other Assets 1,225.4 1,815.4 ------- ------- Total Assets $19,125.1 $19,279.3 ======== ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts payable $ 1,407.9 $1,224.2 Deferred revenues 181.7 137.6 Short-term borrowings and current portion of long-term debt 838.3 24.6 Accrued liabilities and other 1,909.3 1,304.5 ------- ------- Total Current Liabilities 4,337.2 2,690.9 Long-Term Debt 975.0 1,292.0 Other Liabilities and Deferred Credits 1,547.9 1,647.3 Deferred Income Taxes 619.6 769.3 Commitments and Contingencies Minority Interests 527.2 553.7 Stockholder's Equity Capital stock and additional paid-in capital 9,562.2 9,973.8 Preferred stock 1,497.7 1,495.7 Retained earnings 70.3 631.6 -------- -------- Subtotal Stockholder's Equity 11,130.2 12,101.1 -------- -------- Accumulated Other Comprehensive Income (Loss) Minimum pension liability adjustment (16.1) (16.1) Accumulated unrealized gains on securities and derivatives 42.1 257.0 Accumulated foreign currency translation adjustments (38.0) (15.9) -------- -------- Accumulated other comprehensive income (Loss) (12.0) 225.0 -------- -------- Total Stockholder's Equity 11,118.2 12,326.1 -------- -------- Total Liabilities and Stockholder's Equity $19,125.1 $19,279.3 ======== ======== - ---------- Reference should be made to the Notes to the Consolidated Financial Statements. - 25 - HUGHES ELECTRONICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 2001 2000 (Dollars in Millions) Cash Flows from Operating Activities Net Cash Provided by (Used in) Operating Activities $ (145.9) $ 316.0 -------- -------- Cash Flows from Investing Activities Investment in companies, net of cash acquired (213.7) (347.3) Expenditures for property (583.7) (654.3) Expenditures for satellites (643.7) (551.1) Proceeds from disposal of property 0.2 12.8 Proceeds from sale of investments 200.5 41.5 Proceeds from insurance claims 132.4 36.2 -------- -------- Net Cash Used in Investing Activities (1,108.0) (1,462.2) -------- -------- Cash Flows from Financing Activities Net increase in short-term borrowings 367.2 578.5 Long-term debt borrowings 1,515.8 3,973.3 Repayment of long-term debt (1,386.3) (3,602.4) Stock options exercised 17.9 63.7 Preferred stock dividends paid to General Motors (70.3) (72.9) -------- -------- Net Cash Provided by Financing Activities 444.3 940.2 -------- -------- Net cash used in continuing operations (809.6) (206.0) Net cash provided by discontinued operations -- 146.2 -------- -------- Net decrease in cash and cash equivalents (809.6) (59.8) Cash and cash equivalents at beginning of the period 1,508.1 238.2 -------- -------- Cash and cash equivalents at end of the period $ 698.5 $ 178.4 ======== ======== - ---------- Reference should be made to the Notes to the Consolidated Financial Statements. - 26 - 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 Reports on Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001, filed with the Securities and Exchange Commission ("SEC") on March 6, 2001, May 10, 2001 and August 14, 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 September 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 9. 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 was allocated to the Satellite Businesses as part of the Boeing transaction. 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 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." - 27 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Note 2. Accounting Policies - (concluded) The net deferred gain from effective cash flow hedges in OCI of $3.1 million at September 30, 2001 is expected to be recognized in earnings during the next twelve months. New Accounting Standards In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 refines existing impairment accounting guidance and extends the use of this accounting to discontinued operations. SFAS No. 144 allows the use of discontinued operations accounting treatment for both reporting segments and distinguishable components thereof. SFAS No. 144 also eliminates the existing exception to consolidation of a subsidiary for which control is likely to be temporary. Hughes will adopt the statement on January 1, 2002, as required, and, as a result of adoption, does not expect a significant impact on Hughes' consolidated results of operations or financial position. In July 2001, the 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 nine months ended September 30, 2001 was $155.4 million. These statements will have no impact on Hughes' consolidated cash flows. Note 3. Inventories Major Classes of Inventories September 30, December 31, 2001 2000 ---- ---- (Dollars in Millions) Productive materials and supplies $106.1 $ 89.5 Work in process 131.9 128.3 Finished goods 136.8 120.2 ----- ----- Total $374.8 $338.0 ===== ===== Note 4. Employee Termination Benefits During the third quarter of 2001, Hughes announced a 10% reduction of its approximately 7,900 employees located in the United States. As a result, in the third quarter of 2001, 734 employees, across all business disciplines, were given notification of termination that resulted in a charge to operations of $65.3 million. Of that charge, $57.8 million related to employee severance benefits and $7.5 million was for other costs primarily related to a remaining lease obligation associated with excess office space and employee equipment. Additionally, during the second quarter of 2001, Hughes accrued, as a charge to operations, $22.2 million of employee severance benefits associated with the termination of 16 employees. As of September 30, 2001, 37 employees had been terminated with a substantial portion of the remaining employees to be terminated and paid in the fourth quarter of 2001. The remaining accrual for employee severance and other costs amounted to $67.6 million and $7.5 million, respectively, at September 30, 2001. - 28 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Note 5. Comprehensive Income (Loss) Hughes' total comprehensive income (loss) was as follows:
Three Months Nine Months Ended Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- (Dollars in Millions) Net loss $(227.2) $ (93.8) $(489.0) $(244.8) Other comprehensive income (loss): Foreign currency translation adjustments (19.3) (1.9) (22.1) (21.0) Cumulative effect of accounting change -- -- 0.4 -- Unrealized gains (losses) on securities and derivatives: Unrealized holding gains (losses) (123.5) 144.6 (263.2) 126.4 Less: reclassification adjustment for net losses recognized during the period 62.3 -- 47.9 -- ----- ----- ----- ----- Other comprehensive income (loss) (80.5) 142.7 (237.0) 105.4 ----- ----- ----- ----- Total comprehensive income (loss) $(307.7) $ 48.9 $(726.0) $(139.4) ===== ===== ===== =====
Note 6. 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 (876.8 million and 873.9 million during the third 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 1,300.5 million and 1,297.8 million during the third 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. - 29 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Note 6. Available Separate Consolidated Net Income (Loss) - (concluded) 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 7. 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 8. Short-Term Borrowings and Long-Term Debt Short-Term Borrowings and Current Portion of Long-Term Debt
Interest Rates at September 30, December 31, September 30, 2001 2001 2000 ----------------- ------------- ------------- (Dollars in Millions) Revolving credit facility 3.60% $376.0 Other short-term borrowings 5.07%-10.07% 9.7 $ 3.4 Current portion of long-term debt 4.92%- 9.09% 452.6 21.2 ------ ----- Total short-term borrowings and current portion of long-term debt $838.3 $24.6 ====== ===== Long-Term Debt Interest Rates at September 30, December 31, September 30, 2001 2001 2000 ----------------- ------------- ------------- (Dollars in Millions) Notes payable 4.92%- 6.88% $ 796.5 $ 817.7 Revolving credit facilities 5.70%- 5.93% 588.2 464.9 Other debt 5.07%-12.14% 42.9 30.6 ------- ------- Total debt 1,427.6 1,313.2 Less current portion 452.6 21.2 ------- ------- Total long-term debt $ 975.0 $1,292.0 ======= =======
- 30 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Note 9. 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). The September 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. 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. Nine Months Ended September 30, ------------- 2001 2000 ---- ---- (Dollars in Millions) Total revenues $5,989.5 $5,233.3 Net loss (536.7) (346.7) Hughes accounts for acquisitions using the purchase method of accounting, with the results of acquired entities included in the consolidated financial statements from their respective dates of acquisition. Accordingly, the purchase price is 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 is recorded as goodwill. Goodwill additions amounted to $349.1 million for the nine months ended September 30, 2001. 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 $108.0 million. - 31 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Note 9. Acquisitions, Investments and Divestitures - (concluded) 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 11. Summarized financial information for the discontinued operations (excluding intercompany transactions) follows: Nine Months Ended September 30, 2000 ------------------ (Dollars in Millions) Revenues $1,179.6 Income tax provision 30.0 Net income 50.3 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. In the third quarter of 2001, $32.0 million of accrued exit costs were reversed as a credit adjustment to "Other, net." 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 $2.8 million was paid for accrued exit costs and no amounts were paid for involuntary termination benefits during the third quarter of 2001. At September 30, 2001, about $50 million is remaining for accrued exit costs. 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 third quarter of 2001 and 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 $212 million and $86 million, respectively. At September 30, 2001, the investment's market value of $111.1 million approximated its carrying value. - 32 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Note 10. 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. Selected information for Hughes' operating segments are reported as follows:
Drect-To- Home Satellite Network Broadcast Services Systems Other Eliminations Total --------- --------- ------- ----- ------------ ----- (Dollars in Millions) For the Three Months Ended: September 30, 2001 External Revenues $1,566.0 $212.4 $315.6 $ 9.3 -- $2,103.3 Intersegment Revenues 6.6 40.5 24.1 -- $(71.2) -- ------- ------ ------- ----- ------ -------- Total Revenues $1,572.6 $252.9 $339.7 $ 9.3 $(71.2) $2,103.3 ======= ====== ======= ===== ====== ======== Operating Profit (Loss) $ (245.4) $ 62.1 $(35.1) $(5.8) $ 20.5 $ (203.7) September 30, 2000 External Revenues $1,284.7 $164.8 $234.3 $ 4.7 -- $1,688.5 Intersegment Revenues 6.8 34.5 49.7 2.0 $(93.0) -- ------- ------ ------- ----- ------ -------- Total Revenues $1,291.5 $199.3 $284.0 $ 6.7 $(93.0) $1,688.5 ======== ====== ======= ===== ====== ======== Operating Profit (Loss) $ (150.1) $ 52.0 $ 1.6 $(18.3) $(15.6) $ (130.4) For the Nine Months Ended: September 30, 2001 External Revenues $4,576.1 $547.3 $833.2 $24.8 -- $5,981.4 Intersegment Revenues 14.1 119.1 56.9 0.1 $(190.2) -- -------- ------ ------- ------ ------- -------- Total Revenues $4,590.2 $666.4 $890.1 $24.9 $(190.2) $5,981.4 ======== ====== ======= ====== ======= ======== Operating Profit (Loss) $ (573.8) $136.0 $(144.2) $(27.2) $ 30.0 $ (579.2) September 30, 2000 External Revenues $3,692.7 $715.3 $ 808.1 $ 12.5 -- $5,228.6 Intersegment Revenues 24.8 105.4 212.2 4.8 $(347.2) -- -------- ------ ------- ------ ------- -------- Total Revenues $3,717.5 $820.7 $1,020.3 $ 17.3 $(347.2) $5,228.6 ======== ====== ======== ====== ======= ======== Operating Profit (Loss) $ (410.9) $319.1 $ (15.4) $(79.0) $ (46.7) $ (232.9)
- 33 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Note 11. 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 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. 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 was heard on October 15, 2001 by the Second Circuit Court of Appeals. 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 could 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 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 could 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. - 34 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(concluded) Note 11. Contingencies - (concluded) 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 net book value of satellites that were self-insured or with coverage exclusions amounted to approximately $957.0 million at September 30, 2001. Note 12. Subsequent Events In connection with the 1997 spin-off of Hughes' defense electronics business and the subsequent merger of that business with Raytheon, a dispute existed regarding the purchase price adjustments and related issues regarding the adequacy of disclosures made by Hughes to Raytheon in the period prior to consummation of the merger. On October 16, 2001, Hughes reached a settlement of the dispute with Raytheon. Under the terms of the settlement agreement, Hughes agreed to reimburse Raytheon $635.5 million of the original $9.5 billion purchase price. Of the total amount owed to Raytheon, $500 million was paid in October 2001, with the remaining balance to be paid within six months. As a result of the settlement, in the third quarter of 2001, Hughes recorded a decrease to "capital stock and additional paid-in capital" of $574.2 million. - 35 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY DATA
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ----- ---- ---- ---- (Dollars in Millions) (Unaudited) Consolidated Statements of Operations Data: Total revenues $2,103.3 $1,688.5 $5,981.4 $5,228.6 Total operating costs and expenses 2,307.0 1,818.9 6,560.6 5,461.5 -------- -------- -------- -------- Operating loss (203.7) (130.4) (579.2) (232.9) Other expenses, net (117.5) (71.3) (171.8) (448.3) Income tax benefit 93.1 77.8 217.8 354.4 Minority interests in net losses of subsidiaries 0.9 19.6 51.6 31.7 Loss from continuing operations before cumulative effect of accounting change (227.2) (104.3) (481.6) (295.1) Income from discontinued operations, net of taxes -- 10.5 -- 50.3 Cumulative effect of accounting change, net of taxes -- -- (7.4) -- ------- ------- ------- ------- Net loss (227.2) (93.8) (489.0) (244.8) Adjustment to exclude the effect of GM purchase accounting 0.9 5.3 2.5 15.9 Preferred stock dividends (24.1) (24.1) (72.3) (72.9) ------- ------- ------- ------- Loss Used for Computation of Available Separate Consolidated Net Income (Loss) $ (250.4) $(112.6) $(558.8) $ (301.8) ======== ======= ======= ======== Other Data: EBITDA (1) $ 76.5 $ 107.9 $ 271.7 $ 440.2 EBITDA Margin (1) 3.6% 6.4% 4.5% 8.4% Depreciation and amortization $ 280.2 $ 238.3 $ 850.9 $ 673.1 Capital expenditures 366.0 426.0 1,227.4 1,205.4
September 30, 2001 December 31, (Unaudited) 2000 ------------ ------------ Consolidated Balance Sheet Data: (Dollars in Millions) Cash and cash equivalents $ 698.5 $ 1,508.1 Total current assets 3,662.7 4,153.7 Total assets 19,125.1 19,279.3 Total current liabilities 4,337.2 2,690.9 Long-term debt 975.0 1,292.0 Minority interests 527.2 553.7 Total stockholder's equity 11,118.2 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: September 30, 2001 Total Revenues $1,572.6 $252.9 $339.7 $(61.9) $2,103.3 - -------------------------------------------------------------------------------------------------- Operating Profit (Loss) $ (245.4) $ 62.1 $(35.1) $ 14.7 $ (203.7) Operating Profit Margin N/A 24.6% N/A N/A N/A EBITDA $ (74.2) $166.2 $(22.6) $ 7.1 $ 76.5 EBITDA Margin N/A 65.7% N/A N/A 3.6% - -------------------------------------------------------------------------------------------------- Depreciation and Amortization $ 171.2 $104.1 $ 12.5 $ (7.6) $ 280.2 Capital Expenditures 168.6 80.3 121.9 (4.8) 366.0 - -------------------------------------------------------------------------------------------------- September 30, 2000 Total Revenues $1,291.5 $199.3 $284.0 $(86.3) $1,688.5 - -------------------------------------------------------------------------------------------------- Operating Profit (Loss) $(150.1) $ 52.0 $ 1.6 $(33.9) $ (130.4) Operating Profit Margin N/A 26.1% 0.6% N/A N/A EBITDA $ (17.7) $135.5 $ 16.8 $(26.7) $ 107.9 EBITDA Margin N/A 68.0% 5.9% N/A 6.4% - -------------------------------------------------------------------------------------------------- Depreciation and Amortization $ 132.4 $ 83.5 $ 15.2 $ 7.2 $ 238.3 Capital Expenditures 262.0 109.4 79.2 (24.6) 426.0 - -------------------------------------------------------------------------------------------------- For the Nine Months Ended: September 30, 2001 Total Revenues $4,590.2 $666.4 $890.1 $(165.3) $5,981.4 - -------------------------------------------------------------------------------------------------- Operating Profit (Loss) $ (573.8) $136.0 $(144.2) $ 2.8 $ (579.2) Operating Profit Margin N/A 20.4% N/A N/A N/A EBITDA $ (69.5) $440.7 $ (97.7) $ (1.8) $ 271.7 EBITDA Margin N/A 66.1% N/A N/A 4.5% - -------------------------------------------------------------------------------------------------- Depreciation and Amortization $ 504.3 $304.7 $ 46.5 $ (4.6) $ 850.9 Capital Expenditures 522.5 241.7 467.2 (4.0) 1,227.4 - -------------------------------------------------------------------------------------------------- September 30, 2000 Total Revenues $3,717.5 $820.7 $1,020.3 $(329.9) $5,228.6 - -------------------------------------------------------------------------------------------------- Operating Profit (Loss) $ (410.9) $319.1 $ (15.4) $(125.7) $ (232.9) Operating Profit Margin N/A 38.9% N/A N/A N/A EBITDA $ (40.9) $557.9 $ 34.4 $(111.2) $ 440.2 EBITDA Margin N/A 68.0% 3.4% N/A 8.4% - -------------------------------------------------------------------------------------------------- Depreciation and Amortization $ 370.0 $238.8 $ 49.8 $ 14.5 $ 673.1 Capital Expenditures 649.1 317.6 241.0 (2.3) 1,205.4 - --------------------------------------------------------------------------------------------------
- 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 Reports on Form 10-Q for the quarter ended March 31, 2001 and June 30, 2001 filed with the Securities and Exchange Commission ("SEC") on March 6, 2001, May 10, 2001 and August 14, 2001, respectively, and all other Hughes filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report. In addition, the following discussion excludes purchase accounting adjustments related to General Motors' acquisition of Hughes. This Quarterly Report may contain certain statements that Hughes believes are, or may be considered to be, "forward-looking statements," within the meaning of 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 the 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, loss of uninsured 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 9 to the consolidated financial statements and "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures," below. 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 9 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 operating results for the Latin America DIRECTV businesses are comprised of DIRECTV Latin America, LLC ("DLA"), which provides DIRECTV programming to local operating companies located in Latin America and the Caribbean Basin; the exclusive distributors of DIRECTV located in Mexico, Brazil, Argentina, Colombia, and Trinidad and Tobago; and SurFin Ltd. ("SurFin"), a company that provides financing of subscriber receiver equipment to certain DLA local operating companies. Certain of the local operating companies were recently acquired and are discussed in Note 9 to the consolidated financial statements and "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures," below. The non-operating results of the Latin America DIRECTV businesses include the results of unconsolidated local operating companies that are the exclusive distributors of DIRECTV in Venezuela and Puerto Rico. 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 9 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). Recent Events During the third quarter of 2001, Hughes announced a 10% reduction of its approximately 7,900 employees located in the United States. As a result, in the third quarter of 2001, 734 employees, across all business disciplines, were given notification of termination that resulted in a charge to operations of $65.3 million. Of that charge, $57.8 million related to employee severance benefits and $7.5 million was for other costs primarily related to a remaining lease obligation associated with excess office space and employee equipment. Additionally, during the second quarter of 2001, Hughes accrued, as a charge to operations, $22.2 million of employee severance benefits associated with the termination of 16 employees. As of September 30, 2001, 37 employees had been terminated with a substantial portion of the remaining employees to be terminated and paid in the fourth quarter of 2001. The remaining accrual for employee severance and other costs amounted to $67.6 million and $7.5 million, respectively, at September 30, 2001. - 39 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS -- (continued) In connection with the 1997 spin-off of Hughes' defense electronics business and the subsequent merger of that business with Raytheon, a dispute existed regarding the purchase price adjustments and related issues regarding the adequacy of disclosures made by Hughes to Raytheon in the period prior to consummation of the merger. On October 16, 2001, Hughes reached a settlement of the dispute with Raytheon. Under the terms of the settlement agreement, Hughes agreed to reimburse Raytheon $635.5 million of the original $9.5 billion purchase price. Of the total amount owed to Raytheon, $500 million was paid in October 2001, with the remaining balance to be paid within six months. As a result of the settlement, in the third quarter of 2001, Hughes recorded a decrease to "capital stock and additional paid-in capital" of $574.2 million. 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. currently has two satellites under construction, the DIRECTV 4S and 7S satellites, both high-power spot-beam satellites, which are expected to be launched in November 2001 and in late 2003, respectively. DIRECTV expects to use the DIRECTV 4S and 7S satellites to provide additional capacity for new local channel service or other new services. Also, the high-power DIRECTV 5 satellite is expected to be launched in the fourth quarter of 2001 as a replacement to DIRECTV 6, which will then serve as a back-up. Results of Operations Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 Revenues. Revenues for the third quarter of 2001 increased 24.6% to $2,103.3 million, compared with $1,688.5 million in the third quarter of 2000. The increased revenues resulted primarily from $281.1 million of higher revenues at the Direct-To-Home Broadcast segment over the third quarter of 2000. The increase was due to the addition of 1.7 million net new DIRECTV subscribers in the United States and Latin America since September 30, 2000 and added revenues from the consolidation of Galaxy Entertainment Argentina S.A. ("GEA"). This transaction is discussed more fully in Note 9 to the consolidated financial statements and "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures," below. Also contributing to the overall increase in revenues was the Network Systems segment and the Satellite Services segment. The Network Systems segment reported an increase in revenues of $55.7 million that resulted from increased sales of phones and systems for mobile satellite programs and sales of enterprise networks, partially offset by decreased sales of DIRECTV receiving equipment and manufacturing subsidies. The Satellite Services segment also reported an increase in revenues of $53.6 million primarily due to a new sales-type lease transaction executed during the third quarter of 2001 for which there was no comparable transaction in 2000. Operating Costs and Expenses. Operating costs and expenses increased to $2,307.0 million in the third quarter of 2001 from $1,818.9 million in the third quarter of 2000. Broadcast programming and other costs increased by $148.7 million in the third 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, added costs from DIRECTV Broadband and increased costs at the Satellite Services segment associated with a new sales-type lease transaction executed during the third quarter of 2001. Costs of products sold increased by $100.5 million in the third quarter of 2001 from the third quarter of 2000 due - 40 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS -- (continued) mostly to the increased equipment sales discussed above. Selling, general and administrative expenses increased by $197.0 million during the third quarter of 2001 compared to the same period in 2000 due primarily to increased subscriber acquisition costs in both the United States and Latin America, added costs from DIRECTV Broadband and a $65.3 million charge, primarily for severance, related to the 2001 company-wide employee reduction. Depreciation and amortization increased by $41.9 million during the third quarter of 2001 compared to the third quarter of 2000 due to the addition of property and satellites since September 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, goodwill amortization and added depreciation that resulted from DIRECTV Broadband and the consolidation of GEA. 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 third quarter of 2001 was $76.5 million and EBITDA margin was 3.6%, compared to EBITDA of $107.9 million and EBITDA margin of 6.4% in the third quarter of 2000. The change in EBITDA resulted from the $65.3 million charge related to severance and decreased EBITDA at the Direct-To-Home Broadcast segment primarily due to negative EBITDA associated with DIRECTV Broadband. Also contributing to the decrease was lower EBITDA at the Hughes Network Systems segment primarily due to increased costs associated with the rollout of new DIRECWAY(TM) services, including AOL Plus Powered by DIRECWAY, and a $21 million gain recognized in 2000 that resulted from successful negotiations with certain narrowband wireless customers for receivables previously written-off. These decreases were partially offset by the Satellite Services segment's improved EBITDA that resulted from the increased revenues. The change in EBITDA margin resulted primarily from the $65.3 million charge related to severance, increased costs at the Network Systems segment and DIRECTV Broadband. Operating Loss. The operating loss for the third quarter of 2001 was $203.7 million compared to an operating loss of $130.4 million in 2000. The increased operating loss resulted from the decrease in EBITDA and higher depreciation and amortization expense. Interest Income and Expense. Interest income increased to $9.4 million for the third quarter of 2001 compared to interest income of $7.1 million for the same period of 2000. Interest expense decreased to $40.6 million for the third quarter of 2001 from $66.5 million for the third 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 increased to an expense of $86.3 million for the third quarter of 2001 from an expense of $11.9 million in the same period of 2000. Other, net expense for the third quarter of 2001 resulted primarily from equity method losses of $14.1 million and a write-down of $212.0 million related to the Sky Perfect investment (see further discussion in Note 9 to the consolidated financial statements and "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures," below), partially offset by $108.4 million of gains from the sale of investments and the reversal of $32.0 million of accrued exit costs related to the DIRECTV Japan business. See further discussion in Note 9 to the consolidated financial statements and "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures," below. Other, net expense for the third quarter of 2000 resulted primarily from equity method losses. Income Taxes. Hughes recognized an income tax benefit of $93.1 million for the third quarter of 2001, compared to $77.8 million in the third quarter of 2000. The higher tax benefit in the third quarter of 2001 is due to higher pre-tax losses in 2001. The tax benefit in 2000 included the effects of favorable tax settlements. - 41 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS -- (continued) Loss From Continuing Operations. Hughes reported a loss from continuing operations before cumulative effect of accounting change of $227.2 million for the 2001 third quarter, compared to $104.3 million for the same period of 2000. Discontinued Operations. Revenues for the Satellite Businesses for the third quarter of 2000 were $499.5 million. Revenues, excluding intercompany transactions, for the third quarter of 2000 were $378.4 million. The Satellite Businesses reported operating profit of $29.4 million for the third quarter of 2000. Operating profit, excluding intercompany transactions, amounted to $16.7 million for the third quarter of 2000. Income from discontinued operations, net of taxes was $10.5 million for the third quarter of 2000. Direct-To-Home Broadcast Segment Direct-To-Home Broadcast segment third quarter 2001 revenues increased 21.8% to $1,572.6 million from $1,291.5 million in the third quarter of 2000. The Direct-To-Home Broadcast segment had negative EBITDA of $74.2 million in the third quarter of 2001 compared with negative EBITDA of $17.7 million in the third quarter of 2000. The operating loss for the segment increased to $245.4 million in the third quarter of 2001 from $150.1 million in the third quarter of 2000. United States. The DIRECTV U.S. businesses were the biggest contributors to the segment's revenue growth with revenues of $1,363 million for the third quarter of 2001, an 18% increase over third quarter 2000 revenues of $1,154 million. The large change resulted primarily from an increased number of DIRECTV subscribers since September 30, 2000. DIRECTV added 425,000 net new subscribers in the third quarter of 2001, compared to 450,000 net new subscribers in the third quarter of 2000. As of September 30, 2001, DIRECTV had about 10.3 million high-power subscribers compared to about 9.0 million high-power subscribers at September 30, 2000. Average monthly revenue per subscriber was $54.70 and $53.60 in the third quarter of 2001 and 2000, respectively. EBITDA was negative $28 million for the third quarter of 2001 compared to EBITDA of $36 million for the third quarter of 2000. The operating loss for the third quarter of 2001 was $141 million compared to $62 million in the third quarter of 2000. The decrease in EBITDA was due to a $48 million charge primarily related to severance and higher subscriber acquisition costs which resulted from the increased number of subscribers, which more than offset the increased revenues discussed above. The increased operating loss resulted from the decrease in EBITDA and higher depreciation expense primarily associated with customer leased DIRECTV receiving equipment. Latin America. Revenues for the Latin America DIRECTV businesses increased 48% to $201 million for the third quarter of 2001 from $136 million for the third quarter of 2000. The increase in revenues was primarily due to continued subscriber growth and the consolidation of GEA. Latin America DIRECTV added about 66,000 net new subscribers in the third quarter of 2001 compared to about 126,000 net new subscribers in the third quarter of 2000. Subscribers grew to about 1,497,000 at September 30, 2001 compared to about 1,136,000 at September 30, 2000. Average monthly revenue per subscriber was $35 and $36 in the third quarter of 2001 and 2000, respectively. EBITDA was a negative $17 million in the third quarter of 2001 compared to negative EBITDA of $50 million in the third quarter of 2000. The change in EBITDA was due to the increased revenues discussed above, partially offset by a $10 million charge primarily related to severance in the third quarter of 2001. The Latin America DIRECTV businesses incurred an operating loss of $63 million for the third quarter of 2001 compared to an operating loss of $85 million in the third quarter of 2000. The decreased operating loss resulted primarily from the improvement in EBITDA, partially offset by higher depreciation expense that resulted from an increase in customer leased DIRECTV receiving equipment and the consolidation of GEA. DIRECTV Broadband. Revenues and EBITDA for DIRECTV Broadband were $9 million and negative $33 million for the third quarter of 2001, respectively. DIRECTV Broadband incurred an operating loss of $44 million for the third quarter of 2001. DIRECTV Broadband added about 5,000 net new subscribers in the third quarter of 2001. Subscriber additions were negatively impacted by the bankruptcy of a wholesale provider of DSL services. At September 30, 2001, DIRECTV Broadband had more than 73,000 residential subscribers in the United States. - 42 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS -- (continued) Satellite Services Segment Revenues for the Satellite Services segment in the third quarter of 2001 increased $53.6 million to $252.9 million from $199.3 million in the same period in the prior year. The increase was primarily due to a new sales-type lease transaction of $45.5 million executed during the third quarter of 2001 for which there was no comparable transaction in the third quarter of 2000. Revenues associated with outright sales and sales-type leases of transponders were $51.0 million for the third quarter of 2001 compared to $8.5 million for the third quarter of 2000. Revenues from operating leases of transponders, satellite services and other were 79.8% of total revenues for the third quarter of 2001 and increased by 5.8% to $201.9 million from $190.8 million in the third quarter of 2000, primarily due to new direct-to-home video services and growth in internet related services. EBITDA was $166.2 million for the third quarter of 2001, a 22.7% increase from the third quarter 2000 EBITDA of $135.5 million. The increase in EBITDA was due to the increased revenues, partially offset by increased reserves for accounts receivable and a $7 million severance charge. EBITDA margin for the third quarter of 2001 was 65.7% compared to 68.0% in the third quarter of 2000. The decrease in EBITDA margin was due to the increased reserves and severance charge. Operating profit was $62.1 million for the third quarter of 2001 compared to $52.0 million for the third quarter of 2000. The increase in operating profit resulted from the increase in EBITDA, partially offset by higher depreciation expense related to additional satellites placed into service since September 30, 2000 and 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 third quarter of 2001 increased by 19.6% to $339.7 million, compared to $284.0 million in the third quarter of 2000. The increase in revenues resulted from increased revenues related to sales of phones and systems for mobile satellite programs and higher revenues from sales of enterprise networks, partially offset by decreased sales of DIRECTV receiving equipment and manufacturing subsidies. The Network Systems segment reported negative EBITDA of $22.6 million for the third quarter of 2001, compared to EBITDA of $16.8 million in third quarter of 2000. The Network Systems segment had an operating loss of $35.1 million in the third quarter of 2001, compared to an operating profit of $1.6 million in the third quarter of 2000. The change in EBITDA and operating profit resulted from increased costs associated with the rollout of new DIRECWAY services, including AOL Plus Powered by DIRECWAY and a $21 million one-time gain in 2000 that resulted from successful negotiations with certain narrowband wireless customers for receivables previously written-off. Eliminations and Other The elimination of revenues decreased to $61.9 million in the third quarter of 2001 from $86.3 million in the third 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 profit for "eliminations and other" increased to $14.7 million for the third quarter of 2001 from an operating loss of $33.9 million for the third quarter of 2000. The change resulted primarily from a decrease in corporate expenditures, primarily related to employee benefits, and the elimination of certain costs related to the satellite manufacturing businesses. Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 Revenues. Revenues for the nine months ended September 30, 2001 increased 14.4% to $5,981.4 million compared with $5,228.6 million for the nine months ended September 30, 2000. The increase in revenues resulted primarily from $872.7 million of higher revenues at the Direct-To-Home Broadcast segment over the first nine months of 2000. This increase was due to the addition of about 1.7 million net new DIRECTV subscribers in the United States and Latin America since September 30, 2000 and added revenues from the consolidation of Argentina. The increased revenues from the Direct-To-Home Broadcast segment were partially offset by a decrease in revenues of $154.3 million at the Satellite Services segment and $130.2 million at the Network Systems segment. The decrease in revenues from the Satellite Services segment was principally due to a decline of new outright sales and sales-type lease transactions executed during the - 43 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS -- (continued) first nine months of 2001 compared to the first nine months of 2000. 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(R) service in the third quarter of 2000. Operating Costs and Expenses. Operating costs and expenses increased to $6,560.6 million in the first nine months of 2001 from $5,461.5 million in the first nine months of 2000. Broadcast programming and other costs increased by $319.5 million in the first nine 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 and the consolidation of GEA. This increase was partially offset by decreased costs at the Satellite Services segment associated with the lower new outright sales and sales-type lease transaction activity in 2001. Costs of products sold increased by $9.8 million to $590.4 million for the first nine months of 2001 from $580.6 million for the first nine months of 2000. Selling, general and administrative expenses increased by $592.0 million during the first nine months of 2001 compared to the same period in 2000 due primarily to higher subscriber acquisition costs at the Direct-To-Home Broadcast segment in both the United States and Latin America, added costs from DIRECTV Broadband, higher expenses at the Satellite Services segment and a $87.5 million charge, primarily for severance, related to the 2001 company-wide employee reductions. Depreciation and amortization increased by $177.8 million during the first nine months of 2001 compared to the first nine months of 2000 primarily due to the addition of property and satellites since September 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 and the consolidation of GEA. EBITDA. EBITDA for the first nine months of 2001 was $271.7 million and EBITDA margin was 4.5%, compared to EBITDA of $440.2 million and EBITDA margin of 8.4% in the same period of 2000. The change in EBITDA resulted from lower EBITDA at the Satellite Services segment principally due to decreased new outright sales and sales-type lease transactions executed during the first nine months of 2001 compared to the first nine months of 2000 and higher direct operating and selling, general and administrative expenses; lower EBITDA at the Network Systems segment primarily due to increased costs associated with the rollout of new DIRECWAY services and decreased shipments of DIRECTV receiving equipment; and lower EBITDA at the Direct-To-Home Broadcast segment due to negative EBITDA associated with DIRECTV Broadband and a $57.6 million charge primarily related to severance. The decreased EBITDA at the Direct-To-Home Broadcast segment was partially offset by the increased revenues discussed above. The change in EBITDA margin resulted primarily from a $87.5 million charge primarily related to severance, and the increased costs at the Network Systems segment and from DIRECTV Broadband. Operating Loss. The operating loss for the first nine months of 2001 was $579.2 million compared to an operating loss of $232.9 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 $52.2 million for the first nine months of 2001 compared to interest income of $15.3 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 $134.0 million for the first nine months of 2001 from $169.2 million for the first nine 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 a net expense of $90.0 million for the first nine months of 2001 from a net expense of $294.4 million in the same period of 2000. Other, net expense for the first nine months of 2001 resulted primarily from equity method losses of $37.1 million, a write-down of $212.0 million related to the Sky Perfect investment, partially offset by $123.5 million of net gains from the sale of investments and the reversal of $32.0 million of accrued exit costs related to the DIRECTV Japan business. Other, net expense for the first nine months of 2000 included $122.6 million of equity method losses and a $170.6 million charge related to the exit of the DIRECTV Japan business. Income Taxes. Hughes recognized an income tax benefit of $217.8 million for the first nine months of 2001, compared to $354.4 million in the first nine months of 2000. The higher tax benefit in the first nine months of 2000 is primarily due to the additional tax benefit associated with the write-off of Hughes' historical investment in DIRECTV Japan. - 44 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS -- (continued) Loss from Continuing Operations. Hughes reported a loss from continuing operations before cumulative effect of accounting change of $481.6 million for the nine months ended September 30, 2001, compared to $295.1 million for the same period of 2000. Discontinued Operations. Revenues for the Satellite Businesses for the nine months ended September 30, 2000 were $1,571.1 million. Revenues, excluding intercompany transactions, for the first nine months of 2000 were $1,179.6 million. The Satellite Businesses reported operating profit of $108.3 million for the first nine months of 2000. Operating profit, excluding intercompany transactions, amounted to $80.2 million for the first nine months of 2000. Income from discontinued operations, net of taxes, was $50.3 million for the first nine 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 nine months of 2001 increased 23.5% to $4,590.2 million from $3,717.5 million for the first nine months of 2000. The Direct-To-Home Broadcast segment had negative EBITDA of $69.5 million in the first nine months of 2001 compared with negative EBITDA of $40.9 million in the first nine months of 2000. The operating loss for the segment increased to $573.8 million in the first nine months of 2001 from $410.9 million in the first nine months of 2000. United States. The DIRECTV U.S. businesses were the biggest contributors to the segment's revenue growth with revenues of $4,032 million for the first nine months of 2001, a 21% increase over last year's revenues for the same period of $3,342 million. The large increase in revenues resulted primarily from an increased number of DIRECTV subscribers since September 30, 2000. DIRECTV added 940,000 net new subscribers in the first nine months of 2001, compared to 1,307,000 net new subscribers in the first nine months of 2000. In addition, during the third quarter of 2001, DIRECTV made a one-time downward adjustment of approximately 143,000 subscribers. This adjustment corrected errors that accumulated over the past 18 months related to subscribers who disconnected service prior to June 30, 2001 but were counted as active subscribers in DIRECTV's database. As a result, as of September 30, 2001, DIRECTV had about 10.3 million high-power subscribers compared to about 9.0 million high-power subscribers at September 30, 2000. Average monthly revenue per subscriber for the high-power business was $55.30 and $53.60 at September 30, 2001 and September 30, 2000, respectively. EBITDA was $97 million for the first nine months of 2001 compared to EBITDA of $93 million for the first nine months of 2000. The operating loss for the first nine months of 2001 for the DIRECTV U.S. businesses was $233 million compared to $195 million in the first nine months of 2000. The change in EBITDA was due to the increased revenues discussed above, which more than offset higher operating costs and a $48 million charge primarily related to severance. The change in operating loss was due to higher depreciation primarily associated with customer leased DIRECTV receiving equipment, partially offset by the increase in EBITDA. Latin America. Revenues for the Latin America DIRECTV businesses increased 45% to $541 million in the first nine months of 2001 from $372 million in the first nine months of 2000. The increase in revenues was primarily due to continued subscriber growth as well as the consolidation of Argentina. Subscribers grew to about 1,497,000 at September 30, 2001 compared to about 1,136,000 at September 30, 2000. Latin America DIRECTV added about 192,000 net subscribers in the first nine months of 2001 compared to about 332,000 net new subscribers in the first nine months of 2000. Average monthly revenue per subscriber was $35 and $36 at September 30, 2001 and September 30, 2000, respectively. - 45 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS -- (continued) EBITDA was a negative $96 million in the first nine months of 2001 compared to negative EBITDA of $128 million in the first nine months of 2000. The change in EBITDA was due to the increased revenues discussed above, partially offset by higher marketing costs and a $10 million one-time charge primarily related to severance. The Latin America DIRECTV businesses incurred an operating loss of $242 million for the first nine months of 2001 compared to an operating loss of $212 million in the first nine 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 and amortization of goodwill that resulted primarily from the consolidation of GEA. DIRECTV Broadband. Revenues and EBITDA for DIRECTV Broadband were $16 million and negative $74 million for the first nine months of 2001, respectively. DIRECTV Broadband incurred an operating loss of $102 million for the third quarter of 2001. Since its April 3, 2001 acquisition, DIRECTV Broadband has added about 9,000 net subscribers. Net subscriber additions were negatively impacted by customer churn that resulted from the bankruptcy of two wholesale providers of DSL services. At September 30, 2001, DIRECTV Broadband had more than 73,000 residential broadband subscribers in the United States. Satellite Services Segment Revenues for the Satellite Services segment in the first nine months of 2001 decreased $154.3 million to $666.4 million from $820.7 million in the same period in the prior year. The decrease was primarily due to a decline in new outright sales and sales-type lease transactions. Revenues associated with outright sales and sales-type leases of transponders were $62.0 million for the first nine months of 2001 compared to $237.2 million for the first nine months of 2000. Revenues from operating leases of transponders, satellite services and other were 90.7% of total revenues for the first nine months of 2001 and increased by 3.6% to $604.4 million from $583.5 million in the first nine months of 2000, primarily due to increased operating lease revenues from new direct-to-home video services and growth in internet related services. EBITDA was $440.7 million for the first nine months of 2001, a 21.0% decrease from the first nine months of 2000 EBITDA of $557.9 million. The decrease in EBITDA was due to the decreased revenues discussed above, higher direct operating and selling, general and administrative expenses to support the continued satellite fleet expansion, costs associated with new service initiatives, and a $7 million severance charge. EBITDA margin for the first nine months of 2001 was 66.1% compared to 68.0% in the first nine months of 2000. The decrease in EBITDA margin was primarily due to the lower sales and higher operating costs. Operating profit was $136.0 million for the first nine months of 2001 compared to $319.1 million for the first nine 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 September 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 nine months of 2001 decreased by 12.8% to $890.1 million from $1,020.3 million in the first nine months of 2000. The lower revenues resulted primarily from decreased shipments of DIRECTV receiving equipment primarily due to DIRECTV completing the conversion of PRIMESTAR By DIRECTV customers to the high-power DIRECTV service in the third quarter of 2000. The Network Systems segment reported negative EBITDA of $97.7 million for the first nine months of 2001, compared to EBITDA of $34.4 million in the first nine months of 2000. The Network Systems segment had an operating loss of $144.2 million in the first nine months of 2001, compared to an operating loss of $15.4 million in the first nine months of 2000. The change in EBITDA and operating profit resulted from the decreased revenues discussed above, increased costs associated with the rollout of new DIRECWAY services, including AOL Plus Powered by DIRECWAY, and a $21 million one-time gain in 2000 that resulted from successful negotiations with certain narrowband wireless customers for receivables previously written-off. - 46 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS -- (continued) Eliminations and Other The elimination of revenues decreased to $165.3 million in the first nine months of 2001 from $329.9 million in the first nine 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 profit from "eliminations and other" increased to $2.8 million in the first nine months of 2001 from an operating loss of $125.7 million in the first nine months of 2000. The change in operating profit resulted primarily from the decrease in the elimination of revenues discussed above and decreased corporate expenditures, primarily related to employee benefits and the elimination of certain costs related to the satellite manufacturing businesses, partially offset by a severance charge of $23 million. Liquidity and Capital Resources Cash and cash equivalents were $698.5 million at September 30, 2001 compared to $1,508.1 million at December 31, 2000. Cash used in operating activities was $145.9 million in the first nine months of 2001, compared to cash provided by operating activities of $316.0 million in the first nine 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 $1,108.0 million in the nine months ended September 30, 2001, and $1,462.2 million for the same period in 2000. The lower 2001 use of cash for investing activities resulted primarily from decreased investments in companies and an increase in proceeds from the sale of investments and satellite insurance claims in 2001 compared with 2000. These items were partially offset by increased expenditures for satellites. Cash provided by financing activities was $444.3 million in the first nine months of 2001, compared to $940.2 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 $146.2 million in the first nine months ended September 30, 2000. Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) at September 30, 2001 and December 31, 2000 was 0.84 and 1.54, respectively. Working capital decreased by $2,137.3 million to a deficit of $674.5 million at September 30, 2001 from working capital of $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 $1.2 billion primarily due to the settlement with Raytheon in October 2001, termination and exit costs, 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. These cash requirements are expected to be funded from a combination of existing cash balances, cash provided from operations, amounts available under credit facilities and additional borrowings, 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 September 30, 2001. The weighted average interest rate on the notes was 4.92% at September 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 September 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 - 47 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS -- (continued) 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 September 30, 2001, $376.0 million was outstanding under the revolving credit facility, bearing a weighted average interest rate of 3.60%. As of September 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 September 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 September 30, 2001. At September 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 September 30, 2001, with borrowings bearing a weighted average interest rate of 5.70%. $188.2 million was outstanding under the $212.5 million credit facility at September 30, 2001. The weighted average interest rate on these borrowings was 5.93% at September 30, 2001. Other short-term and long-term debt outstanding at September 30, 2001 included $52.6 million related primarily to DLA, bearing fixed and floating rates of interest of 5.07% to 12.14%. Principal on these borrowings is due in varying amounts through 2007. On October 15, 2001, under the terms of a $1.725 billion intercompany term loan, Hughes requested that PanAmSat refinance and repay the amount owed to Hughes. As a result, under the terms of the loan, PanAmSat is currently using its best efforts to obtain the necessary external financing; however, no assurance can be given that PanAmSat will be successful in this regard. 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 September 30, 2001. Acquisitions, Investments and Divestitures. Acquisitions and Investments. On May 1, 2001, DLA, which operates the Latin America DIRECTV business, 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 9 to the consolidated financial statements for further discussion. 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 $108.0 million. 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 - 48 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS -- (continued) 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 11 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. In the third quarter of 2001, $32.0 million of accrued exit costs were reversed as a credit adjustment to "Other, net." 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 $2.8 million was paid for accrued exit costs and no amounts were paid for involuntary termination benefits during the third quarter of 2001. At September 30, 2001, about $50 million is remaining for accrued exit costs. 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 third quarter of 2001 and 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 $212 million and $86 million, respectively. At September 30, 2001, the investment's market value of $111.1 million approximated its carrying value. New Accounting Standards In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 refines existing impairment accounting guidance and extends the use of this accounting to discontinued operations. SFAS No. 144 allows the use of discontinued operations accounting treatment for both reporting segments and distinguishable components thereof. SFAS No. 144 also eliminates the existing exception to consolidation of a subsidiary for which control is likely to be temporary. Hughes will adopt the statement on January 1, 2002, as required, and, as a result of adoption, does not expect a significant impact on Hughes' consolidated results of operations or financial position. In July 2001, the 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 - 49 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS -- (concluded) 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 nine months ended September 30, 2001 was $155.4 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- 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 September 30, 2001, the fair value of these instruments was not significant. * * * * * * - 50 - -----END PRIVACY-ENHANCED MESSAGE-----