-----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, JuReJB0jLLNm5MXio5VVZCfM+k5zLx1NfrD7xj9GW7Ce0jWCndFjPeGTfoMQtOXb Ja3wXSxQGmoKaSYFxBnHsw== 0000040730-02-000026.txt : 20020415 0000040730-02-000026.hdr.sgml : 20020415 ACCESSION NUMBER: 0000040730-02-000026 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011221 FILED AS OF DATE: 20020312 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-00143 FILM NUMBER: 02573317 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-K 1 final10k2001.txt GENERAL MOTOR'S YEAR END REPORT FOR 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF - --- 1934 For the fiscal year ended December 31, 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 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered - --------------------------------------------- ----------------------------- Common, $1-2/3 par value (559,421,886 shares outstanding as of February 28, 2002) New York Stock Exchange, Inc. Class H Common, $0.10 par value (877,600,541 shares outstanding as of February 28, 2002) New York Stock Exchange, Inc. Note: The $1-2/3 par value common stock of the Registrant is also listed for trading on: Chicago Stock Exchange, Inc. Chicago, Illinois Pacific Exchange, Inc. San Francisco, California Philadelphia Stock Exchange, Inc. Philadelphia, Pennsylvania Montreal Stock Exchange Montreal, Quebec, Canada Toronto Stock Exchange Toronto, Ontario, Canada Borse Frankfurt am Main Frankfurt on the Main, Germany Borse Dusseldorf Dusseldorf, Germany Bourse de Bruxelles Brussels, Belgium Courtiers en Valeurs Mobilieres Paris, France The London Stock Exchange London, England 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 . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value (based upon the average of the highest and lowest sales prices on the Composite Tape on February 28, 2002) of General Motors Corporation $1-2/3 par value and GM Class H common stocks held by nonaffiliates on February 28, 2002 was approximately $30.0 billion and $12.9 billion, respectively. GM's Class H common stock is a "tracking stock" designed to provide holders with financial returns based on the financial performance of Hughes. However, in the event of a GM liquidation, insolvency or similar event, GM Class H stockholders would have no direct claim against the assets of Hughes. Rather, GM Class H stockholders would only have rights in the assets of GM as common stockholders of GM. We determine the earnings per share and the amounts available for the payment of dividends on the GM Class H common stock by a fraction which reflects the portion of Hughes' earnings that is allocated to the GM Class H common stock. We sometimes refer to this fraction as the "Class H fraction." The numerator and denominator of the Class H fraction are determined as follows: - The numerator of the Class H fraction is the weighted average number of shares of GM Class H common stock outstanding during the applicable period. - The denominator of the Class H fraction is the notional number of shares of GM Class H common stock which, if outstanding, would represent 100% of the tracking stock interest in the earnings of Hughes. We sometimes also refer to the denominator of the Class H fraction as the "Average Class H dividend base." It can be adjusted by the GM board of directors in specified circumstances, including to reflect contributions by GM to Hughes. Documents incorporated by reference are as follows: Part and Item Number of Form Document 10-K into Which Incorporated - -------- ----------------------------- General Motors Notice of Annual Meeting of Stockholders and Proxy Statement for the Annual Meeting of Stockholders to be held June 4, 2002 Part III, Items 10 through 13 COVER PAGE PART I GENERAL MOTORS CORPORATION AND SUBSIDIARIES THE CORPORATION General Motors Corporation, incorporated in 1916 under the laws of the State of Delaware, is hereinafter sometimes referred to as the "Registrant", the "Corporation", "General Motors", or "GM." ITEM 1. Business General The following information is incorporated herein by reference to the indicated pages in Part II: Item Page(s) ---- ------- Wholesale Sales II-6 Employment and Payrolls II-13 Note 24 of Notes to the GM Consolidated Financial Statements (Segment Reporting) II-54 through II-57 GM presents separate supplemental consolidating statements of income and other financial information for the following businesses: (1) Automotive, Communications Services, and Other Operations and (2) Financing and Insurance Operations. GM participates in the automotive industry through the activities of its automotive business operating segment: 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). GMNA designs, manufactures, and/or markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, Saturn, and Hummer. GME, GMLAAM, and GMAP meet the demands of customers outside North America with vehicles designed, manufactured, and marketed under the following nameplates: Opel, Vauxhall, Holden, Isuzu, Saab, Buick, Chevrolet, GMC, and Cadillac. GM's communications services relate to its Hughes Electronics Corporation subsidiary (Hughes) which includes digital entertainment, information and communications services, and satellite-based private business networks. GM's other operations 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 Financing and Insurance Operations primarily relate to General Motors Acceptance Corporation (GMAC). GMAC provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, commercial, vehicle, and homeowners' insurance, and asset-based lending. Substantially all automotive-related products are marketed through retail dealers and through distributors and jobbers in the United States, Canada, and Mexico, and through distributors and dealers overseas. At December 31, 2001, there were approximately 7,800 GM vehicle dealers in the United States, 830 in Canada, and 162 in Mexico. Additionally, there were a total of approximately 11,710 outlets overseas which include dealers and authorized sales, service, and parts outlets. Raw Materials and Services GM purchases materials, parts, supplies, freight transportation, energy, and other services from numerous unaffiliated firms. Interruptions in production or delivery of these goods or services could adversely affect GM. Backlog of Orders Shipments of GM automotive products are made as promptly as possible after receipt of firm sales orders; therefore, no significant backlog of unfilled orders accumulates. Hughes had a $5.3 billion and $6.7 billion backlog of commercial contracts relating to its telecommunications business at the end of 2001 and 2000, respectively. I-1 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Competitive Position GM's principal competitors in passenger cars and trucks in the United States and Canada include Ford Motor Company, DaimlerChrysler Corporation, Toyota Corporation, Nissan Motor Corporation, Ltd., Honda Motor Company, Ltd., Mazda Motor Corporation, Mitsubishi Motors Corporation, Volkswagen A.G. (Volkswagen), Hyundai Motor Company, Ltd. (Hyundai), and Bayerische Motoren Werke AG (BMW). All but Volkswagen and Hyundai currently operate vehicle manufacturing facilities in the United States or Canada. Toyota and GM operate the New United Motor Manufacturing, Inc. facility in Fremont, California as a joint venture which currently builds passenger cars and light-duty trucks. Wholesale unit sales of GM passenger cars and trucks during the three years ended December 31, 2001 are summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II. Total industry new motor vehicle (passenger cars, trucks, and buses) registrations of domestic and foreign makes and GM's competitive position during the years ended December 31, 2001, 2000, and 1999 were as follows: 2001(1) 2000 1999 ---- ---- ---- (units in thousands) Total industry registrations In the United States 17,475 17,814 17,418 In Canada and Mexico 2,544 2,474 2,231 In other countries 36,608 37,009 35,863 ------ ------ ------ Total industry registrations - all countries 56,627 57,297 55,512 ====== ====== ====== 2001(1) 2000 1999 ---- ---- ---- (percent of total industry) GM's registrations In the United States 28% 28% 29% In Canada and Mexico 27 28 29 In other countries 8 8 8 Total GM's registrations - all countries 15 15 16 - ----------------- (1) Preliminary The above information on registrations of new cars, trucks, and buses was obtained from outside sources and that pertaining to GM's registrations includes units which are manufactured overseas by other companies and which are imported and sold by GM and affiliates. Research and Development In 2001, GM spent $6.2 billion for research, manufacturing engineering, product engineering, and development activities related primarily to the development of new products or services or the improvement of existing products or services, including activities related to vehicle emissions control, improved fuel economy, and the safety of persons using GM products. In addition, $82 million was spent for customer-sponsored activities. Comparably, $6.6 billion and $6.8 billion were spent on company-sponsored activities in 2000 and 1999, respectively, and $278 million and $295 million were spent on customer-sponsored activities in 2000 and 1999, respectively. Environmental Matters Automotive Emissions Control Both the federal and California governments currently impose stringent emission control requirements on motor vehicles sold in their respective jurisdictions. These requirements include pre-production testing of vehicles, testing of vehicles after assembly, the imposition of emission defect and performance warranties, and the obligation to recall and repair customer-owned vehicles determined to be non-compliant with emissions requirements. Both the U.S. Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) continue to place great emphasis on compliance testing of customer-owned vehicles. Failure to comply with the emission standards or defective emission control systems or components discovered during such testing can lead to substantial cost for General Motors related to emissions recalls. New CARB and federal requirements will increase the time and mileage periods over which manufacturers are responsible for a vehicle's emission performance. I-2 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive Emissions Control - (concluded) Both the EPA and the CARB emission requirements will become even more stringent in the future. A new tier of exhaust emission standards for cars and light-duty trucks, the "Low-Emission Vehicles (LEV) II" standards, will begin phasing in for California vehicles in the 2004 model year. Similar federal "Tier 2" standards will also start in 2004. In addition, both CARB and EPA have adopted more stringent standards applicable to future heavy-duty trucks. California requires that a specified percentage of cars and certain light-duty trucks be zero emission vehicles (ZEVs), such as electric vehicles or hydrogen fuel cell vehicles. This requirement starts at 10% in model year 2003 and increases in future years. Manufacturers have the option of meeting a portion of this requirement with partial ZEV credits, which are vehicles that meet very stringent emission standards and have extended emission system warranties. An additional portion of the ZEV requirement can be met with vehicles that meet these partial ZEV requirements and incorporate advanced technology, such as a hybrid electric propulsion system. The Clean Air Act permits states that have areas with air quality problems to adopt the California car and truck emission standards in lieu of the federal requirements and four states, New York, Massachusetts, Maine and Vermont, have done so. To provide states an alternative to the adoption of California standards, GM and other auto manufacturers began selling LEVs in the remaining 45 states in 2001, under the provisions of the National Low Emission Vehicle Program. In addition to the above-mentioned exhaust emission programs, onboard diagnostic (OBD) devices, used to diagnose problems with emission control systems, were required both federally and in California effective with the 1996 model year. This system has the potential of increasing warranty costs and the chance for recall. OBD requirements become more challenging each year as vehicles meet lower emission standards, and new diagnostics are required. New evaporative emission control requirements for cars and trucks began phasing in with the 1995 model year in California and the 1996 model year federally. Systems are being further modified to accommodate federal onboard refueling vapor recovery (ORVR) control standards. ORVR was phased-in on passenger cars in the 1998 through 2000 model years, and is phasing-in on light-duty trucks in the 2001 through 2006 model years. Beginning with the 2004 model year, even more stringent evaporative emission standards apply in California, as well as federally. Starting in the 2001 model year, the test procedure for exhaust emissions have become more complex with vehicles required to meet two additional test requirements: 1) measuring exhaust emissions over a new test cycle with the air conditioner operating; and 2) measuring exhaust emissions over a new high speed (80 mph) and high load cycle. Both of these requirements have the potential of adding hardware (and thus costs) to many vehicles. Industrial Environmental Control GM is subject to various laws relating to the protection of the environment including laws regulating air emissions, water discharges, waste management, and environmental cleanup. GM is in various stages of investigation or remediation for sites where contamination has been alleged, and recorded a liability of $253 million at December 31, 2001 and $316 million at December 31, 2000 for worldwide environmental investigation and remediation as summarized below: . GM has been identified as a potentially responsible party at sites identified by the EPA and state regulatory agencies for investigation and remediation under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar state statutes. GM voluntarily and actively participates in cleanup activity where such involvement is verified. The total liability for sites involving GM was estimated to be $85 million at December 31, 2001. This compares with $97 million at December 31, 2000. . For closed or closing plants owned by the Corporation, an estimated liability for environmental investigation and remediation is typically recognized at the time of the closure decision. Such liability, which is based on an environmental assessment of the plant property, was estimated at $56 million at December 31, 2001. This compares with $74 million at December 31, 2000. . GM is involved in investigation and remediation activities at additional locations worldwide with an estimated liability of approximately $112 million at December 31, 2001. This compares with $145 million at December 31, 2000. I-3 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Industrial Environmental Control (concluded) The cost impact of the Clean Air Act Amendments under Title V is the annual emission fees of approximately $9 million per year. Additional programs under the Clean Air Act, including Hazardous Air Pollutant standards, and Compliance Assurance Monitoring and periodic monitoring requirements are estimated to cost $500 million to $700 million in aggregate through the year 2005. For the years ended December 31, 2001, 2000, and 1999, expenditures by GM in the U.S. for industrial environmental control facilities were $65 million, $85 million, and $71 million, respectively. The Corporation currently estimates that future expenditures for industrial environmental control facilities through 2005 will be approximately $157 million. Specific environmental expenses are difficult to isolate since expenditures may be made for more than one purpose, making precise classification difficult. Vehicular Noise Control Federal Truck Regulations preempt all state/local noise regulations for trucks over 10,000 lbs. Gross Vehicle Weight Rating (GVWR). All jurisdictions regulating noise levels of school buses which are built on medium-duty truck chassis have adopted standards compatible with federal regulations for medium-duty trucks. Federal Truck Regulations contain label and owner's manual requirements. Passenger cars and light-duty trucks are subject to state and local motor vehicle noise regulations. The current standard for vehicles in these classes is 80 dB as measured at 50 feet. Future implementation of more stringent exhaust emission regulations and more stringent fuel economy regulations will require an assessment of increased costs of noise control. Safety Regulations & Consumer Information Expenditures to maintain and improve the operational safety, occupant protection, and vehicle security and theft deterrence capability of new GMNA models continue. These expenditures include amounts for the study of alternative approaches for meeting the needs of all three areas. GM continues to meet the government requirement for passive restraints by installing driver and passenger air bags on all passenger cars and many light trucks and vans. Since 1998, these have been less aggressive air bags to address concerns about inflation injuries to children and smaller adult passengers who are not properly positioned. GM also continues to make available air bag on-off switches for customers eligible to request them under the requirements of the National Highway Traffic Safety Administration (NHTSA). In 2000, the NHTSA adopted extensive modifications to Federal Motor Vehicle Safety Standard (FMVSS) 208, to require advanced air bags. The amendment entails a substantial increase in the number of crash test configurations and test dummy occupant sizes for which certification compliance performance will be required beginning September 1, 2003. It also adds a large number of static air bag suppression or low risk deployment test requirements. A significant amount of engineering design and development is already underway, with more anticipated. For cars and certain light trucks and vans, side structure and interior trim designs continue to be affected by the NHTSA's consumer information dynamic side impact crash test program at elevated impact speeds. A new government requirement for vehicle interior impact protection continues to significantly affect upper body structure and interior trim designs of passenger cars and light trucks and vans. The phase-in for this requirement began on September 1, 1998, and will apply to all these vehicles by September 1, 2002. NHTSA has proposed changing the existing fuel system crash integrity requirements of FMVSS 301. The potentially significant changes associated with the substantially increased rear impact crash test energy would compel some undetermined redesign, cost, and weight increases for some of GM's vehicles. The new FMVSS 225 requirement for universal child restraint anchorages in motor vehicles continues to have mass and cost implications for many near-future GM vehicles. Unless ongoing auto industry actions can convince the NHTSA to modify certain FMVSS 225 test procedures and requirements, these implications will continue to affect many GM vehicles. Vehicle parts marking, required by the Anti-Car Theft Act of 1992, currently affects approximately 22 passenger car and 4 light-duty truck plants. Anticipated NHTSA rulemaking likely will expand parts marking to remaining passenger cars and light-duty vehicles currently deemed to be "low theft" vehicles. Approximately 10 additional vehicle lines and 4 additional assembly plants would be affected. This would result in increased vehicle piece and tooling costs for the affected plants. The Transportation Recall Enhancement, Accountability and Documentation (TREAD) Act requires certain significant regulatory and consumer information actions by the NHTSA. Some undetermined redesign and cost implications likely will result from these changes. Among other items, beginning in 2002 the NHTSA must: I-4 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Safety Regulations & Consumer Information (concluded) .Upgrade tire regulations, and require a vehicle Tire Pressure Monitoring (warning) System (TPMS), at an approximate $50 per vehicle variable cost if direct pressure monitoring technology is required. .Expand its New Car Assessment Program (NCAP) to implement consumer information programs for vehicle rollover resistance (based on dynamic driving maneuvers), and for child restraints. (Although not required by the TREAD Act, the NHTSA also plans a vehicle stopping distance addition to NCAP.) These additions to this consumer information program likely will result in additional testing and design costs for GM vehicles to assure favorable ratings. .Implement extensive early warning defect reporting requirements, including information from foreign countries. This likely will result in an administrative burden increase. In 2002, the NHTSA is expected to amend FMVSS 108 to reduce allowable light output from daytime running lamps, and has begun rulemaking to reduce consumer complaints of glare from other exterior front lamps. Considerations include reduced headlamp mounting heights, revised photometric requirements, vehicle-based (as opposed to lamp-based) photometric specifications, headlamp cleaners, automatic lamp leveling, etc. These rulemaking activities could necessitate moderate to extensive redesign of front lighting systems. Automotive Fuel Economy The Energy Policy and Conservation Act passed in 1975 provided for production-weighted average fuel economy standards for passenger cars for 1978 and thereafter. Based on EPA combined city-highway test data, the GM 2001 model year domestic passenger car fleet attained a Corporate Average Fuel Economy (CAFE) of 28.3 miles per gallon (mpg) versus the standard of 27.5 mpg. The CAFE estimate for 2002 model year domestic passenger cars is projected at 28.6 mpg versus the standard of 27.5 mpg. For GM's imported passenger cars, 2001 model year CAFE attained 28.4 mpg versus a standard of 27.5 mpg. The CAFE estimate for 2002 model year import passenger cars is 27.7 mpg versus the standard of 27.5 mpg. Fuel economy standards for light-duty trucks became effective in 1979. General Motors' light truck CAFE fleet average for the 2001 model year is 20.7 mpg versus a standard of 20.7 mpg. GM's 2002 model year truck CAFE is projected at 21.2 mpg versus a standard of 20.7 mpg. GM's ability to meet increased CAFE standards is contingent on various future economic, consumer, legislative, and regulatory factors that GM cannot control and cannot predict with certainty. If GM could not comply with any new CAFE standards, GM could be subject to sizeable civil penalties and could have to close plants or severely restrict product offerings to remain in compliance. End of Life Vehicles During September 2000, the European parliament passed a directive requiring member states to adopt legislation regarding end-of-life vehicles and the responsibility of manufacturers for dismantling and recycling vehicles they have sold. European Union member states are required to transform the concepts detailed in the directive into national law by April 2002. Under the directive, manufacturers are financially responsible for at least a portion of the cost of the take-back of vehicles placed into service after July 2002 and all vehicles placed in service prior to July 2002 that are still in operation in January 2007. The laws developed in the individual local legislatures throughout Europe will have a significant impact on the amount ultimately paid by the manufacturers for this issue. GME is currently assessing the impact of this potential legislation on its results of operations and financial position. Seasonal Nature of Business In the automotive business, there are retail sales fluctuations of a seasonal nature, so that production varies from month to month. Certain changeovers occur throughout the year for reasons such as new market entries and new vehicle changes; however, the changeover period related to the annual new model introduction has traditionally occurred in the third quarter of each year. For this reason, third quarter operating results are, in general, less favorable than those in the other three quarters of the year, depending on the magnitude of the changeover needed to commence production of new models incorporating, for example, design modifications related to more fuel-efficient vehicle packaging, stricter government standards for safety and emission controls, and consumer-oriented improvements in performance, comfort, convenience, and style. I-5 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Segment Reporting Data Operating segment and principal geographic area data for 2001, 2000, and 1999 are summarized in Note 24 to the GM Consolidated Financial Statements in Part II. * * * * * * The Registrant makes no attempt herein to predict the future trend of its business and earnings or the effect thereon of the results of changes in general economic, industrial, regulatory, and international conditions. ITEM 2. Properties The Corporation, excluding its Financing and Insurance Operations, has 294 locations operating in 36 states and 148 cities in the United States. Of these, 22 are engaged in the final assembly of GM cars and trucks; 39 are service parts operations responsible for distribution or warehousing; 10 major plants, offices, and research facilities relate to the operations of Hughes Electronics Corporation; and the remainder are offices or involved primarily in the testing of vehicles or the manufacturing of automotive components and power products. In addition, the Corporation has 20 locations in Canada and assembly, manufacturing, distribution, or warehousing operations in 51 other countries, including equity interests in associated companies which conduct assembly, manufacturing, or distribution operations. The major facilities outside the United States and Canada, which are principally vehicle manufacturing and assembly operations, are located in Germany, the United Kingdom, Brazil, Mexico, Australia, Sweden, Belgium, Spain, China, Thailand, Argentina, Portugal, and Poland. Most facilities are owned by the Corporation or its subsidiaries. Leased properties consist primarily of warehouses and administration, engineering, and sales offices. The leases for warehouses generally provide for an initial period of five years and contain renewal options. Leases for sales offices are generally for shorter periods. Properties of the Registrant and its subsidiaries include facilities which, in the opinion of management, are suitable and adequate for the manufacture, assembly, and distribution of their products. Additional information regarding worldwide expenditures for plants and equipment is presented in Note 24 to the GM Consolidated Financial Statements in Part II. ITEM 3. 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 year ended December 31, 2001, or subsequent thereto, but before the filing of this report are summarized below: Other Matters Nine purported class actions are pending in state courts, five in Delaware (Wurzel v. Cornelius, et al., Selden Realty Association, Inc. v. Hughes Electronics Corporation, et al., Weilheimer v. Cornelius, et al., Kopelman v. Cornelius, et al., Lerner v. Cornelius, et al.), three in California (Salamone v. Hughes Electronics Corporation, et al., Brody v. Hughes Electronics Corporation, et al., Lieberman v. Hughes Electronics Corporation et al.) and one in New York (Krim v. General Motors Corporation, et al.) on behalf of owners of GM Class H shares, against Hughes Electronics Corporation ("Hughes") and the Hughes directors. General Motors Corporation ("GM") is also a defendant in the Delaware cases. The lawsuits allege that The News Corporation Limited had been favored as a bidder to purchase Hughes over EchoStar Communications Corporation ("EchoStar") to benefit GM in violation of alleged fiduciary duties. Subsequently, an agreement, subject to regulatory approvals, was reached to merge Hughes and EchoStar. The five Delaware cases have been consolidated, two of the California cases have been stayed and plaintiff has requested dismissal of the third. None of the cases has been certified as a class action. GM, Hughes and the Hughes directors intend to vigorously defend these cases. * * * Seven putative nationwide and statewide class actions are pending in state and federal courts alleging that the paint or paint application process used on some GM vehicles was defective due to the omission of a primer surfacer layer. Generally, plaintiffs allege that GM's failure to disclose the alleged paint defect is a fraudulent omission and a violation of various states' consumer protection laws. No determination has been made that any case may proceed as a class action. I-6 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (continued) Christian Amedee and Louis Fuxan v. General Motors Corporation, et al., Civil District Court for the Parish of New Orleans, State of Louisiana filed March 24, 1995, Cherise Miller, et al., v. General Motors Corporation, United States District Court for the Northern District of Illinois, filed on April 8, 1998, and Rose Ann Hayes v. General Motors Corporation et al. filed on May 22, 2001 in the Circuit Court for Madison County Illinois are purported nationwide class actions. Eddie Glorioso v. General Motors Corporation and Scott Arnold v. General Motors Corporation, consolidated in Superior Court for the City and County of San Francisco, California, both filed in July 1998, are purported California statewide class actions. Scott Haverdink v. General Motors Corporation, Court of Common Pleas of Philadelphia County, Pennsylvania, filed on May 16, 1999, is a putative Pennsylvania statewide class action. In Darryl Oshanek v. General Motors Corporation and General Motors of Canada, Limited, Supreme Court of British Columbia, Canada, filed on June 2, 1999, a putative class action on behalf of residents of British Columbia, on January 5, 2001, General Motors Corporation was dismissed as a defendant. Plaintiff has appealed. GM intends to vigorously oppose class certification and defend these cases. * * * On June 3, 1999, the National Rural Telecommunications Cooperative ("NRTC") filed a lawsuit against DIRECTV, Inc. and Hughes Communications Galaxy, Inc., which GM refers to together in this description as "DIRECTV," in the U.S. District Court for the Central District of California, alleging that DIRECTV breached its DBS Distribution Agreement with the NRTC. The DBS Distribution Agreement provides the NRTC with certain distribution rights, in certain specified portions of the United States, for a specified period of time, with respect to DIRECTV(R) programming delivered over 27 of the 32 frequencies at the 101(degree) west longitude orbital location. The NRTC claims that DIRECTV has wrongfully deprived it of the exclusive right to distribute programming formerly provided by United States Satellite Broadcasting Company, Inc. ("USSB") over the other five frequencies at 101(degree), and seeks recovery of related revenues from the date USSB was acquired by Hughes. DIRECTV denies that the NRTC is entitled to exclusive distribution rights to the former USSB(R) programming because, among other things, the NRTC's exclusive distribution rights are limited to programming distributed over 27 of the 32 frequencies at 101(degree). The NRTC also pleads, in the alternative, the right to distribute former USSB programming on a non-exclusive basis, but stipulated to dismiss this claim without prejudice on August 25, 2000. DIRECTV maintains that the NRTC's right under the DBS Distribution Agreement is to market and sell the former USSB programming as its non-exclusive sales agent and that NRTC is not entitled to the additional claimed revenues. DIRECTV intends to vigorously defend against the NRTC claims. DIRECTV also filed a counterclaim against the NRTC seeking a declaration of the parties' rights under the DBS Distribution Agreement. On August 26, 1999, the NRTC filed a second lawsuit in the U.S. District Court for the Central District of California against DIRECTV alleging that DIRECTV has breached the DBS Distribution Agreement. In this lawsuit, the NRTC is asking the Court to require DIRECTV to pay the NRTC a proportionate share of unspecified financial benefits that DIRECTV derives from programming providers and other third parties. DIRECTV denies that it owes any sums to the NRTC on account of the allegations in these matters and plans to vigorously defend itself against these claims or this claim. On June 21, 2001, the Court permitted the NRTC to amend the action to also seek an exclusive right to distribute in its territories, and to retain revenues from, "Advanced Services," which the NRTC defines to include services such as Wink, TiVo, Ultimate TV and AOL-TV. DIRECTV denies that the NRTC is entitled to exclusive distribution rights to the so-called Advanced Services because, among other things, the services are not services transmitted by DIRECTV over the 27 frequencies as to which the NRTC has contractual rights. Pegasus Satellite Television, Inc. ("Pegasus") and Golden Sky Systems, Inc. ("Golden Sky"), the two largest NRTC affiliates, filed an action on January 11, 2000 against DIRECTV in the U.S. District Court for the Central District of California. The plaintiffs alleged, among other things, that DIRECTV has interfered with their contractual relationship with the NRTC. The plaintiffs alleged that their rights and damages are derivative of the rights and damages asserted by the NRTC in its two cases against DIRECTV. The plaintiffs also alleged that DIRECTV misused their subscriber information, and interfered with their contractual relationships with manufacturers and distributors by preventing those parties from selling receiving equipment to the plaintiffs' dealers. On October 19, 2000, Golden Sky agreed to dismiss its equipment-related claims with prejudice. DIRECTV denies that it has wrongfully interfered with any of the plaintiffs' business relationships and will vigorously defend the lawsuit. DIRECTV filed a counterclaim on March 9, 2001, seeking judicial declarations that the contracts between Pegasus and the NRTC, and Golden Sky and the NRTC, do not include rights of first refusal and will terminate when the DIRECTV-1 satellite is removed from orbit. On June 21, 2001, the Court permitted Pegasus and Golden Sky to amend their complaint to seek an exclusive right, also derivative from the NRTC's claimed right, to distribute in their territories, and to retain revenues from, the "Advanced I-7 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (continued) Services." DIRECTV denies that Pegasus and Golden Sky are entitled to exclusive distribution rights to the so-called Advanced Services because, among other things, the services are not services transmitted by DIRECTV over the 27 frequencies as to which the NRTC and derivatively, Pegasus and Golden Sky, have contractual rights. A class action suit was filed in the U.S District Court for the Central District of California against DIRECTV on behalf of the NRTC's participating members on February 29, 2000. The Court certified a class on December 29, 2000. The class asserted claims identical to the claims that were asserted by Pegasus and Golden Sky in their lawsuit against DIRECTV, described in the preceding paragraph. Similar to Golden Sky, however, the class has dismissed its equipment-related claims without prejudice. DIRECTV filed counterclaims against the class identical to those filed against Pegasus and Golden Sky as described above. On June 21, 2001, the class was also permitted to amend its complaint to seek an exclusive right, derivative from the NRTC's claimed right, to distribute in their territories, and to retain revenues from, the "Advanced Services." DIRECTV denies that the class is entitled to exclusive distribution rights to the so-called Advanced Services because, among other things, the services are not services transmitted by DIRECTV over the 27 frequencies as to which the NRTC and derivatively, the class, have contractual rights. On February 1, 2001, the NRTC filed a third lawsuit in the U.S. District Court for the Central District of California against DIRECTV, seeking a declaration from the court that it is not required to defend and indemnify DIRECTV for the Pegasus and Golden Sky and class action lawsuits. The NRTC has been paying and continues to pay DIRECTV's legal fees in those matters under protest. DIRECTV filed a counterclaim on February 21, 2001 seeking a declaratory judgment that the NRTC is indeed responsible for the defense and indemnity of DIRECTV. On September 19, 2001, the NRTC filed a fourth 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, LLC ("PMC") 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. DIRECTV filed a counterclaim on October 26, 2001 seeking a declaratory judgment that the NRTC is indeed responsible for the defense and indemnity of DIRECTV. The U.S. District Court for the Central District of California has consolidated for purposes of discovery each of the NRTC, Pegasus and Golden Sky and class action lawsuits, but has not determined if the cases will be consolidated for trial. A trial date in December 2002 has been set in the first NRTC case. An amount of loss, if any, cannot be estimated at this time in the NRTC, Pegasus and class action litigation. * * * 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 million. The trial judge issued an order granting GECC $49 million in interest under Connecticut's offer-of-judgment statute. With this order, the total judgment entered in GECC's favor was $182 million. Hughes and DIRECTV filed a notice of appeal on December 29, 2000. Oral argument on the appeal was heard on October 15, 2001 by the Second Circuit Court of Appeals. While the appeal is pending, post-judgment interest on the total judgment is accruing at a rate of 6.241% per year, compounded annually, from the date judgment was entered in October 2000. Hughes and DIRECTV believe that it is reasonably possible that the jury verdict will be overturned and a new trial granted. * * * I-8 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (continued) There had been a pending grand jury investigation into whether Hughes should be accused of criminal violations of United States export control laws arising out of the participation of two of its employees on a committee formed to review the findings of Chinese engineers regarding the failure of a Long March rocket in China in 1996. On January 7, 2002, the U.S. Department of Justice advised Hughes that it would not prosecute Hughes or any of its current or former employees in connection with the activities of the committee or any other matters that were under investigation by the Grand Jury. As a result, Hughes is no longer at risk of criminal prosecution for any of these matters. However, Hughes remains subject to the authority of the U.S. State Department to impose sanctions for non-criminal violations of the Arms Export Control Act. The possible civil sanctions could include fines as well as debarment from various export privileges and participating in government contracts. On October 6, 2000, Hughes completed the sale of its satellite systems manufacturing businesses ("Satellite Businesses") to The Boeing Company ("Boeing"). In that transaction, Hughes retained liability for certain possible fines and penalties and the financial consequences of debarment related to the business now owned by Boeing should the State Department impose such sanctions against the Satellite Businesses. Hughes does not expect sanctions imposed by the State Department, if any, to have a material adverse effect on Hughes. * * * On September 7, 2000, a putative class action was commenced against DIRECTV, Inc., Thomson Consumer Electronics, Inc., Best Buy Co., Inc., Circuit City Stores, Inc. and Tandy Corporation, Inc. in the U.S. District Court in Los Angeles. The named plaintiffs purport to represent a class of all consumers who purchased DIRECTV equipment and services at any time from March 1996 to September 1, 2000. The plaintiffs allege that the defendants have violated federal and California antitrust statutes by entering into agreements to exclude competition and force retailers to boycott competitors' products and services. The plaintiffs seek declaratory and injunctive relief, as well as unspecified damages, including treble damages. DIRECTV believes that the complaint is without merit and intends to vigorously defend against the allegations raised therein. DIRECTV successfully stayed the case pending resolution of relevant issues in the antitrust suit brought by EchoStar as described below. Since the EchoStar case was dismissed, the stay of this lawsuit was lifted. DIRECTV's motion to compel arbitration pursuant to the DIRECTV customer agreement is now pending before the court. An amount of loss, if any, cannot be estimated at this time. * * * 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, and will move to dismiss the complaint. DIRECTV and Hughes will vigorously defend against these allegations and seek to enforce the arbitration agreement. An amount of loss, if any, cannot be estimated at this time. * * * On May 18, 2001, in Oklahoma State Court, plaintiffs Cable Connection, Inc., TV Options, Inc., Swartzel Electronics, Inc. and Orbital Satellite, Inc. filed a class action complaint against DIRECTV and Hughes. All four plaintiffs are DIRECTV dealers (three residential and one commercial), who allege claims ranging from breach of contract to fraud, promissory estoppel, antitrust and unfair competition claims. The plaintiffs seek unspecified damages and injunctive relief. They claim to be bringing the complaint on behalf of all DIRECTV dealers, including former PRIMESTAR and USSB dealers. On August 17, 2001, DIRECTV and Hughes successfully stayed the case and the court ordered the individual plaintiffs to pursue their claims in arbitration pursuant to the arbitration clause in each of the dealer's contracts with DIRECTV. None of the plaintiffs has yet instituted arbitration proceedings. * * * I-9 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (continued) On December 5, 2000, PMC and Pegasus Development Corporation filed suit in U.S. District Court for the District of Delaware against DIRECTV, Hughes, Thomson Consumer Electronics, Inc. and Philips Electronics North American Corporation, alleging infringement of seven U.S. patents. Based in part on the successful defense by Hughes against an earlier action brought by PMC on one of the subject patents, Hughes expects that strong defenses of invalidity and non-infringement exist, in addition to numerous other defenses including license, laches and estoppel, and patent misuse. Hughes answered the complaint on January 21, 2001 raising these defenses and related counterclaims and intends to vigorously defend the lawsuit and pursue counterclaims against Pegasus Development Corporation and PMC. * * * Following the discontinuation of DIRECTV Japan's operations in September 2000, Global Japan, Inc. ("Global") commenced an action in the New York Supreme Court on October 5, 2000 against Hughes Electronics, DIRECTV Japan Management Company, Inc., DIRECTV International, Inc., DIRECTV, Inc., and the Hughes-appointed directors of DIRECTV Japan for alleged breach of contract and fiduciary duty, fraudulent conveyance and tortious interference in connection with the termination of two direct broadcast satellite distribution agreements between Global and DIRECTV Japan. Global seeks, among other things, damages of approximately $100 million. Hughes contends that Global is entitled to $2 million as its sole and exclusive remedy under the termination provisions of the distribution agreements and intends to vigorously defend against the allegations raised. * * * 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 November 13, 2001, the U.S. Court of Appeals for the Federal Circuit affirmed the lower court decision. On December 26, 2001, Hughes filed a Combined Petition for Panel Rehearing and Rehearing en Banc, seeking to increase the award, which was denied in January of 2002. Both parties have until April 25, 2002 to seek Supreme Court Review. 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. * * * DIRECTV filed suit in California State Court, Los Angeles County, on June 22, 2001 against Pegasus and Golden Sky (referred to together as "Defendants") to recover monies (currently approximately $60 million) that Defendants owe DIRECTV under the parties' Seamless Marketing Agreement, which provides for reimbursement to DIRECTV of certain subscriber acquisition costs incurred by DIRECTV on account of new subscriber activations in Defendants' territory. Defendants had ceased making payments altogether, and indicated that it did not intend to make any further payments due under the Agreement. On July 13, 2001, Defendants sent notice of termination of the Agreement and on July 16, 2001, Defendants answered DIRECTV's complaint and filed a cross complaint alleging counts of fraud in the inducement, breach of contract, breach of the covenant of good faith and fair dealing, intentional interference with contractual relations, intentional interference with prospective economic advantage and violation of California Bus. and Prof. Code 17200. The latter three counts duplicate claims already asserted by Defendants in the above-referenced federal court litigation. Defendants seek an unstated amount of damages and punitive damages. DIRECTV denies any liability to Defendants, and intends to vigorously pursue its damages claim against Defendants and defend against Defendants' cross claims. Defendants removed the action to federal district court, Central District of Los Angeles, where it has been transferred to the judge hearing the other, above-referenced litigation, and consolidated therewith for purposes of discovery. * * * I-10 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (concluded) In connection with the 2000 sale by Hughes of its satellite systems manufacturing businesses to Boeing, the stock purchase agreement provides for potential adjustment to the purchase price based upon the value of the final closing net assets of the satellite systems manufacturing businesses. The stock purchase agreement also provides for an arbitration process to resolve any disputes that arise in determining the purchase price adjustment. Based upon the final closing net assets of the satellite systems manufacturing businesses derived from the closing date financial statements that were prepared by Hughes, Boeing is owed a purchase price adjustment of $164 million plus interest from the date of sale, the total amount of which has been provided for in GM's financial statements. However, Boeing has submitted additional proposed adjustments totaling about $750 million, which remain unresolved. Hughes believes that these additional proposed adjustments are without merit and intends to vigorously contest the matter in the arbitration process which will result in a binding decision unless the matter is otherwise settled. Although GM believes it has adequately provided for the disposition of this matter, the impact of its disposition cannot be determined at this time. * * * (b) Previously reported legal proceedings which have been terminated, either during the year ended December 31, 2001, or subsequent thereto, but before the filing of this report are summarized below: EchoStar and others commenced an action in the U.S. District Court in Colorado on February 1, 2000 against DIRECTV, Hughes Network Systems ("HNS") and Thomson Consumer Electronics, Inc. seeking, among other things, injunctive relief and unspecified damages, including treble damages, in connection with allegations that the defendants have entered into agreements with retailers and program providers and engaged in other conduct that violates the antitrust laws and constitutes unfair competition. Following the announcement of the proposed merger with EchoStar, this lawsuit was dismissed in its entirety with prejudice in early November 2001. * * * In October 2001, Hughes reached a settlement with Raytheon on a purchase price adjustment related to the 1997 spin-off of Hughes' defense electronics business and the subsequent merger of that business with Raytheon. Under the terms of the settlement, Hughes agreed to reimburse Raytheon $636 million of the original $9.5 billion purchase price. Hughes paid $500 million of the settlement amount in October 2001 and the remainder was paid subsequent to December 31, 2001. * * * * * * * * * I-11 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 4. Submission of Matters to a Vote of Security Holders NONE ITEM 4A. Executive Officers of the Registrant The names and ages of all executive officers of the Registrant at February 28, 2002 and their positions and offices with the Registrant on that date are as follows: Name and (Age) Positions and Offices - -------------- ----------------------------------------- John F. Smith, Jr. (63) Chairman of the Board; Member, Investment Funds Committee G. Richard Wagoner, Jr. (49) President and Chief Executive Officer John M. Devine (57) Vice Chairman and Chief Financial Officer Robert A. Lutz (70) Vice Chairman of Product Development and Chairman of GM North America John D. Finnegan (53) Executive Vice President; President, GMAC Thomas A. Gottschalk (59) Executive Vice President, Law and Public Policy There are no family relationships, as defined, between any of the above executive officers, and there is no arrangement or understanding between any of the above executive officers and any other person pursuant to which he was selected as an officer. Each of the above executive officers was elected by the Board of Directors to hold office until the next annual election of officers and until his successor is elected and qualified or until his earlier resignation or removal. The Board of Directors elects the officers in conjunction with each annual meeting of the stockholders. I-12 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 4A. Executive Officers of the Registrant - concluded Mr. John F. Smith, Jr. has been associated with General Motors since 1961. He was elected Executive Vice President in charge of International Operations in 1988. Effective August 1990, he was elected Vice Chairman of the Board of Directors. On April 6, 1992, Mr. Smith was elected President and Chief Operating Officer. Effective November 1992, he was elected Chief Executive Officer and President. He served as President until October 1998 and Chief Executive Officer until June 2000. On January 1, 1996, Mr. Smith became Chairman of the Board of Directors. Mr. G. Richard Wagoner, Jr. has been associated with General Motors since 1977. He was elected Vice President in charge of finance for General Motors Europe in June 1989. In July 1991, he was elected President and Managing Director of General Motors do Brasil. Effective November 1992, he was elected Executive Vice President and Chief Financial Officer of General Motors. In July 1994, he was named President of North American Operations. In October 1998, he was elected a director, President and Chief Operating Officer of General Motors. Effective June 1, 2000, he was elected Chief Executive Officer. Mr. John M. Devine was named Vice Chairman and Chief Financial Officer of General Motors Corporation, effective January 1, 2001. He has responsibility for GM's Worldwide Financial Operations and GM Asset Management. He is a member of the GM Automotive Strategy Board and serves as its global process leader for finance. Mr. Devine was Chairman and Chief Executive Officer of Fluid Ventures, LLC, immediately prior to his GM appointment. He retired from Ford Motor Company in October 1999, after a 32 year career, as the company's Executive Vice President and Chief Financial Officer. Mr. Robert A. Lutz was named Vice Chairman of Product Development of General Motors Corporation, effective September 1, 2001. He was named Chairman of GM North America on November 13, 2001. He is a member of the Automotive Strategy Board and the North American Strategy Board. Mr. Lutz was Chairman and Chief Executive Officer of Exide Technologies, immediately prior to his GM appointment. He retains the Chairman position. He also has held a number of executive positions with Ford Motor Company until 1986 and the former Chrysler Corporation from which he retired in 1998. Mr. John D. Finnegan has been associated with General Motors since 1976. In 1992, he was elected as Executive Vice President and Chief Financial Officer of General Motors Acceptance Corporation. During 1994, he added the responsibilities of Chairman and President of GMAC Mortgage Corporation. Effective December 1995, he was named Vice President and Treasurer of General Motors. In November 1997, he was elected Vice President and Group Executive of General Motors and President of General Motors Acceptance Corporation. Effective May 1999, he was elected Chairman of General Motors Acceptance Corporation and Executive Vice President of General Motors. Mr. Thomas A. Gottschalk has been associated with General Motors since 1994. He previously held the position of senior vice president and general counsel. He was elected to the position of Executive Vice President of General Motors with primary responsibility for Law and Public Policy on May 25, 2001. He retains the general counsel responsibility in his current position and is also responsible for the Office of the Secretary. He is a member of the Automotive Strategy Board and is the global process leader for Law and Public Policy. Prior to General Motors, he was a partner and member of the management committee of the law firm of Kirkland and Ellis in Washington, D.C. I-13 PART II GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters General Motors' (GM's) common stocks are listed on the stock exchanges specified on the cover page of this Form 10-K under the trading symbols "GM" and "GMH". GM's Dividend Policy is described in the Management's Discussion and Analysis (MD&A) in Part II. As of December 31, 2001, there were 444,739 holders of record of GM $1-2/3 par value common stock and 185,553 holders of record of GM Class H common stock. As of December 31, 2000, there were 464,399 holders of record of GM $1-2/3 par value common stock and 192,813 holders of record of GM Class H common stock. The following table sets forth the high and low sale prices of GM's common stocks as reported on the Composite Tape and the quarterly dividends declared for the last two years. 2001 Quarters ---------------------------------------- 1st 2nd 3rd 4th ----- ----- ----- ------ Cash dividends per share of common stocks $1-2/3 par value $0.50 $0.50 $0.50 $0.50 Class H $- $- $- $- Price range of common stocks $1-2/3 par value (1): High $59.48 $64.89 $67.80 $53.22 Low $50.25 $50.20 $39.17 $40.52 Class H (1): High $28.00 $25.09 $21.65 $15.80 Low $17.90 $17.50 $11.50 $12.12 2000 Quarters ---------------------------------------- 1st 2nd 3rd 4th ----- ----- ----- ----- Cash dividends per share of common stocks $1-2/3 par value $0.50 $0.50 $0.50 $0.50 Class H $- $- $- $- Price range of common stocks $1-2/3 par value (1): High $88.13 $94.63 $76.63 $68.25 Low $70.75 $57.25 $56.94 $48.44 Class H (1)(2): High $47.00 $41.58 $37.61 $38.00 Low $30.50 $27.33 $24.63 $21.33 (1) The principal market is the New York Stock Exchange, and prices are based on the Composite Tape. GM $1-2/3 par value common stock is also listed on the Chicago and Philadelphia stock exchanges and on the Pacific Exchange. (2) The stock prices have been adjusted to reflect the three-for-one stock split of the GM Class H common stock, in the form of a 200% stock dividend, paid on June 30, 2000. II-1 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 6. Selected Financial Data (Unaudited) Years Ended December 31 ----------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (dollars in millions except per share amounts) Total net sales and revenues $177,260 $184,632 $176,558 $155,445 $172,580 ======= ======= ======= ======= ======= Income from continuing operations $601 $4,452 $5,576 $3,049 $6,483 Income (loss) from discontinued operations - - 426 (93) 215 --- ----- ----- ----- ----- Net income $601 $4,452 $6,002 $2,956 $6,698 === ===== ===== ===== ===== $1-2/3 par value common stock Basic earnings per share (EPS) from continuing operations $1.78 $6.80 $8.70 $4.40 $8.52 Basic earnings (losses) per share from discontinued operations $ - $ - $0.66 $(0.14) $0.18 Diluted EPS from continuing operations $1.77 $6.68 $8.53 $4.32 $8.45 Diluted earnings (losses) per share from discontinued operations $ - $ - $0.65 $(0.14) $0.17 Cash dividends declared per share $2.00 $2.00 $2.00 $2.00 $2.00 Class H common stock (1) (3) Basic EPS from continuing operations $ - $ - $ - $ - $0.77 Basic EPS from discontinued operations $ - $ - $ - $ - $0.29 Diluted EPS from continuing operations $ - $ - $ - $ - $0.77 Diluted EPS from discontinued operations $ - $ - $ - $ - $0.29 Cash dividends declared per share $ - $ - $ - $ - $0.33 Class H common stock (1) (4) Basic earnings (losses) per share from continuing operations $(0.55) $0.56 $(0.26) $0.23 $0.01 Diluted earnings (losses) per share from continuing operations $(0.55) $0.55 $(0.26) $0.23 $0.01 Cash dividends declared per share $ - $ - $ - $ - $ - Total assets $323,969 $303,100 $274,730 $246,688 $221,767 Long-term debt (2) $10,726 $7,410 $7,415 $7,118 $5,669 GM-obligated mandatorily redeemable preferred securities of subsidiary trusts $ - $139 $218 $220 $222 Stockholders' equity $19,707 $30,175 $20,644 $15,052 $17,584 Reference should be made to the notes to GM's consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. (1) Adjusted to reflect the three-for-one stock split of the GM Class H common stock, in the form of a 200% stock dividend, paid on June 30, 2000. (2) Automotive, Communications Services, and Other Operations only. (3) Prior to its recapitalization on December 17, 1997. (4) Subsequent to its recapitalization on December 17, 1997. * * * * * * II-2 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 7. 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 Hughes Electronics Corporation (Hughes) consolidated financial statements and MD&A for the period ended December 31, 2001, included as Exhibit 99 to this GM Annual Report on Form 10-K for the period ended December 31, 2001, and related Hughes Annual Report on Form 10-K filed separately with the Securities and Exchange Commission (SEC); and the General Motors Acceptance Corporation (GMAC) Annual Report on Form 10-K for the period ended December 31, 2001, filed separately with the SEC. 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 ACO 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, 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 ACO 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. II-3 GENERAL MOTORS CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS For the year ended December 31, 2001, income from continuing operations for the Corporation was $601 million, or $1.77 per share of GM $1-2/3 par value common stock, compared with $4.5 billion and $5.6 billion, or $6.68 and $8.53 per share of GM $1-2/3 par value common stock, for 2000 and 1999, respectively. Income from continuing operations includes the special items on an after-tax basis outlined below: 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 Year Ended December 31, 2001 Reported Net Income (Loss) $1,270 $(765) $(81) $(57) $367 $(618) $(916) $(1,167) $1,786 $(18) $601 Ste. Therese Charge (A) 194 - - - 194 - - 194 - - 194 Raytheon Settlement (B) - - - - - - 474 474 - - 474 Gain on Sale of Thomson (C) - - - - - (67) - (67) - - (67) SkyPerfecTV! Writedown (D) - - - - - 133 - 133 - - 133 Severance Charge (E) - - - - - 40 - 40 - - 40 DIRECTV Japan Adjustment (F) - - - - - (21) - (21) - - (21) Isuzu Restructuring (G) - - - 133 133 - - 133 - - 133 SFAS 133 Adjustment (H) 14 (2) 1 1 14 8 - 22 (34) - (12) ----- ---- --- ---- --- ----- ------ ---- ----- -- ----- Adjusted Income (Loss) $1,478 $(767) $(80) $77 $708 $(525) $(442) $(259) $1,752 $(18) $1,475 ===== === == == === === === === ===== == ===== For Year Ended December 31, 2000 Reported Net Income (Loss) $3,174 $(676) $26 $(233) $2,291 $829 $(281) $2,839 $1,602 $11 $4,452 Phase-out of Oldsmobile Charge (I) 939 - - - 939 - - 939 - - 939 Postemployment Benefits Charge (J) 294 - - - 294 - - 294 - - 294 Capacity Reduction Adjustment (K) - 419 - - 419 - - 419 - - 419 Satellite Businesses Gain (L) - - - - - (1,132) - (1,132) - - (1,132) ----- --- -- --- ----- ----- --- ----- ----- -- ----- Adjusted Income (Loss) $4,407 $(257) $26 $(233) $3,943 $(303) $(281) $3,359 $1,602 $11 $4,972 ===== === == === ===== ===== === ===== ===== == ===== For Year Ended December 31, 1999 Reported Net Income (Loss) $4,857 $423 $(81) $(218) $4,981 $(270) $(669) $4,042 $1,527 $7 $5,576 Postemployment Benefits Adjustment (M) (553) - - - (553) - - (553) - - (553) Hourly Retiree Benefits Charge (N) 257 - - - 257 - 151 408 - - 408 Termination Benefits Charge (O) 39 - - - 39 - 35 74 16 - 90 Wireless Business Charge (P) - - - - - 165 - 165 - - 165 ----- --- -- --- ----- --- --- ----- ----- -- ----- Adjusted Income (Loss) $4,600 $423 $(81) $(218) $4,724 $(105) $(483) $4,136 $1,543 $7 $5,686 ===== === == === ===== === === ===== ===== == ===== See footnotes on next page for further discussion of these items.
II-4 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Footnotes: - --------- A) The Ste. Therese Charge relates to asset impairments and postemployment costs for termination and other postemployment benefits associated with the announcement of the closing of the Ste. Therese, Quebec assembly plant. B) The Raytheon Settlement relates to Hughes' settlement with the Raytheon Company on a purchase price adjustment related to Raytheon's 1997 merger with Hughes Defense. C) The Gain on Sale of Thomson relates to Hughes' sale of 4.1 million shares of Thomson Multimedia common stock. D) The SkyPerfecTV! Writedown relates to Hughes' non-cash charge from the revaluation of its investment. E) The Severance Charge relates to Hughes' 10% company-wide workforce reduction in the U.S. F) The DIRECTV Japan Adjustment relates to a favorable adjustment to the expected costs associated with the shutdown of Hughes' DIRECTV Japan business. G) The Isuzu Restructuring charges include GM's portion of severance payments and asset impairments that were part of the restructuring of its affiliate Isuzu Motors Ltd. H) The SFAS 133 Adjustment represents the net impact during the first quarter of 2001 from the initial adoption of SFAS No. 133, "Accounting for Derivatives and Hedging Activities." I) The Phase-out of Oldsmobile Charge relates to the costs associated with GM's decision to phase-out the Oldsmobile division as the current model lineup product lifecycles come to an end, or when the models are no longer economically viable. J) The Postemployment Benefits Charge relates to postemployment costs for termination and other postemployment benefits associated with four North American manufacturing facilities slated for conversion and capacity reduction (Oklahoma City, Oklahoma; Delta Engine, Lansing, Michigan; Spring Hill, Tennessee; and Wilmington, Delaware). K) The Capacity Reduction Adjustment relates to costs associated with the reduction in production capacity, including the restructuring of Vauxhall Motors Limited's manufacturing operations in the U.K. L) The Satellite Businesses Gain relates to the sale of Hughes' satellite systems manufacturing businesses to The Boeing Company. M) The Postemployment Benefits Adjustment relates to the reversal of a liability for benefits payable to excess U.S. hourly employees. N) The Hourly Retiree Benefits Charge relates to the benefit increase granted to hourly retirees in connection with the 1999 UAW agreement. O) The Termination Benefits Charge relates to a U.S. salaried early retirement program. Approximately 1,700 people (100 executives) elected participation in this program. P) The Wireless Business Charge relates to Hughes' decision to discontinue certain of its wireless manufacturing operations at Hughes Network Systems. II-5 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Vehicle Unit Deliveries of Cars and Trucks - GMA
Years Ended December 31, -------------------------------------------------------------------------------- 2001 2000 1999 ------------------------- ------------------------- -------------------------- GM as GM as GM as a % of a % of a % of Industry GM Industry Industry GM Industry Industry GM Industry -------- ----- -------- -------- ----- -------- -------- ------ -------- (units in thousands) United States Cars 8,455 2,272 26.9% 8,857 2,532 28.6% 8,700 2,591 29.8% Trucks 9,020 2,632 29.2% 8,957 2,421 27.0% 8,718 2,426 27.8% ------- ----- ----- ----- ----- ----- Total United States 17,475 4,904 28.1% 17,814 4,953 27.8% 17,418 5,017 28.8% Canada, Mexico, and Other 2,775 686 24.7% 2,781 707 25.4% 2,525 666 26.4% ------ ----- ------ ----- ------ ----- Total GMNA 20,250 5,590 27.6% 20,595 5,660 27.5% 19,943 5,683 28.5% GME 19,632 1,801 9.2% 20,158 1,856 9.2% 20,252 1,974 9.7% GMLAAM 3,861 663 17.2% 3,664 605 16.5% 3,342 539 16.1% GMAP 12,884 506 3.9% 12,880 476 3.7% 11,975 455 3.8% ------ ----- ------ ----- ------ ----- Total Worldwide 56,627 8,560 15.1% 57,297 8,597 15.0% 55,512 8,651 15.6%
Wholesale Sales Years Ended December 31, ----------------------------------- 2001 2000 1999 ----- ----- ----- (units in thousands) GMNA Cars 2,441 2,933 2,992 Trucks 2,746 2,842 2,882 ----- ----- ----- Total GMNA 5,187 5,775 5,874 ----- ----- ----- GME Cars 1,666 1,744 1,824 Trucks 94 135 144 ----- ----- ----- Total GME 1,760 1,879 1,968 ----- ----- ----- GMLAAM Cars 463 438 350 Trucks 203 196 173 --- --- --- Total GMLAAM 666 634 523 --- --- --- GMAP Cars 202 175 162 Trucks 258 283 259 --- --- --- Total GMAP 460 458 421 --- --- --- Total Worldwide 8,073 8,746 8,786 ===== ===== ===== GMA Financial Review GMA's income and margin adjusted to exclude special items (adjusted income and margin) was $708 million and 0.5% for 2001, $3.9 billion and 2.7% for 2000, and $4.7 billion and 3.2% for 1999. The decrease in 2001 adjusted income and margin, compared with 2000, was primarily due to a decrease in wholesale sales volume and pricing pressures in North America and Europe. These unfavorable conditions were partially offset by cost structure improvements, also primarily in North America and Europe. The decrease in 2000 adjusted income and margin, compared with 1999, was primarily due to an increase in spending for product development activities, pricing pressures in North America and Europe, a decrease in wholesale sales volume, and unfavorable product mix, primarily in Europe. These unfavorable conditions were partially offset by cost structure improvements, primarily in North America. GMA's total net sales and revenues adjusted to exclude special items (adjusted total net sales and revenues) were $140.7 billion, $148.1 billion, and $146.1 billion for 2001, 2000, and 1999, respectively. The decrease in 2001 adjusted total net sales and revenues, compared with 2000, was largely due to lower wholesale volumes and unfavorable net price in North America and Europe. Net price comprehends the percent increase/(decrease) a customer pays in the current period for the same comparably equipped vehicle over the price paid in the previous year's period. The increase in 2000 adjusted total net sales and revenues, compared with 1999, was largely due to growth initiatives, including OnStar and Service Parts Operations, which were partially offset by lower wholesale volumes and unfavorable net price in North America and Europe. II-6 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review (continued) GMNA's adjusted income was $1.5 billion, $4.4 billion, and $4.6 billion for 2001, 2000, and 1999, respectively. The decrease in 2001 adjusted income from 2000 was primarily due to unfavorable net price of (1.3)% year-over-year and lower wholesale sales volumes. The decrease was partially offset by favorable product mix and improvements in manufacturing costs due to performance efficiencies, material cost savings, and engineering productivity. The decrease in 2000 adjusted income from 1999 was primarily due to unfavorable net price of (0.7)% year-over-year and lower wholesale sales volumes. The decrease was partially offset by improvements in manufacturing costs due to performance efficiencies and material cost savings. GME's adjusted loss was $767 million for 2001, compared with an adjusted loss of $257 million and adjusted income of $423 million for 2000 and 1999, respectively. The increase in GME's 2001 adjusted loss from 2000 was due to a continued shift in sales mix from larger, more profitable vehicles to smaller, less profitable entries, as well as a decrease in wholesale sales volume and continued competitive pricing pressures. These decreases were partially offset by improved material and structural cost performance. The decrease in GME's 2000 adjusted income from 1999 was due to the weakening of the European industry, unfavorable sales mix, an increase in competitive pricing pressure, and a decrease in wholesale sales volume which was further impacted by the reduced availability of the new Corsa during the launch period. GMLAAM's adjusted loss was $80 million for 2001, compared with adjusted income of $26 million and an adjusted loss of $81 million for 2000 and 1999, respectively. The decrease in 2001 adjusted earnings, compared with 2000, was primarily due to material cost increases reflecting supplier cost pressures, manufacturing cost increases, and the devaluation of the currency in Argentina. These decreases were partially offset by nominal price increases and an increase in wholesale sales volumes. The increase in 2000 adjusted income, compared with 1999, was primarily due to nominal price increases and an increase in wholesale sales volumes. This was partially offset by an increase in manufacturing costs and material costs. GMAP's adjusted income was $77 million for 2001 compared with adjusted losses of $233 million and $218 million for 2000 and 1999, respectively. The increase in 2001 adjusted earnings, compared with 2000, was primarily due to GMAP's suspension of recording its share of Isuzu's losses. GM reduced its investment balance in Isuzu to zero in the second quarter of 2001 and GM does not intend to invest any additional capital in Isuzu or guarantee any obligation of Isuzu. In addition, there were equity income improvements from several joint ventures in the region, as well as slightly favorable price increases and increased wholesale sales volume. Increased adjusted losses for 2000 compared with 1999 were primarily due to increased equity losses at Isuzu which were partially offset by increased wholesale sales volumes. GMA's effective income tax rate on an adjusted basis was 28.7%, 30.9%, and 31.7% for 2001, 2000, and 1999, respectively. GMA's effective income tax rate on a reported basis was 25.1%, 26.6%, and 32.0% for 2001, 2000, and 1999, respectively. Hughes Financial Review Total adjusted net sales and revenues were $8.3 billion, $8.7 billion, and $7.6 billion for 2001, 2000, and 1999, respectively. The decrease in adjusted net sales and revenues in 2001, compared with 2000, was due to decreased revenues at PanAmSat Corporation (PanAmSat) and Hughes Network Systems (HNS), and as a result of the sale of the satellite systems manufacturing businesses to The Boeing Company on October 6, 2000. The decrease in adjusted net sales and revenues at PanAmSat was primarily due to a decline of new outright sales and sales-type lease transactions executed during 2001 compared to 2000. The decrease in adjusted 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 adjusted net sales and revenues at the Direct-To-Home businesses that resulted from the addition of approximately 1.5 million net new subscribers in the United States and Latin America since December 31, 2000. The increase in adjusted net sales and revenues in 2000 compared with 1999 resulted from growth in the DIRECTV businesses from the addition of more than 2.3 million net new subscribers in the United States and Latin America from December 31, 1999 to December 31, 2000. PanAmSat also contributed to the increase in adjusted net sales and revenues primarily due to increased revenues from outright sales and sales-type lease transactions executed during 2000. II-7 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes Financial Review (continued) Hughes' adjusted losses were $525 million, $303 million, and $105 million for 2001, 2000, and 1999, respectively. The increase in 2001 adjusted loss, compared with 2000, was primarily due to lower profits in 2001 from sales and sales-type lease transactions and higher operating costs at PanAmSat, increased costs associated with the rollout of new DIRECWAY services, lower profits resulting from decreased shipments of DIRECTV receiving equipment at HNS, the added cost of DIRECTV Broadband, and increased depreciation and amortization expense due to various acquisitions in 2001 and capital expenditures for satellites and property. The increase in 2000 adjusted loss, compared with 1999, was primarily due to higher marketing costs at the Direct-To-Home businesses, increased depreciation and amortization expense due to 1999 acquisitions and additions to satellites and property, as well as increased interest expense as a result of increased average outstanding borrowings throughout the year. GMAC Financial Review GMAC's adjusted income was $1.8 billion, $1.6 billion, and $1.5 billion for 2001, 2000, and 1999, respectively. Income from automotive and other financing operations totaled $1.3 billion, $1.1 billion, and $1.1 billion in 2001, 2000, and 1999, respectively. The increase in adjusted income in 2001, compared with 2000, was primarily due to lower market interest rates and increased asset levels. These increases were partially offset by weakness in off-lease residual values, higher credit losses, and wider borrowing spreads that occurred in the wake of negative rating agency actions. In 2000, compared to 1999, increased financing volumes and asset levels were offset by the negative impact from the higher level of market interest rates. Income from insurance operations totaled $200 million, $220 million, and $210 million in 2001, 2000, and 1999, respectively. The decrease in income in 2001, compared with 2000, was primarily due to a reduction in capital gains reflecting the general weakness in the equity markets. This decrease was partially offset by improved underwriting results. The increase in income in 2000, compared with 1999, was primarily due to improved operating results, higher investment income, and capital gains. Income from mortgage operations totaled $331 million, $327 million, and $260 million in 2001, 2000, and 1999, respectively. The increase in income in 2001, compared with 2000, was primarily due to strong origination volumes and securitizations which kept pace with the large run-off of home mortgages that occurred during periods of high refinancing activity. Revenue growth during 2001 associated with strong residential loan originations, increases in the servicing portfolio, and realized gains on the sale and securitization of mortgage loans, were largely offset by impairment charges recorded on mortgage servicing rights due to higher mortgage prepayment experience. Pre-tax gains on securitizations of mortgage loans were $1.0 billion, 37.6% and 65.0% higher than the gains in 2000 and 1999, respectively. The strong year-over-year performance in 2000, compared with 1999, reflects the benefit of strong international growth, lower cost of servicing, and increased mortgage originations during the second half of 2000. Automotive and other financing revenue totaled $15.1 billion in 2001, compared with $15.5 billion and $13.8 billion for 2000 and 1999, respectively. The decrease in revenue in 2001 was primarily due to a decline in asset earning rates during 2001, operating lease assets, and wholesale receivables, which were partially offset by an increase in retail receivables. The increase in 2000, compared with 1999, was mainly due to higher average retail, wholesale, and commercial and other loan receivable balances. Net premiums earned from insurance operations totaled $2.0 billion, $1.9 billion, and $1.8 billion in 2001, 2000, and 1999, respectively. The increase in 2001, compared with 2000, was primarily due to expanding customer relationships in assumed reinsurance business and strong volume in dealer vehicle inventory insurance. The increase in 2000, compared with 1999, was due to premium growth across all business lines. Mortgage revenue totaled $5.3 billion, $3.9 billion, and $3.0 billion in 2001, 2000, and 1999, respectively. The increase in revenue in 2001, compared with 2000 and 1999, was primarily attributed to stronger lending volumes, loan originations, securitizations, and an increase in the servicing portfolio reflecting significant refinancing activity prompted by the decline in interest rates observed throughout most of 2001. Other income, including gains and fees related to sold finance receivables, totaled $3.0 billion, $2.4 billion, and $1.7 billion in 2001, 2000, and 1999, respectively. The increase in 2001, compared with 2000, was primarily the result of increased income from increased securitization levels of retail and wholesale receivables. Additionally, interest income increased due to the increase in cash and cash equivalents in 2001. The increase in 2000, compared to 1999, was primarily attributable to increases in interest and servicing fees, factoring commissions, and other servicing fees. LIQUIDITY AND CAPITAL RESOURCES Financing Structure In 2001, GM and GMAC experienced excellent access to the capital markets as GM and GMAC were able to issue various securities to raise capital and extend borrowing terms consistent with GM's need for financial flexibility. Although downgrades to GM's and GMAC's credit ratings have reduced GM's and GMAC's access to the commercial paper market, the amount of commercial paper available to GM and GMAC remains sufficient to meet the Corporation's capital needs. Moreover, the downgrades have not had a significant adverse effect on GM's and GMAC's ability to issue long-term public debt, to obtain bank debt, or to sell asset-backed securities. Accordingly, GM and GMAC expect that they will continue to have excellent access to the capital markets sufficient to meet the Corporation's needs for financial flexibility. II-8 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Financing Structure (continued) As an additional source of funds, GM currently has unrestricted access to a $5.6 billion line of credit with a syndicate of banks which is committed through June 2006. Similarly, GMAC has a $7.4 billion line of credit, committed through June 2002, and an additional $7.4 billion committed through June 2006. GMAC currently plans to seek renewal of the line of credit committed through June 2002. On March 6, 2002, GM issued $3.8 billion of convertible debt securities as part of a comprehensive effort to improve the Corporation's financial flexibility. The offering includes $1.2 billion principal amount of 4.5% Series A Convertible Senior Debentures due 2032 and $2.6 billion principal amount of 5.25% Series B Convertible Senior Debentures due 2032. The securities mature in 30 years and are convertible into GM $1-2/3 common stock once specific conditions are satisfied. The proceeds of the offering, combined with other cash generation initiatives, will be used to rebuild GM's liquidity position, reduce its underfunded pension liability, and fund its postretirement health care obligations. Automotive, Communications Services, and Other Operations At December 31, 2001, cash, marketable securities, and $3.0 billion of assets of the Voluntary Employees' Beneficiary Association (VEBA) trust invested in fixed-income securities totaled $12.2 billion, compared with $13.3 billion at December 31, 2000. The decrease from December 31, 2000 was primarily due to capital expenditures, GM's purchase of an additional 10% equity stake in Suzuki for $493 million, an equity injection into GMAC of $500 million, and an overall decrease in earnings. These items were partially offset by improvements in managed working capital. Total assets in the VEBA trust used to pre-fund part of GM's other postretirement benefits liability approximated $4.9 billion and $6.7 billion at December 31, 2001 and 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. Net liquidity excluding Hughes was $1.0 billion as cash, marketable securities, and $3.0 billion of assets of the VEBA trust invested in fixed-income securities exceeded loans payable and long term debt at December 31, 2001, a decrease of $2.5 billion from the prior year. In order to provide financial flexibility to GM and its suppliers, GM maintains a two-part financing program through General Electric Capital Corporation (GECC) pursuant to a Trade Payables Agreement with GM wherein GECC (1) purchases GM receivables at a discount from GM suppliers prior to the due date of those receivables, and pays on behalf of GM the amount due on other receivables which have reached their due date (the first part) and (2) from time to time allows GM to defer payment to GECC with respect to all or a portion of receivables which it has purchased or paid on behalf of GM, which deferral lasts generally up to 40 days. To the extent GECC can realize favorable economics from transactions arising in the first part of the program, they are shared with GM. Whenever GECC and GM agree that GM will defer payment beyond the normal due date for receivables under the second part of the program, GM becomes obligated to pay interest for the period of such deferral. Outstanding balances of GM receivables held by GECC are classified as accounts payable in GM's financial statements. If any of GM's long-term unsecured debt obligations become subject to a rating by S&P of BBB- (GM's current rating is BBB+) with a negative outlook or below BBB-, or a rating by Moody's of Baa3 (GM's current rating is A3) with a negative outlook or below Baa3, the first part of the program would be unavailable to GM and its suppliers. If any of GM's long-term unsecured debt obligations become subject to a rating by S&P of BBB or lower, or a rating by Moody's of Baa2 or lower, the second part of the program would be unavailable to GM. The maximum amount permitted under the program is $2 billion. At December 31, 2001, the outstanding balance under the first part of the program amounted to approximately $495 million, and the outstanding balance under the second part of the program was $1.2 billion. Long-term debt was $10.7 billion and $7.4 billion at December 31, 2001 and 2000, respectively. The ratio of long-term debt to long-term debt and GM's net assets of Automotive, Communications Services, and Other Operations was 72.6% and 30.8% at December 31, 2001 and 2000, respectively. 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 76.5% and 36.6% at December 31, 2001 and 2000, respectively. Beginning January 2004, Fiat S.p.A. (Fiat) has the right to exercise a put option to require GM to purchase 80% of Fiat Auto B.V. (Fiat Auto) at fair market value. The put expires on July 24, 2009. The process for establishing the value that would be paid by GM to Fiat involves the determination of "Fair Market Value" by investment banks that would be retained by the parties pursuant to provisions set out in the Master Agreement between GM and Fiat, which has been made public in filings with the SEC. As a result of GM's purchase of the initial 20% investment in Fiat Auto for $2.4 billion in the July 2000 transaction, some have suggested a valuation of $9.6 billion for the other 80% of Fiat Auto. However, Exhibit 8.03(a)(iii) to the Master Agreement states that "in determining the Fair Market Value of the Put Shares, the price [$2.4 billion] paid by General Motors for its initial 20% interest in Fiat Auto shall not be considered." II-9 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive, Communications Services, and Other Operations (continued) Until a valuation is actually performed in accordance with provisions of the Master Agreement, the amount that GM may pay for 80% of Fiat Auto is not quantifiable. This is due in large part to the fact that there are many variables that could cause such a determination to rise or fall, including, but not limited to, the operating results and prospects of Fiat Auto, such factors as the timing of any possible exercise of the put, regional and global economic developments and those in the automotive industry, developments specific to the business of Fiat Auto, the resolution of any antitrust issues arising in the context of such a transaction and other legislative developments in the countries in which Fiat Auto and GM conduct their business operations. Fiat Auto has recently announced a major restructuring, including a significant write-off, all of which may be relevant to any prospective valuation of Fiat Auto. Recently, Fiat stated that it expects Fiat Auto to return to profitability by the end of 2002 and that it does not plan to sell Fiat Auto to GM. If the put were exercised, GM would have the option to pay for the 80% interest in Fiat Auto entirely in shares of GM $1-2/3 par value common stock, entirely in cash, or in whatever combination thereof GM may choose. To the extent GM chooses to pay in cash, that portion of the purchase price may be paid to Fiat in four installments over a three-year period. GM would expect to fund any such payments from normal operating cash flows or financing activities. At this time it cannot be determined what the effects of the exercise of the put would be, if it ever occurs during the next eight years; however, if it is exercised, it could have a material effect on GM at or after the time of exercise. Financing and Insurance Operations At December 31, 2001, GMAC owned assets and serviced automotive receivables totaling $220.1 billion, compared with $185.7 billion at December 31, 2000. Total consolidated assets of GMAC at December 31, 2001 were $192.7 billion, compared with $168.5 billion at December 31, 2000. The increases were primarily due to increases in serviced retail receivables, cash and cash equivalents, mortgages held for sale, other assets, mortgage lending receivables, mortgage loans held for investment, due and deferred from receivable sales, and mortgage servicing rights. These increases were partially offset by decreases in serviced wholesale receivables, operating lease assets, receivables due from ACO, and factored receivables. Total automotive and commercial finance receivables serviced by GMAC, including sold receivables, amounted to $130.6 billion and $112.5 billion at December 31, 2001 and 2000, respectively. The year-to-year increase was primarily due to a $24.3 billion increase in serviced retail receivables, which was partially offset by a $5.3 billion decrease in serviced wholesale receivables. Continued increased GM-sponsored retail financing incentives contributed to the rise in serviced retail receivables. The decrease in serviced wholesale receivables was due to lower dealer inventory levels. Principal balances of active trusts of sold wholesale receivables (including retained subordinated interests) increased $6.2 billion, due to the completion of three sales in 2001. Additionally, outstanding principal balances of sold retail automotive receivables (including retained subordinated interests) increased by $3.5 billion due to the completion of five sales during 2001. GMAC's liquidity, as well as its ability to profit from ongoing acquisition activity, is in large part dependent on its timely access to capital and the costs associated with raising funds in different segments of the capital markets. In this regard, GMAC regularly accesses the short-term, medium-term, long-term debt, and asset-backed securitization markets principally through commercial paper, notes, and underwritten transactions. As of December 31, 2001, GMAC's total borrowings were $152.0 billion compared with $133.4 billion at December 31, 2000. The higher year-to-year debt balances were principally used to fund increased asset levels. Approximately 84% of this debt represented funding for operations in the United States, and the remaining 16% represented borrowings for operations in Canada (7%), the United Kingdom (3%), Germany (2%), and other countries (4%). GMAC's 2001 year-end ratio of total debt to total stockholder's equity was 9.4:1 compared to 9.5:1 at December 31, 2000. Total short-term debt outstanding at December 31, 2001 amounted to $36.2 billion compared with $56.9 billion at year-end 2000. Off-Balance Sheet Arrangements GM and GMAC use off-balance sheet special purpose entities ("SPEs") where the economics and sound business principles warrant their use. GM's principal use of SPEs occurs in connection with the securitization and sale of financial assets generated or acquired in the ordinary course of business by GM's wholly-owned subsidiary GMAC and its subsidiaries and, to a lesser extent, by GM. The assets securitized and sold by GMAC and its subsidiaries consist principally of mortgages, and wholesale and retail loans secured by vehicles sold through GM's dealer network. The assets sold by GM consist of trade receivables. GM and GMAC use SPEs in a manner consistent with conventional practices in the securitization industry, the purpose of which is to isolate the receivables for the benefit of securitization investors. The use of SPEs enables GM and GMAC to access the highly liquid and efficient markets for the sale of these types of financial assets when they are packaged in securitized forms. II-10 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Off-Balance Sheet Arrangements (continued) GM leases real estate and equipment from various SPEs which have been established to facilitate the financing of those assets for GM by nationally prominent, creditworthy lessors. These assets consist principally of office buildings, warehouses, and machinery and equipment. The use of SPEs allows the parties providing the financing to isolate particular assets in a single entity and thereby syndicate the financing to multiple third parties. This is a conventional financing technique used to lower the cost of borrowing and, thus, the lease cost to a lessee such as GM. There is a well-established market in which institutions participate in the financing of such property through their purchase of interests in these SPEs. All of the SPEs established to facilitate property leases to GM are owned by institutions which are truly independent of, and not affiliated with, GM. These institutions maintain substantial equity investments in their SPEs. No officers, directors or employees of GM, GMAC, or their affiliates hold any direct or indirect equity interests in such SPEs. Assets in SPEs were as follows (dollars in millions): December 31, ------------------ 2001 2000 ------ ------ Automotive, Communications Services, and Other Operations Assets leased under operating leases $2,412 $1,729 Trade receivables sold 868 897 ----- ------ Total $3,280 $2,626 ===== ===== Financing and Insurance Operations Receivables sold or securitized: - Mortgage loans $104,678 $86,344 - Retail finance receivables 11,978 6,957 - Wholesale finance receivables 16,227 9,988 ------- ------- Total $132,883 $103,289 ======= ======= Book Value Per Share Book value per share was 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 decreased to $24.79 at December 31, 2001, from $39.36 at December 31, 2000. Book value per share of GM Class H common stock decreased to $4.96 at December 31, 2001, from $7.87 at December 31, 2000. Dividends Dividends may be paid on common stocks only when, as, and if declared by GM's Board of Directors 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. At December 31, 2001, the amount available for the payment of dividends on GM $1-2/3 par value and GM Class H common stocks was $10.1 billion and $19.4 billion, respectively. GM's policy is to distribute dividends on its $1-2/3 par value common stock based on the outlook and indicated capital needs of the business. Cash dividends per share of GM $1-2/3 par value common stock were $2.00 in 2001, 2000, and 1999. 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 the business of Hughes. The dividends per share for the GM Series H 6.25% Automatically Convertible Preference Stock were $35.1172 in 2001. On April 2, 2001, GM redeemed approximately 5 million outstanding Series G 9.12% Depository Shares, each of which represented a one-fourth interest in a GM Series G Preference Stock, and 5 million outstanding Series G 9.87% Trust Originated Preferred Securities(sm) (TOPrS(sm)) at a total redemption price that included accrued and unpaid dividends. The Series D preference stock was redeemed on May 2, 2000, and as a result, the amount paid on that date to the Series D shareholders of record included accrued and unpaid dividends as part of the total redemption price. - -------------------- sm "Trust Originated Preferred Securities" and "TOPrS" are service trademarks of Merrill Lynch & Co. II-11 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Euro Conversion On January 1, 1999, 11 of 15 member countries of the European Union established fixed conversion rates between their existing currencies and adopted the euro as their new common currency. The euro traded on currency exchanges and the legacy currencies remained legal tender in the participating countries for a transition period until January 1, 2002. Beginning on January 1, 2002, euro-denominated bills and coins were issued and on February 28, 2002 legacy currencies were withdrawn from circulation. The Corporation has reviewed and has made required modifications to applicable information technology systems and contracts based on the new currency. At December 31, 2001, the conversion to the euro has not resulted in any material adverse impact on GM's financial position or results of operations. European Matters During 2001, GM Europe announced its intention to turn around its business with the implementation of Project Olympia. The initial stages of Project Olympia sought to identify initiatives that could deliver: . Solid and profitable business performance as of 2003 . A strengthened and optimized sales structure . A revitalized Opel/Vauxhall brand . Further market growth opportunities . Continuous improvement by refocusing the organizational structure The project identified several initiatives which aim to address the goals mentioned above. These initiatives, which include, among other things, reducing GM Europe's manufacturing capacity, restructuring the dealer network in Germany, and redefining the way vehicles are marketed, are in varying stages of planning and execution. The impact that such initiatives may have on the financial position and results of operations of GM is currently being assessed, and may include a charge to earnings in 2002. During September 2000, the European parliament passed a directive requiring member states to adopt legislation regarding end-of-life vehicles and the responsibility of manufacturers for dismantling and recycling vehicles they have sold. European Union member states are required to transform the concepts detailed in the directive into national law by April 2002. Under the directive, manufacturers are financially responsible for at least a portion of the cost of the take-back of vehicles placed in service after July 2002 and all vehicles placed in service prior to July 2002 that are still in operation in January 2007. The laws developed in the individual national legislatures throughout Europe will have a significant impact on the amount ultimately paid by the manufacturers for this issue. Management is currently assessing the impact of this potential legislation on GM's financial position and results of operations, and may include a charge to earnings in 2002. The European Commission has adopted a draft block exemption regulation that provides for a reform of the rules governing automotive distribution and service in Europe. The European Commission's proposal would eliminate the current block exemption in place since 1985 that permits manufacturers to control where their dealerships are located and the brands that they sell. The current block exemption expires in October 2002, however there is a transition period until the end of September 2003 for existing agreements with dealers. GM is presently evaluating the effect this proposed regulation would have on its present distribution and aftermarket strategies. Hughes/EchoStar Transactions On October 28, 2001, GM and its wholly owned subsidiary Hughes, together with EchoStar Communications Corporation (EchoStar), announced the signing of definitive agreements that, subject to stockholder approval, regulatory clearance, and certain other conditions, provide for the split-off of Hughes from GM and the subsequent merger of the Hughes business with EchoStar. These transactions are designed to address strategic challenges currently facing the Hughes business and to provide liquidity and value to GM, which would help to support the credit position of GM after the transactions. The split-off of Hughes from GM would occur by means of a distribution to the holders of GM Class H common stock of one share of Class C common stock of a Hughes holding company (that will own all of the stock of Hughes at the time of the split-off) in exchange for each share of GM Class H common stock held immediately prior to the split-off. Immediately following the split-off, the businesses of Hughes and EchoStar would be combined in the Hughes/EchoStar merger to form New EchoStar. Each share of the Hughes holding company Class C common stock shares would remain outstanding and become a share of Class C common stock of New EchoStar. Holders of Class A and Class B common stock of EchoStar would receive 1/0.73, or about 1.3699 shares of stock of the merged entity in exchange for each share of Class A or Class B common stock of EchoStar held prior to the Hughes/EchoStar merger. The transactions are structured in a manner that will not result in the recapitalization of GM Class H common stock into GM $1-2/3 par value common stock at a 120% exchange ratio, as currently provided for under certain circumstances in the General Motors Restated Certificate of Incorporation, as amended. The GM $1-2/3 par value common stock would remain outstanding and would be GM's only class of common stock after the transactions. II-12 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes/EchoStar Transactions (continued) As part of the transactions, GM would receive a dividend from Hughes of up to $4.2 billion in cash and its approximately 30% retained economic interest in Hughes would be reduced by a commensurate amount. In addition, GM may achieve additional liquidity with respect to a portion of its retained economic interest in Hughes represented by up to 100 million shares of GM Class H common stock (or, after the transactions, New EchoStar Class C common stock), including by exchanging such shares for GM outstanding obligations. Following these transactions, subject to IRS approval, and based on a number of assumptions, GM may retain an interest in the merged entity. The transactions are subject to a number of conditions, including approval by a majority of each class of GM stockholders - GM $1-2/3 and GM Class H - each voting separately as distinct classes and also voting together as a single class based on their respective per share voting power. The proposed transactions also are subject to antitrust clearance and approval by the Federal Communications Commission. In addition, the transactions are contingent upon the receipt of a favorable ruling from the IRS that the separation of Hughes from GM will be tax-free to GM and its stockholders for U.S. federal income tax purposes. The transactions are currently expected to close in the second half of 2002. GM, Hughes, and EchoStar have agreed that, in the event that the transactions do not occur because certain specified regulatory-related conditions have not been satisfied, EchoStar will be required to purchase Hughes' interest in PanAmSat Corporation for an aggregate purchase price of approximately $2.7 billion, which is payable, depending on the circumstances, solely in cash or in a combination of cash and either debt or equity securities of EchoStar. In addition, in the event that the transactions do not occur because certain of the specified regulatory clearances or approvals relating to United States antitrust and or federal communication commission matters have not been satisfied, EchoStar will be required to pay a $600 million termination fee to Hughes. If the GM stockholders approve the transactions, and if GM receives the IRS ruling and the above-mentioned regulatory approvals, the financial results of Hughes will be reported as discontinued operations in GM's consolidated financial statements. GM would record a dividend of up to $4.2 billion as a reduction in GM's investment in Hughes. GM would record the split-off of Hughes at fair value and would recognize a gain based on an implied exchange ratio of 0.73 shares of EchoStar Class A common stock in exchange for each share of GM Class H common stock, which is the inverse of the exchange ratio in the Hughes/EchoStar merger of 1/0.73, or about 1.3699, shares of New EchoStar Class A or Class B common stock in exchange for each share of EchoStar Class A or Class B common stock. Based upon the closing price of EchoStar Class A common stock of $27.47 per share on December 31, 2001, the transaction would value Hughes' equity at $27.6 billion, with a resulting after-tax gain of approximately $14.0 billion based on the net book value of Hughes at December 31, 2001. In addition, GM currently anticipates that as a result of the split-off there would be a reduction of GM stockholders' equity of approximately $3.6 billion based on stock prices at December 31, 2001. The actual gain or loss, as well as the actual impact to stockholders' equity, would be higher or lower depending on the actual EchoStar Class A common stock price and the net book value of Hughes at the time the transactions close. Depending upon whether shares of GM Series H 6.25% Automatically Convertible Preference Stock held by America Online, Inc. (AOL) have converted to GM Class H common stock prior to the closing, as they would mandatorily at June 24, 2002, the gain, assuming the same December 31, 2001 stock prices, could be increased by approximately 10%. Employment and Payrolls Worldwide employment at December 31, (in thousands) 2001 2000 1999 ---- ---- ---- GMNA 202 212 217 GME 73 89 91 GMLAAM 23 24 23 GMAP 11 11 10 GMAC 29 29 27 Hughes 14 12 (1) 11 (1) Other 13 12 12 --- --- --- Total employees 365 389 391 === === === Worldwide payrolls - continuing operations (in billions) $19.8 $20.9 (1) $21.1 (1) U.S. hourly payrolls (in billions) (2)(4) $8.5 $9.4 $10.0 Average labor cost per active hour worked U.S. hourly (3) (4) $57.76 $52.16 $50.51 - ------------------------ (1) Amounts have been adjusted to exclude Hughes' employees transferred to The Boeing Company. (2) Includes employees "at work" (excludes laid-off employees receiving benefits). (3) Includes U.S. hourly wages and benefits divided by the number of hours worked. (4) Amounts have been adjusted to exclude Hughes employees. II-13 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Significant Accounting Principles The consolidated financial statements of GM are prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. GM believes that of its significant accounting policies, the following may involve a higher degree of judgments, estimates, and complexity: Sales Allowances At the time of sale, GM records as a reduction of revenue the estimated impact of sales allowances in the form of dealer and customer incentives. There may be numerous types of incentives available at any particular time. This estimate is based upon the assumption that a certain number of vehicles in dealer stock will have a specific incentive applied against them. If the actual number of vehicles differs from this estimate, or if a different mix of incentives occurs, the sales allowances could be affected. Policy and Warranty Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of warranty claims. Management actively studies trends of warranty claims and takes action to improve vehicle quality and minimize warranty claims. Management believes that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. Impairment of Long-Lived Assets GM periodically reviews the carrying value of its long-lived assets held and used and assets to be disposed of, including goodwill and other intangible assets, when events and circumstances warrant such a review. This review is performed using estimates of future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates of such cash flows and fair value could affect the evaluations. Employee Costs Pension and other postretirement benefits costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest cost, expected return on plan assets, mortality rates, and other factors. In accordance with accounting principles generally accepted in the United States, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect GM's pension and other postretirement obligations and future expense. Postemployment Benefits GM establishes reserves for termination and other postemployment benefit liabilities to be paid pursuant to union or other contractual agreements in connection with closed plants. The reserve is based on a comprehensive study that considers the impact of the annual production and labor forecast assumptions as well as redeployment scenarios. Management believes the assumptions used in the reserve are appropriate; however, changes in assumptions may affect the postemployment benefit liability. Allowance for Credit Losses The allowance for credit losses generally is established by GMAC during the period in which receivables are acquired and is maintained at a level considered appropriate by management based on historical and other factors that affect collectibility. These factors include the historical trends of repossessions, charge-offs, recoveries, and credit losses; the careful monitoring of portfolio credit quality, including the impact of acquisitions; and current and projected economic and market conditions. Different assumptions or changes in economic circumstances could result in changes to the allowance for credit losses. II-14 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Significant Accounting Principles (continued) Investments in Operating Leases GMAC's investments in residual values of its leasing portfolio represent an estimate of the values of the assets at the end of the lease contract and are initially recorded based on appraisals and estimates. Management reviews residual values periodically to determine that recorded amounts are appropriate and the operating lease assets have not been impaired. GMAC actively manages the remarketing of off-lease vehicles to maximize the realization of their value. Changes in the value of the residuals or other external factors impacting GMAC's future ability to market the vehicles under prevailing market conditions may impact the realization of residual values. Accounting for Derivatives and Other Contracts at Fair Value The Corporation uses derivatives in the normal course of business to manage its exposure to fluctuations in commodity prices and interest and foreign currency rates. Effective January 1, 2001, the Corporation accounts for its derivatives on the Consolidated Balance Sheet as assets or liabilities at fair value in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". Such accounting is complex, evidenced by significant interpretations of the primary accounting standard, which continues to evolve, as well as the significant judgments and estimates involved in the estimating of fair value in the absence of quoted market values. These estimates are based upon valuation methodologies deemed appropriate in the circumstances, however, the use of different assumptions may have a material effect on the estimated fair value amounts. New Accounting Standards In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. This statement specifies that certain acquired intangible assets in a business combination be recognized as assets separately from goodwill and that existing intangible assets and goodwill be evaluated for these new separation requirements. Management does not expect this statement to have a material impact on GM's consolidated financial position or results of operations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." 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. In addition, this statement requires that goodwill be tested for impairment at least annually at the reporting unit level. The Corporation implemented SFAS No. 142 on January 1, 2002. In accordance with this statement, GM is not required to complete the transitional goodwill impairment test until June 30, 2002. The Corporation is evaluating but has not yet determined whether adoption of this statement will result in an impairment of goodwill. Management estimates that goodwill and indefinite lived intangible asset amortization required under previous accounting standards of $383 million pre-tax ($302 million after-tax) will not be charged to the income statement in 2002. 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, 2003. 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 supersedes 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 implemented 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. II-15 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Forward-Looking Statements In this report, in reports subsequently filed by GM with the SEC on Forms 10-Q and 8-K, and in related comments by management of GM and Hughes, our use of the words "expect," "anticipate," "estimate," "forecast," "objective," "plan," "goal," and similar expressions is intended to identify forward-looking statements. While these statements represent our current judgments on what the future may hold, and we believe these judgments are reasonable, actual results may differ materially due to numerous important factors that are described below and other factors that may be described in subsequent reports which GM may file with the SEC on Forms 10-Q and 8-K: . Changes in economic conditions, currency exchange rates, significant terrorist acts, or political instability in the major markets where the Corporation procures material, components, and supplies for the production of its principal products or where its products are produced, distributed, or sold (i.e., North America, Europe, Latin America, and Asia Pacific). . Shortages of fuel or interruptions in transportation systems, labor strikes, work stoppages, or other interruptions to or difficulties in the employment of labor in the major markets where the Corporation purchases material, components, and supplies for the production of its products or where its products are produced, distributed, or sold. . Significant changes in the competitive environment in the major markets where the Corporation purchases material, components, and supplies for the production of its products or where its products are produced, distributed, or sold. . Changes in the laws, regulations, policies, or other activities of governments, agencies, and similar organizations where such actions may affect the production, licensing, distribution, or sale of the Corporation's products, the cost thereof, or applicable tax rates. . The ability of the Corporation to achieve reductions in cost and employment levels, to realize production efficiencies, and to implement capital expenditures, all at the levels and times planned by management. . With respect to Hughes, additional risk factors 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, and Hughes' ability to access capital to maintain its financial flexibility. Additionally, the in-orbit satellites of Hughes and its 81% owned subsidiary, PanAmSat Corporation, 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 operation of Hughes' businesses. With respect to both in-orbit and launch problems, insurance carried by Hughes and PanAmSat, if any, 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. * * * * * * ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk GM is exposed to market risk from changes in foreign currency exchange rates, interest rates, and certain commodity and equity security prices. GM enters into a variety of foreign exchange, interest rate, and commodity forward contracts and options, primarily to maintain the desired level of exposure arising from these risks. A risk management control system is utilized to monitor foreign exchange, interest rate, commodity and equity price risks, and related hedge positions. A discussion of GM's accounting policies for derivative financial instruments is included in Note 1 to the GM consolidated financial statements. Further information on GM's exposure to market risk is included in Notes 19 and 20 to the GM consolidated financial statements. The following analyses provide quantitative information regarding GM's exposure to foreign currency exchange rate risk, interest rate risk, and commodity and equity price risk. GM uses a model to evaluate the sensitivity of the fair value of financial instruments with exposure to market risk that assumes instantaneous, parallel shifts in exchange rates, interest rate yield curves, and commodity and equity prices. For options and instruments with non-linear returns, models appropriate to the instrument are utilized to determine the impact of market shifts. There are certain shortcomings inherent in the sensitivity analyses presented, primarily due to the assumption that exchange rates change in a parallel fashion and that interest rates change instantaneously. In addition, the analyses are unable to reflect the complex market reactions that normally would arise from the market shifts modeled. II-16 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Foreign Exchange Rate Risk GM has foreign currency exposures related to buying, selling, and financing in currencies other than the local currencies in which it operates. More specifically, GM is exposed to foreign currency risk related to the uncertainty to which future earnings or asset and liability values are exposed to as the result of operating cash flows and various financial instruments that are denominated in foreign currencies. At December 31, 2001 and 2000, the net fair value liability of financial instruments with exposure to foreign currency risk was approximately $15.0 billion and $13.6 billion, respectively. The potential loss in fair value for such financial instruments from a 10% adverse change in quoted foreign currency exchange rates would be approximately $1.5 billion and $1.2 billion for 2001 and 2000, respectively. Interest Rate Risk GM is subject to market risk from exposure to changes in interest rates due to its financing, investing, and cash management activities. More specifically, the Corporation is exposed to interest rate risk associated with long-term debt and contracts to provide commercial and retail financing, retained mortgage servicing rights, and retained assets related to mortgage securitization. In addition, GM is exposed to prepayment risk associated with its capitalized mortgage servicing rights and its retained assets. This risk is managed with U.S. Treasury options and futures, which exposes GM to basis risk since the derivative instruments do not have identical characteristics to the underlying mortgage servicing rights. At December 31, 2001 and 2000, the net fair value liability of financial instruments held for purposes other than trading with exposure to interest rate risk was approximately $5.3 billion and $18.1 billion, respectively. The potential loss in fair value resulting from a 10% adverse shift in quoted interest rates would be approximately $1.6 billion and $385 million for 2001 and 2000, respectively. At December 31, 2001, the net fair value liability of financial instruments held for trading purposes with exposure to interest rate risk was approximately $3.6 billion compared to a net fair value asset of approximately $3.2 billion at December 31, 2000. The potential loss in fair value resulting from a 10% adverse shift in quoted interest rates would be approximately $182 million and $217 million for 2001 and 2000, respectively. This analysis excludes GM's operating lease portfolio. A fair value change in the debt that funds this portfolio would potentially have a different impact on the fair value of the portfolio itself. As such, the overall impact to the fair value of financial instruments from a hypothetical change in interest rates may be overstated. Commodity Price Risk GM is exposed to changes in prices of commodities used in its Automotive business, primarily associated with various non-ferrous metals used in the manufacturing of automotive components. GM enters into commodity forward and option contracts to offset such exposure. At December 31, 2001, the net fair value liability of such contracts was approximately $78 million, compared to a net fair value asset of approximately $51 million at December 31, 2000. The potential loss in fair value resulting from a 10% adverse change in the underlying commodity prices would be approximately $150 million and $152 million for 2001 and 2000, respectively. This amount excludes the offsetting impact of the price risk inherent in the physical purchase of the underlying commodities. Equity Price Risk GM is exposed to changes in prices of various available-for-sale equity securities in which it invests. At December 31, 2001 and 2000, the fair value of such investments was approximately $2.3 billion and $3.3 billion, respectively. The potential loss in fair value resulting from a 10% adverse change in equity prices would be approximately $231 million and $330 million for 2001 and 2000, respectively. * * * * * * II-17 RESPONSIBILITIES FOR CONSOLIDATED FINANCIAL STATEMENTS The following consolidated financial statements of General Motors Corporation and subsidiaries were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America and, as such, include amounts based on judgments of management. Management is further responsible for maintaining internal control designed to provide reasonable assurance that the books and records reflect the transactions of the companies and that established policies and procedures are carefully followed. From a stockholder's point of view, perhaps the most important feature in internal control is that it is continually reviewed for effectiveness and is augmented by written policies and guidelines, the careful selection and training of qualified personnel, and a strong program of internal audit. Deloitte & Touche LLP, an independent auditing firm, is engaged to audit the consolidated financial statements of General Motors Corporation and subsidiaries and issue reports thereon. The audit is conducted in accordance with auditing standards generally accepted in the United States of America that comprehend the consideration of internal control and tests of transactions to the extent necessary to form an independent opinion on the financial statements prepared by management. The Independent Auditors' Report appears on the next page. The Board of Directors, through the Audit Committee (composed entirely of independent Directors), is responsible for assuring that management fulfills its responsibilities in the preparation of the consolidated financial statements. The Audit Committee annually recommends to the Board of Directors the selection of the independent auditors in advance of the Annual Meeting of Stockholders and submits the selection for ratification at the Meeting. In addition, the Audit Committee reviews the scope of the audits and the accounting principles being applied in financial reporting. The independent auditors, representatives of management, and the internal auditors meet regularly (separately and jointly) with the Audit Committee to review the activities of each, to ensure that each is properly discharging its responsibilities, and to assess the effectiveness of internal control. It is management's conclusion that internal control at December 31, 2001 provides reasonable assurance that the books and records reflect the transactions of the companies and that established policies and procedures are complied with. To reinforce complete independence, Deloitte & Touche LLP has full and free access to meet with the Audit Committee, without management representatives present, to discuss the results of the audit, the adequacy of internal control, and the quality of financial reporting. /s/John F. Smith, Jr. /s/G. Richard Wagoner, Jr. /s/John M. Devine John F. Smith, Jr. G. Richard Wagoner, Jr. John M. Devine Chairman President and Vice Chairman and Chief Executive Officer Chief Financial Officer II-18 Independent Auditors' Report General Motors Corporation, its Directors, and Stockholders: We have audited the Consolidated Balance Sheets of General Motors Corporation and subsidiaries as of December 31, 2001 and 2000, and the related Consolidated Statements of Income, Cash Flows, and Stockholders' Equity for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed at Item 14. These financial statements and the financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of General Motors Corporation and subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/DELOITTE & TOUCHE LLP - ------------------------ DELOITTE & TOUCHE LLP Detroit, Michigan January 16, 2002 (March 6, 2002 as to Note 25) II-19 ITEM 8 CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, -------------------------------- 2001 2000 1999 ---- ---- ---- (dollars in millions except per share amounts) GENERAL MOTORS CORPORATION AND SUBSIDIARIES Total net sales and revenues (Notes 1, 2, and 23) $177,260 $184,632 $176,558 ------- ------- ------- Cost of sales and other expenses (Notes 2, 3, and 23) 143,850 145,664 140,708 Selling, general, and administrative expenses 23,302 22,252 19,053 Interest expense (Note 13) 8,590 9,552 7,750 ------- ------- ------- Total costs and expenses 175,742 177,468 167,511 ------- ------- ------- Income from continuing operations before income taxes and minority interests 1,518 7,164 9,047 Income tax expense (Note 8) 768 2,393 3,118 Equity income (loss) and minority interests (149) (319) (353) ----- ----- ----- Income from continuing operations 601 4,452 5,576 Income from discontinued operations (Note 1) - - 426 ---- ----- ----- Net income 601 4,452 6,002 Dividends on preference stocks (Note 17) ( 99) (110) (80) --- ----- ----- Earnings attributable to common stocks $502 $4,342 $5,922 === ===== ===== Basic earnings (losses) per share attributable to common stocks (Note 18) $1-2/3 par value Continuing operations $1.78 $6.80 $8.70 Discontinued operations (Note 1) - - 0.66 ---- ---- ---- Earnings per share attributable to $1-2/3 par value $1.78 $6.80 $9.36 ==== ==== ==== Earnings per share attributable to Class H $(0.55) $0.56 $(0.26) ==== ==== ==== Earnings (losses) per share attributable to common stocks assuming dilution (Note 18) $1-2/3 par value Continuing operations $1.77 $6.68 $8.53 Discontinued operations (Note 1) - - 0.65 ---- ---- ---- Earnings per share attributable to $1-2/3 par value $1.77 $6.68 $9.18 ==== ==== ==== Earnings per share attributable to Class H $(0.55) $0.55 $(0.26) ==== ==== ==== Reference should be made to the notes to consolidated financial statements. II-20 CONSOLIDATED STATEMENTS OF INCOME - concluded Years Ended December 31, -------------------------------- 2001 2000 1999 ---- ---- ---- (dollars in millions) AUTOMOTIVE, COMMUNICATIONS SERVICES, AND OTHER OPERATIONS Total net sales and revenues (Notes 1, 2, and 23) $151,491 $160,627 $156,107 Cost of sales and other expenses (Notes 2, 3, and 23) 135,620 138,303 134,111 Selling, general, and administrative expenses 16,043 16,246 14,324 ------- ------- ------- Total costs and expenses 151,663 154,549 148,435 ------- ------- ------- Interest expense (Note 13) 751 815 828 Net expense from transactions with Financing and Insurance Operations (Note 1) 435 682 308 ----- ----- ----- Income (loss) from continuing operations before income taxes and minority interests (1,358) 4,581 6,536 Income tax (benefit) expense (Note 8) (270) 1,443 2,167 Equity income (loss) and minority interests (79) (299) (327) ----- ----- ----- Income (loss) from continuing operations (1,167) 2,839 4,042 Income from discontinued operations (Note 1) - - 426 ----- ----- ----- Net income (loss) - Automotive, Communications Services, and Other Operations $(1,167) $2,839 $4,468 ===== ===== ===== Years Ended December 31, -------------------------------- 2001 2000 1999 ---- ---- ---- (dollars in millions) FINANCING AND INSURANCE OPERATIONS Total revenues $25,769 $24,005 $20,451 ------ ------ ------ Interest expense (Note 13) 7,839 8,737 6,922 Depreciation and amortization expense (Note 9) 5,857 5,982 5,445 Operating and other expenses 7,105 5,805 4,595 Provisions for financing and insurance losses (Notes 1 and 23) 2,527 1,580 1,286 ------ ------ ------ Total costs and expenses 23,328 22,104 18,248 ------ ------ ------ Net income from transactions with Automotive, Communications Services, and Other Operations (Note 1) (435) (682) (308) ----- ----- ----- Income before income taxes and minority interests 2,876 2,583 2,511 Income tax expense (Note 8) 1,038 950 951 Equity income (loss) and minority interests (70) (20) (26) ----- ----- ----- Net income - Financing and Insurance Operations $1,768 $1,613 $1,534 ===== ===== ===== The above supplemental consolidating information is explained in Note 1, "Nature of Operations." Reference should be made to the notes to consolidated financial statements. II-21 CONSOLIDATED BALANCE SHEETS December 31, GENERAL MOTORS CORPORATION AND SUBSIDIARIES 2001 2000 ---- ---- ASSETS (dollars in millions) Automotive, Communications Services, and Other Operations Cash and cash equivalents (Note 1) $8,432 $9,119 Marketable securities (Note 4) 790 1,161 ------- ------- Total cash and marketable securities 9,222 10,280 Accounts and notes receivable (less allowances) 5,406 5,835 Inventories (less allowances) (Note 6) 10,034 10,945 Equipment on operating leases - net (Note 7) 4,524 5,699 Deferred income taxes and other current assets (Note 8) 7,877 8,388 ------- ------- Total current assets 37,063 41,147 Equity in net assets of nonconsolidated associates 4,950 3,497 Property - net (Note 9) 34,908 33,977 Intangible assets - net (Notes 1 and 10) 13,721 7,622 Deferred income taxes (Note 8) 22,294 14,870 Other assets (Note 11) 17,274 32,243 ------- ------- Total Automotive, Communications Services, and Other Operations assets 130,210 133,356 Financing and Insurance Operations Cash and cash equivalents (Note 1) 10,123 1,165 Investments in securities (Note 4) 10,669 9,595 Finance receivables - net (Note 5) 99,813 92,415 Investment in leases and other receivables (Note 7) 34,618 36,752 Other assets (Note 11) 36,979 27,846 Net receivable from Automotive, Communications Services, and Other Operations (Note 1) 1,557 1,971 ------- ------- Total Financing and Insurance Operations assets 193,759 169,744 ------- ------- Total assets $323,969 $303,100 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Automotive, Communications Services, and Other Operations Accounts payable (principally trade) $18,297 $18,309 Loans payable (Note 13) 2,402 2,208 Accrued expenses (Note 12) 34,090 33,252 Net payable to Financing and Insurance Operations (Note 1) 1,557 1,971 ------ ------ Total current liabilities 56,346 55,740 Long-term debt (Note 13) 10,726 7,410 Postretirement benefits other than pensions (Note 14) 34,515 34,306 Pensions (Note 14) 10,790 3,480 Other liabilities and deferred income taxes (Note 12) 13,794 15,768 ------- ------- Total Automotive, Communications Services, and Other Operations liabilities 126,171 116,704 Financing and Insurance Operations Accounts payable 7,900 7,416 Debt (Note 13) 153,186 135,037 Other liabilities and deferred income taxes (Note 12) 16,259 12,922 ------- ------- Total Financing and Insurance Operations liabilities 177,345 155,375 ------- ------- Total liabilities 303,516 272,079 Minority interests 746 707 General Motors - obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of General Motors (Note 16) Series G - 139 Stockholders' equity (Note 17) $1-2/3 par value common stock (issued, 559,044,427 and 548,181,757 shares) 932 914 Class H common stock (issued, 877,505,382 and 875,286,559 shares) 88 88 Capital surplus (principally additional paid-in capital) 21,519 21,020 Retained earnings 9,463 10,119 ------ ------ Subtotal 32,002 32,141 Accumulated foreign currency translation adjustments (2,919) (2,502) Net unrealized loss on derivatives (307) - Net unrealized gains on securities 512 581 Minimum pension liability adjustment (9,581) (45) ------- ------- Accumulated other comprehensive loss (12,295) (1,966) ------- ------- Total stockholders' equity 19,707 30,175 ------- ------- Total liabilities and stockholders' equity $323,969 $303,100 ======= ======= Reference should be made to the notes to consolidated financial statements. II-22 CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, ----------------------------------------------------------------------------------------- 2001 2000 1999 ------------------------- ------------------------- ------------------------- Automotive, Financing Automotive, Financing Automotive, Financing Comm.Serv., and Comm.Serv., and Comm.Serv., and and Other Insurance and Other Insurance and Other Insurance --------- --------- --------- --------- --------- --------- Cash flows from operating activities (dollars in millions) Income (loss) from continuing operations $(1,167) $1,768 $2,839 $1,613 $4,042 $1,534 Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities Depreciation and amortization expenses 7,051 5,857 7,429 5,982 6,873 5,445 Postretirement benefits other than pensions, net of payments and VEBA contributions 1,861 20 772 27 (1,057) 21 Pension expense, net of contributions 148 - 128 - (808) - Originations and purchases of mortgage loans - (103,821) - (51,202) - (53,006) Proceeds on sales of mortgage loans - 99,580 - 51,444 - 55,777 Originations and purchases of mortgage securities - (1,636) - (1,571) - (1,309) Proceeds on sales of mortgage securities - 859 - 994 - 1,545 Change in other investments and miscellaneous assets 959 (958) 1,154 (1,692) 522 (127) Change in other operating assets and liabilities (Note 1) (2,056) 850 724 2,505 7,523 (23) Other (911) 762 (2,175) 779 (951) 944 ----- ----- ------ ----- ------ ------ Net cash provided by operating activities $5,885 $3,281 $10,871 $8,879 $16,144 $10,801 ----- ----- ------ ----- ------ ------ Cash flows from investing activities Expenditures for property (8,611) (20) (9,200) (522) (7,061) (323) Investments in marketable securities - acquisitions (857) (34,198) (2,520) (24,599) (4,149) (21,257) Investments in marketable securities - liquidations 1,228 33,124 3,057 24,114 2,886 20,593 Mortgage servicing rights - acquisitions - (2,226) - (1,096) - (1,424) Mortgage servicing rights - liquidations - 20 - 12 - 35 Finance receivables - acquisitions - (236,723) - (214,666) - (186,379) Finance receivables - liquidations - 131,447 - 143,242 - 130,293 Proceeds from sales of finance receivables - 96,029 - 58,369 - 48,178 Operating leases - acquisitions (5,214) (12,826) (6,709) (15,174) (6,415) (16,750) Operating leases - liquidations 5,943 11,780 6,149 9,844 4,243 7,836 Investments in companies, net of cash acquired (743) (542) (4,302) (2,077) (2,706) (2,402) Net investing activity with Financing and Insurance Operations (500) - (1,069) - 75 - Other 176 (458) 3,281 93 (924) 732 ----- ------ ------ ------ ------ ------ Net cash used in investing activities (8,578) (14,593) (11,313) (22,460) (14,051) (20,868) ----- ------ ------ ------ ------ ------ Cash flows from financing activities Net increase (decrease) in loans payable 194 (20,238) 142 7,723 140 (2,500) Long-term debt - borrowings 5,850 58,498 5,279 22,414 9,090 26,471 Long-term debt - repayments (2,602) (18,882) (6,196) (16,196) (8,281) (13,078) Net financing activity with Automotive, Communications Services, and Other Operations - 500 - 1,069 - (75) Repurchases of common and preference stocks (264) - (1,613) - (3,870) - Proceeds from issuing common stocks 100 - 2,792 - 2,090 - Proceeds from sales of treasury stocks 417 - - - - - Cash dividends paid to stockholders (1,201) - (1,294) - (1,367) - ----- ------ ----- ------ ----- ------ Net cash provided by (used in) financing activities 2,494 19,878 (890) 15,010 (2,198) 10,818 ----- ------ --- ------ ----- ------ Effect of exchange rate changes on cash and cash equivalents (74) (22) (249) (6) (206) - Net transactions with Automotive /Financing Operations (414) 414 970 (970) 185 (185) --- --- --- --- --- --- Net cash (used in) provided by continuing operations (687) 8,958 (611) 453 (126) 566 Net cash provided by discontinued operations (Note 1) - - - - 128 - --- ----- --- --- --- --- Net (decrease) increase in cash and cash equivalents (687) 8,958 (611) 453 2 566 Cash and cash equivalents at beginning of the year 9,119 1,165 9,730 712 9,728 146 ----- ------ ----- ----- ----- --- Cash and cash equivalents at end of the year $8,432 $10,123 $9,119 $1,165 $9,730 $712 ===== ====== ===== ===== ===== === Reference should be made to the notes to consolidated financial statements.
II-23 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, and 1999
Accumulated Total Other Total Capital Capital Comprehensive Retained Comprehensive Stockholders' Stock Surplus Income (Loss) Earnings Loss Equity ------- ------- ------------- -------- ------------- ------------ (dollars in millions) Balance at January 1, 1999 $1,104 $12,661 $6,984 $(5,697) $15,052 Shares reacquired (76) (3,794) - - (3,870) Shares issued 19 3,588 - - 3,607 Comprehensive income: Net income - - $6,002 6,002 - 6,002 ----- Other comprehensive income (loss): Foreign currency translation adjustments - - (944) - - - Unrealized gains on securities - - 515 - - - Minimum pension liability adjustment - - 4,968 - - - ----- Other comprehensive income - - 4,539 - 4,539 4,539 ------ Comprehensive income - - $10,541 - - - ====== Cash dividends - - (1,367) - (1,367) Delphi initial public offering (Note 1) - 1,244 - 1,244 Delphi spin-off (Note 1) - 95 (4,658) - (4,563) ----- ------ ----- ----- ------ Balance at December 31, 1999 1,047 13,794 6,961 (1,158) 20,644 Shares reacquired (184) (9,626) - - (9,810) Shares issued 139 16,852 - - 16,991 Comprehensive income: Net income - - $4,452 4,452 - 4,452 ----- Other comprehensive income (loss): Foreign currency translation adjustments - - (469) - - - Unrealized losses on securities - - (415) - - - Minimum pension liability adjustment - - 76 - - - --- Other comprehensive loss - - (808) - (808) (808) --- Comprehensive income - - $3,644 - - - ===== Cash dividends - - (1,294) - (1,294) ----- ------ ------ ----- ------ Balance at December 31, 2000 1,002 21,020 10,119 (1,966) 30,175 Shares reacquired - (125) - - (125) Shares issued 18 624 - - 642 Comprehensive income: Net income - - $601 601 - 601 --- Other comprehensive income (loss): Foreign currency translation adjustments - - (417) - - - Unrealized loss on derivatives - - (307) - - - Unrealized losses on securities - - (69) - - - Minimum pension liability adjustment - - (9,536) - - - ----- Other comprehensive loss - - (10,329) - (10,329) (10,329) ------ Comprehensive loss - - $(9,728) - ====== Delphi spin-off adjustment (a) - - (56) - (56) Cash dividends - - (1,201) - (1,201) ----- ------ ----- ------ ------ Balance at December 31, 2001 $1,020 $21,519 $9,463 $(12,295) $19,707 ===== ====== ===== ====== ====== (a) Resolution of workers' compensation, pension, and other postemployment liabilities owed to GM by Delphi Automotive Systems, which GM spun-off in 1999. Reference should be made to the notes to consolidated financial statements.
II-24 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of General Motors Corporation and domestic and foreign subsidiaries that are more than 50% owned, principally General Motors Acceptance Corporation and Subsidiaries (GMAC) and Hughes Electronics Corporation and Subsidiaries (Hughes), (collectively referred to as the "Corporation", "General Motors" or "GM"). General Motors' share of earnings or losses of associates, in which at least 20% of the voting securities is owned, is included in the consolidated operating results using the equity method of accounting, except for investments where GM is not able to exercise significant influence over the operating and financial decisions of the investee, in which case, the cost method of accounting is used. The financial data related to Delphi Automotive Systems Corporation (Delphi) is presented as discontinued operations for the period ended December 31, 1999. GM encourages reference to the GMAC and Hughes Annual Reports on Form 10-K for the period ended December 31, 2001, filed separately with the Securities and Exchange Commission, and the Hughes consolidated financial statements included as Exhibit 99 to this GM Annual Report on Form 10-K for the period ended December 31, 2001. Certain amounts for 2000 and 1999 have been reclassified to conform with the 2001 classifications. Special purpose entities (SPEs) used in connection with the securitization or sale of finance receivables and mortgage loans are not consolidated when GM and GMAC have surrendered control over those financial assets. SPEs used in connection with the leasing of property are not consolidated when the owner of the SPE has made a substantial investment that is at risk for the life of the SPE. Assets in unconsolidated SPEs were as follows (dollars in millions): December 31, ------------------ 2001 2000 ------ ------ Automotive, Communications Services, and Other Operations - --------------------------------------------------------- Assets leased under operating leases $2,412 $1,729 Trade receivables sold 868 897 ------ ------ Total $3,280 $2,626 ===== ===== Financing and Insurance Operations - ---------------------------------- Receivables sold or securitized: - Mortgage loans $104,678 $86,344 - Retail finance receivables 11,978 6,957 - Wholesale finance receivables 16,227 9,988 ------- ------- Total $132,883 $103,289 ======= ======= Nature of Operations 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. These transactions consist principally of borrowings and other financial services provided by Financing and Insurance Operations to Automotive, Communications Services, and Other Operations. Use of Estimates in the Preparation of the Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ from those estimates. II-25 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 1. Significant Accounting Policies (continued) Revenue Recognition Sales generally are recorded when products are shipped (when title and risks and rewards of ownership have passed), or when services are rendered to independent dealers or other third parties. Provisions for dealer and customer sales incentives, allowances, and rebates are made at the time of vehicle sales. Incentives, allowances, and rebates related to vehicles previously sold are recognized as reductions of sales when announced. Financing revenue is recorded over the terms of the receivables using the interest method. Income from operating lease assets is recognized on a straight-line basis over the scheduled lease terms. Insurance premiums are earned on a basis related to coverage provided over the terms of the policies. Commissions, premium taxes, and other costs incurred in acquiring new business are deferred and amortized over the terms of the related policies on the same basis as premiums are earned. The liability for losses and loss expenses includes a provision for unreported losses, based on past experience, net of the estimated salvage and subrogation recoverable. Product-Related Expenses Advertising and sales promotion, research and development, and other product-related costs are charged to expense as incurred. Provisions for estimated expenses related to product warranties are made at the time the products are sold. Advertising expense was $4.0 billion in 2001, $4.3 billion in 2000, and $4.5 billion in 1999. Research and development expense was $6.2 billion in 2001, $6.6 billion in 2000, and $6.8 billion in 1999. Depreciation and Amortization As of January 1, 2001, the Corporation adopted the straight-line method of depreciation for real estate, plants, and equipment placed in service after January 1, 2001. Assets placed in service before January 1, 2001 continue to be generally depreciated using accelerated methods. The accelerated methods accumulate depreciation of approximately two-thirds of the depreciable cost during the first half of the estimated useful lives of property groups as compared to the straight-line method, which allocates depreciable costs equally over the estimated useful lives of property groups. Management believes the adoption of the straight-line depreciation method for assets placed into service after January 1, 2001 better reflects the consistent utilization of the asset over its useful life. The effect of this change on the results of operations for the year ended December 31, 2001 was not material. Equipment on operating leases is depreciated on a straight-line basis over the term of the lease agreement. The difference between the net book value and the proceeds of sale or salvage on items disposed of is accounted for as a charge against or credit to the provision for depreciation. Expenditures for special tools are amortized over their estimated useful lives, primarily using the units of production method. Replacements of special tools for reasons other than changes in products are charged directly to cost of sales. Goodwill is amortized on a straight-line basis over periods ranging from 20 to 40 years. Valuation of Long-Lived Assets GM periodically evaluates the carrying value of long-lived assets to be held and used and long-lived assets to be disposed of, including goodwill and other intangible assets, when events and circumstances warrant such review. These evaluations and reviews are generally done in conjunction with the annual business planning cycle. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset for assets to be held and used, or the amount by which the carrying value exceeds the fair market value less cost to dispose for assets to be disposed. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Foreign Currency Translation Foreign currency exchange transaction and translation losses on an after-tax basis included in consolidated net income in 2001, 2000, and 1999, pursuant to Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," amounted to $107 million, $100 million, and $162 million, respectively. Stock-Based Compensation As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," GM applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25 to its stock options and other stock-based employee compensation awards. II-26 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 1. Significant Accounting Policies (continued) Cash and Cash Equivalents Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less. Statement of Cash Flows Supplementary Information Years Ended December 31, ------------------------- Automotive, Communications Services, and Other Operations 2001 2000 1999 - ---------------------------------------- ---- ---- ---- (dollars in millions) Increase (decrease) in cash due to changes in other operating assets and liabilities were as follows: Accounts receivable $111 $(625) $(659) Prepaid expenses and other deferred charges (254) 66 (623) Inventories 522 (297) (66) Accounts payable 558 1,254 5,606 Deferred taxes and income taxes payable (1,444) (629) (160) Accrued expenses and other liabilities (1,549) 955 3,425 ----- --- ----- Total $(2,056) $724 $7,523 ===== === ===== Cash paid for interest and income taxes was as follows: Interest $1,259 $968 $526 Income taxes $1,149 $2,310 $2,166 During 2000, Automotive, Communications Services, and Other Operations made investments in companies, net of cash acquired of approximately $4.3 billion. This amount consists primarily of GM's purchase of a 20% equity interest in Fuji Heavy Industries Ltd. (Fuji) for approximately $1.3 billion and GM's acquisition of a 20% interest in Fiat Auto Holdings, B.V. (Fiat Auto) for $2.4 billion. In addition during 2000, Fiat S.p.A. purchased approximately 32 million shares of GM $1-2/3 par value common stock for $2.4 billion which is included in proceeds from issuing common stocks. Years Ended December 31, ------------------------- Financing and Insurance Operations 2001 2000 1999 - ---------------------------------- ---- ---- ---- (dollars in millions) Increase (decrease) in cash due to changes in other operating assets and liabilities were as follows: Other receivables $(2,622) $(726) $(269) Other assets 49 (29) (83) Accounts payable 483 3,155 114 Deferred taxes and other liabilities 2,940 105 215 ----- ----- --- Total $850 $2,505 $(23) === ===== == Cash paid for interest and income taxes was as follows: Interest $7,239 $8,511 $6,618 Income taxes $694 $475 $214 Derivative Instruments GM is party to a variety of foreign exchange, interest rate and commodity forward contracts and options entered into in connection with the management of its exposure to fluctuations in foreign exchange, interest rates, and certain commodity prices. These financial exposures are managed in accordance with corporate policies and procedures. All derivatives are recorded at fair value on the balance sheet. Effective changes in fair value of derivatives designated as cash flow hedges and hedges of a net investment in a foreign operation are recorded in net unrealized loss on derivatives, a separate component of accumulated other comprehensive loss. Amounts are reclassified from accumulated other comprehensive loss when the underlying hedged item impacts earnings and all ineffective changes in fair value are recorded currently in earnings. Changes in fair value of derivatives designated as fair value hedges are recorded currently in earnings offset to the extent the derivative was effective by changes in fair value of the hedged item. Changes in fair value of derivatives not designated as hedging instruments are recorded currently in earnings. II-27 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 1. Significant Accounting Policies (continued) New Accounting Standards In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. This statement specifies that certain acquired intangible assets in a business combination be recognized as assets separately from goodwill and that existing intangible assets and goodwill be evaluated for these new separation requirements. Management does not expect this statement to have a material impact on GM's consolidated financial position or results of operations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." 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. In addition, this statement requires that goodwill be tested for impairment at least annually at the reporting unit level. The Corporation implemented SFAS No. 142 on January 1, 2002. In accordance with this statement, GM is not required to complete the transitional goodwill impairment test until June 30, 2002. The Corporation is evaluating but has not yet determined whether adoption of this statement will result in an impairment of goodwill. Management estimates that goodwill and indefinite lived intangible asset amortization required under previous accounting standards of $383 million pre-tax ($302 million after-tax) will not be charged to the income statement in 2002. 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, 2003. 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 implemented 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. Discontinued Operations On February 5, 1999, Delphi completed an initial public offering (IPO) of 100 million shares of its common stock, which represented 17.7% of its outstanding common shares. On April 12, 1999, the GM Board of Directors (GM Board) approved the complete separation of Delphi from GM by means of a spin-off (which was tax-free to GM and its stockholders for U.S. federal income tax purposes). On May 28, 1999, GM distributed to holders of its $1-2/3 par value common stock 80.1% of the outstanding shares of Delphi, which resulted in 0.69893 shares of Delphi common stock being distributed for each share of GM $1-2/3 par value common stock outstanding on the record date of May 25, 1999. In addition, GM contributed the remaining 2.2% of Delphi shares (around 12.4 million shares) to a Voluntary Employee Beneficiary Association (VEBA) trust established by GM to fund benefits to its hourly retirees. In total, the complete separation of Delphi in the year ended December 31, 1999 resulted in a reduction to stockholders' equity of approximately $3.3 billion. The financial data related to GM's investment in Delphi through May 28, 1999 is classified as discontinued operations for the period ended December 31, 1999. Delphi net sales (including sales to GM) included in discontinued operations totaled $12.5 billion for the year ended December 31, 1999. Income from Delphi discontinued operations of $426 million for the year ended December 31, 1999, is reported net of income tax expense of $314 million. II-28 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 2. Asset Impairments GM recorded pre-tax charges against income for asset impairments of $140 million ($90 million after-tax, or $0.16 per share of GM $1-2/3 par value common stock) in 2001 and $917 million ($587 million after-tax, or $0.99 per share of GM $1-2/3 par value common stock) in 2000. GM did not record any such pre-tax charges against income in 1999. These charges are components of the following line items in the income statement: Years Ended December 31, ------------------------ 2001 2000 ---- ---- (dollars in millions) Total net sales and revenues $ - $315 Cost of sales and other expenses 140 602 --- --- Total $140 $917 === === The 2001 charges related to the write-down of equipment as a result of the announcement of the closing of the Ste. Therese, Quebec assembly plant in 2002 and the write-down of certain equipment on operating leases that was determined to be impaired in GM North America (GMNA). In 2000, the pre-tax charges were comprised of $572 million ($356 million after-tax) for GMNA , and $345 million ($231 million after-tax) for GM Europe (GME). The amount related to the write-down of special tools and equipment on operating leases as a result of the phase-out of the Oldsmobile division as the current model lineup product lifecycles come to an end, or until the models are no longer economically viable, and the reduction in production capacity at GME, including the restructuring of Vauxhall Motors Limited's manufacturing operations in the U.K. NOTE 3. Postemployment Benefit Costs GM records liabilities for termination and other postemployment benefits to be paid pursuant to union or other contractual agreements in connection with closed plants in North America. GM reviews the adequacy and continuing need for these liabilities on an annual basis in conjunction with its year-end production and labor forecasts. Furthermore, GM reviews the reasonableness of these liabilities on a quarterly basis. In 2001, GM recognized postemployment benefit liabilities related to the announced closing of the Ste. Therese, Quebec assembly plant in 2002. The 2001 charge relates to 1,350 employees and increased cost of sales by $137 million ($89 million after-tax, or $0.16 per share of GM $1-2/3 par value common stock). In 2000, GM recognized postemployment benefit liabilities associated with reductions in production capacity and conversions at the following U.S. plants: Oklahoma City, Oklahoma; Delta Engine, Lansing, Michigan; Spring Hill, Tennessee; and Wilmington, Delaware. The 2000 charge relates to approximately 4,000 U.S. employees and increased cost of sales by $473 million ($294 million after-tax, or $0.50 per share of GM $1-2/3 par value common stock). II-29 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 3. Postemployment Benefit Costs (concluded) The liability for postemployment benefits as of December 31, 2001 totals approximately $626 million, with anticipated spending of approximately 97% over the next three years. The following tables summarize the activity from December 31, 1999 through December 31, 2001 for this liability (dollars in millions):
December 31, 2000 2001 Activity December 31, 2001 ------------------ ------------------------------- ------------------ Excess Interest Excess Plant Employees Balance Spending Accretion Adjustment Balance Employees ----- --------- ------- -------- --------- ---------- ------- --------- Buick City/Flint V-6 313 $34 $(24) $2 $ - $12 214 Kalamazoo 289 27 (18) 1 - 10 78 Flint V-8 106 7 (4) - - 3 41 Van Nuys 329 78 (19) 4 - 63 308 Tarrytown 61 4 (4) - - - - Framingham 37 13 (2) 1 - 12 37 Danville 7 3 - - - 3 7 Delta Engine 664 26 (16) 1 - 11 206 Oklahoma City 2,080 221 (81) 13 - 153 1,971 Spring Hill 444 107 (4) 6 - 109 444 Wilmington 879 119 (39) 6 - 86 330 Ste. Therese - - - 3 137 140 1,350 Other 572 26 (3) 1 - 24 569 ----- --- ---- -- --- --- ----- Total 5,781 $665 $(214) $38 $137 $626 5,555 ===== === === == === === ===== December 31, 1999 2000 Activity December 31, 2000 ------------------ ------------------------------- ------------------ Excess Interest Excess Plant Employees Balance Spending Accretion Adjustment Balance Employees ----- --------- ------- -------- --------- ---------- ------- --------- Buick City/Flint V-6 403 $50 $(19) $3 $ - $34 313 Kalamazoo 459 43 (18) 2 - 27 289 Flint V-8 659 51 (46) 2 - 7 106 Van Nuys 366 96 (23) 5 - 78 329 Tarrytown 61 6 (2) - - 4 61 Framingham 91 16 (4) 1 - 13 37 Danville 16 4 (1) - - 3 7 Delta Engine - - - - 26 26 664 Oklahoma City - - - - 221 221 2,080 Spring Hill - - - - 107 107 444 Wilmington - - - - 119 119 879 Other 615 29 (3) - - 26 572 ----- ---- ---- -- --- --- --- Total 2,670 $295 $(116) $13 $473 $665 5,781 ===== === === == === === =====
NOTE 4. Marketable Securities Marketable securities held by GM are classified as available-for-sale, except for certain mortgage-related securities, which are classified as held to maturity or trading securities. Unrealized gains and losses, net of related income taxes, for available-for-sale and held to maturity securities are included as a separate component of stockholders' equity. Unrealized gains and losses for trading securities are included in income on a current basis. GM determines cost on the specific identification basis. II-30 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 4. Marketable Securities (continued) Automotive, Communications Services, and Other Operations Investments in marketable securities were as follows (dollars in millions): December 31, 2001 -------------------------------------- Book/ Fair Unrealized Unrealized Cost Value Gains Losses ------ ------ ---------- ---------- Type of security Bonds, notes, and other securities Corporate debt securities and other $777 $790 $13 $ - --- --- -- --- Total marketable securities $777 $790 $13 $ - === === == === December 31, 2000 -------------------------------------- Book/ Fair Unrealized Unrealized Cost Value Gains Losses ------ ------ ---------- ---------- Type of security Bonds, notes, and other securities United States government and agencies $90 $91 $ 1 $ - States and municipalities 9 9 - - Corporate debt securities and other 1,063 1,061 - 2 ----- ----- -- -- Total marketable securities $1,162 $1,161 $ 1 $ 2 ===== ===== == == Debt securities totaling $265 million mature within one year and $504 million mature after one through five years, and $21 million mature after ten years. Proceeds from sales of marketable securities totaled $373 million in 2001, $1.3 billion in 2000, and $2.0 billion in 1999. The gross gains related to sales of marketable securities were $6 million, $1 million, and $21 million in 2001, 2000, and 1999, respectively. The gross losses related to sales of marketable securities were $5 million, $12 million, and $6 million in 2001, 2000, and 1999, respectively. Financing and Insurance Operations Investments in securities were as follows (dollars in millions): December 31, 2001 -------------------------------------- Book/ Fair Unrealized Unrealized Cost Value Gains Losses ------ ------ ---------- ---------- Type of security Bonds, notes, and other securities United States government and agencies $615 $626 $14 $3 States and municipalities 931 970 43 4 Mortgage-backed securities 924 913 17 28 Corporate debt securities and other 2,725 2,749 50 26 ----- ----- ---- -- Total debt securities available-for-sale 5,195 5,258 124 61 Mortgage-backed securities held to maturity 371 371 - - Mortgage-backed securities held for trading purposes 4,305 3,722 - 583 ----- ----- --- --- Total debt securities 9,871 9,351 124 644 Equity securities 1,214 1,318 246 142 ------ ------ --- --- Total investment in securities $11,085 $10,669 $370 $786 ====== ====== === === II-31 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 4. Marketable Securities (concluded) December 31, 2000 ---------------------------------- Book/ Fair Unrealized Unrealized Cost Value Gains Losses ------ ------ ---------- ---------- Type of security Bonds, notes, and other securities United States government and agencies $556 $565 $10 $ 1 States and municipalities 1,492 1,567 81 6 Mortgage-backed securities 387 384 14 17 Corporate debt securities and other 2,520 2,506 47 61 ----- ----- --- -- Total debt securities available-for-sale 4,955 5,022 152 85 Mortgage-backed securities held to maturity 218 218 - - Mortgage-backed securities held for trading purposes 3,445 3,298 - 147 ----- ----- ---- --- Total debt securities 8,618 8,538 152 232 Equity securities 766 1,057 395 104 ----- ----- --- --- Total investment in securities $9,384 $9,595 $547 $336 ===== ===== === === Debt securities available-for-sale totaling $896 million mature within one year, $2.3 billion mature after one through five years, $716 million mature after five years through 10 years, and $1.4 billion mature after 10 years. Proceeds from sales of marketable securities totaled $5.1 billion in 2001, $3.5 billion in 2000, and $2.9 billion in 1999. The gross gains related to sales of marketable securities were $228 million, $315 million, and $292 million in 2001, 2000, and 1999, respectively. The gross losses related to sales of marketable securities were $145 million, $147 million, and $126 million in 2001, 2000, and 1999, respectively. NOTE 5. Finance Receivables and Securitizations Finance Receivables - Net Finance receivables - net included the following (dollars in millions): December 31, ---------------------- 2001 2000 ------- ------- Retail $71,845 $51,337 Wholesale 15,537 26,993 Commercial 5,743 5,546 Leasing and lease financing 1,862 2,178 Term loans to dealers and others 12,652 12,565 ------- ------ Total finance receivables 107,639 98,619 Less - Unearned income (5,766) (4,872) Allowance for financing losses (2,060) (1,332) ------ ------- Total finance receivables - net $99,813 $92,415 ====== ====== Finance receivables that originated outside the U.S. are $20.7 billion and $21.4 billion at December 31, 2001 and 2000, respectively. The aggregate amount of total finance receivables maturing in each of the five years following December 31, 2001 is as follows: 2002-$47.6 billion; 2003-$23.7 billion; 2004-$18.1 billion; 2005-$10.5 billion; 2006-$5.6 billion and 2007 and thereafter-$2.1 billion. Securitizations of Finance Receivables and Mortgage Loans The Corporation has sold retail finance receivables through special purpose subsidiaries with principal aggregating $8.4 billion in 2001, $5.2 billion in 2000, and $5.1 billion in 1999. These subsidiaries generally retain a subordinated investment of no greater than 5.25% of the total receivables pool and sell the remaining portion. Net pre-tax gains relating to such sales amounted to $210 million in 2001, $14 million in 2000, and $64 million in 1999. The Corporation's sold retail finance receivable servicing portfolio amounted to $12.0 billion and $7.0 billion at December 31, 2001 and 2000, respectively. II-32 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 5. Finance Receivables and Securitizations (continued) Securitizations of Finance Receivables and Mortgage Loans (continued) The Corporation has sold wholesale receivables on a revolving basis resulting in decreases in wholesale outstandings of $16.2 billion and $10.0 billion at December 31, 2001 and 2000, respectively. The Corporation is committed to sell eligible wholesale receivables arising in certain dealer accounts. During the years 2001, 2000, and 1999, there were no gains recorded on the sale of wholesale receivables. Due to the short-term nature of wholesale receivables, the fair value of retained interests in wholesale securitizations is assumed to approximate cost. When the Corporation securitizes retail and wholesale receivables, it retains interest-only strips, all or a portion of senior and subordinated tranches, servicing rights, and cash reserve accounts, all of which are retained interests in the securitized receivables. Interest-only strip receivables, cash deposits, and other related amounts are generally restricted assets and subject to limited recourse provisions. With respect to retained servicing responsibilities, the Corporation receives annual servicing fees approximating 2% (for retail receivables) and 1% (for wholesale receivables) of the outstanding balance. Additionally, the Corporation receives the rights to future cash flows arising after the investors in the securitization trust have received their contracted return. During 2001, GM sold residential, commercial, and other mortgage loans in securitization transactions, generally retaining servicing responsibilities and, in some cases, subordinated interests. In 2001, 2000, and 1999, GM recognized pre-tax gains of $995 million, $723 million, and $603 million, respectively, on the securitization of residential and commercial mortgages. At December 31, 2001, total mortgage loans owned or securitized totaled $103.4 billion, of which $89.6 billion had been securitized, $10.4 billion was held for sale, and $3.4 billion was held for investment (see Note 11). At that date, mortgage loans owned or securitized which were 60 days or more past due totaled $3.1 billion. The investors and the securitization trusts associated with the sales of finance receivables and mortgage loans have no recourse to GM's other assets for failure of debtors to pay when due. The Corporation's retained interests are subordinate to the investors' interests. Their fair value is subject to credit, prepayment, and interest rate risks on the transferred assets. The resulting gain or loss on securitization transactions is determined by allocating the carrying amount of the loans or finance receivables between the securities sold and the interests retained based on their relative fair value at the date of sale. Fair values are based on quoted market prices, if available. Otherwise, the fair values of the retained interests are estimated based on the present value of expected future cash flows. Key economic assumptions used in measuring the fair value of retained interests at the date of the securitization, for securitizations completed during 2001, were as follows: Mortgage Loans Retail Finance --------------------------- Receivables Residential Commercial -------------- ------------- ------------ Prepayment speed 0.8% to 1.3% 9.8% to 38.0% 0.0% to 50.0% Weighted-average life (in years) 1.5 to 1.8 1.7 to 8.2 1.2 to 13.3 Residual cash flows discounted at 9.5% to 12.0% 6.5% to 13.5% 6.9% to 54.7% Variable returns to transferees One month LIBOR Forward benchmark plus contractual interest rate yield curve spread ranging from plus contractual spread 4 to 35 basis points Expected credit losses used in measuring the fair value of retained interests in residential and commercial mortgage loans securitized during 2001 were 0.0% to 22.9% and 0.0% to 1.9%, respectively, at the date of securitization. At December 31, 2001, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10% and 20% adverse changes in those assumptions were as follows (dollars in millions): II-33 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 5. Finance Receivables and Securitizations (concluded) Securitizations of Finance Receivables and Mortgage Loans (concluded) Mortgage Loans Retail Finance ----------------------------- Receivables Residential Commercial -------------- ------------- ------------- Carrying amount/fair value of retained interests $1,678 $2,675 $782 Prepayment speed (annual rate) 0.6% to 1.8% 9.9% to 47.0% 0.0% to 50.0% Reduction in fair value due to 10% adverse change $2 $199 $2 Reduction in fair value due to 20% adverse change $4 $387 $2 Residual cash flows discount rate (annual rate) 7.7% to 12.0% 6.5% to 13.5% 6.9% to 58.4% Reduction in fair value due to 10% adverse change $7 $78 $40 Reduction of fair value due to 20% adverse change $15 $152 $75 Variable returns to transferees Reduction in fair value due to 10% adverse change $30 $17 $ - Reduction in fair value due to 20% adverse change $61 $31 $ - Expected credit losses used in the calculation of the fair value of residual cash flows at December 31, 2001 for residential and commercial mortgage loans were 0.0% to 22.9% and 0.0% to 2.3%, respectively. An immediate 10% adverse change in these assumptions would reduce the fair value of such cash flows by $136 million and $8 million for residential and commercial mortgage loans, respectively. An immediate 20% adverse change in these assumptions would reduce the fair value of such cash flows by $271 million and $11 million for residential and commercial mortgage loans, respectively. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities. Further, these sensitivities show only the change in the asset balances and do not show any expected changes in the fair value of derivative financial instruments used to manage the interest rate and prepayment risks associated with these assets, as discussed in Note 19. The following summarizes cash flows received from (paid to) securitization trusts during the year ended December 31, 2001 (dollars in millions): Mortgage Loans Retail Finance ----------------------- Receivables Residential Commercial -------------- ----------- ---------- Proceeds from new securitizations $7,354 $34,803 $3,262 Servicing fees received 292 255 16 Other cash flows received on retained interests 1,560 763 64 Pool buybacks and purchases of delinquent assets (510) (320) - Servicing advances (88) (616) (95) Repayments of servicing advances 66 613 71 Mortgage Servicing Rights The fair value of GM's mortgage servicing rights totaled $5.4 billion and $4.1 billion at December 31, 2001 and 2000, respectively. The key economic assumptions used in the calculation of such fair values are prepayment speeds and discount rates. At December 31, 2001, a prepayment speed of 12.4% and a discount rate of 9.1% were used in the calculation of fair value. At that date, an immediate 10% and 20% adverse change in the assumed prepayment speed would reduce the fair value of mortgage servicing rights by $162 million and $310 million, respectively. An immediate 10% and 20% adverse change in the assumed discount rate would reduce the fair value of mortgage servicing rights by $162 million and $314 million, respectively. These sensitivities are hypothetical and should be used with caution for reasons similar to those discussed above. II-34 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 6. Inventories Inventories included the following for Automotive, Communications Services, and Other Operations (dollars in millions): December 31, ------------------- 2001 2000 ------ ------ Productive material, work in process, and supplies $5,069 $5,544 Finished product, service parts, etc. 6,779 7,257 ------ ------ Total inventories at FIFO 11,848 12,801 Less LIFO allowance 1,814 1,856 ------ ------ Total inventories (less allowances) $10,034 $10,945 ====== ====== Inventories are stated generally at cost, which is not in excess of market. The cost of approximately 90% of U.S. inventories is determined by the last-in, first-out (LIFO) method. Generally, the cost of all other inventories is determined by either the first-in, first-out (FIFO) or average cost methods. NOTE 7. Equipment on Operating Leases The Corporation has significant investments in the residual values of its leasing portfolios. The residual values represent the estimate of the values of the assets at the end of the lease contracts and are initially recorded based on appraisals and estimates. Realization of the residual values is dependent on the Corporation's future ability to market the vehicles under then prevailing market conditions. Management reviews residual values periodically to determine that recorded amounts are appropriate. Automotive, Communications Services, and Other Operations Equipment on operating leases included in equipment on operating leases and other assets was as follows (dollars in millions): December 31, -------------------- 2001 2000 -------- -------- Equipment on operating leases $11,107 $11,268 Less accumulated depreciation (1,767) (1,335) ------ ------ Net book value $9,340 $9,933 ===== ===== Current $4,524 $5,699 Noncurrent (Note 11) 4,816 4,234 ----- ----- Net book value $9,340 $9,933 ===== ===== Financing and Insurance Operations Equipment on operating leases included in investment in leases and other receivables was as follows (dollars in millions): December 31, -------------------- 2001 2000 -------- -------- Equipment on operating leases $36,534 $41,295 Less accumulated depreciation (8,544) (8,762) ------- ------- Net book value $27,990 $32,533 ====== ====== The lease payments to be received related to equipment on operating leases maturing in each of the five years following December 31, 2001 are as follows: Automotive, Communications Services, and Other Operations - 2002-$1.8 billion; 2003-$644 million; 2004-$607 million; 2005 - $556 million, and 2006 - $516 million. Financing and Insurance Operations - 2002-$6.5 billion; 2003-$3.6 billion; 2004-$1.6 billion; 2005 - $265 million, and 2006 - $8 million. II-35 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 8. Income Taxes Income from continuing operations before income taxes and minority interests included the following (dollars in millions): Years Ended December 31, ------------------------------ 2001 2000 1999 ---- ---- ---- U.S. income (loss) $(1,190) $3,019 $4,156 Foreign income 2,708 4,145 4,891 ----- ----- ----- Total $1,518 $7,164 $9,047 ===== ===== ===== The provision for income taxes was estimated as follows (dollars in millions): Years Ended December 31, ------------------------------ 2001 2000 1999 ---- ---- ---- Income taxes estimated to be payable currently U.S. federal $34 $45 $156 Foreign 1,347 971 1,368 U.S. state and local (9) 72 308 ------- ------ ------ Total payable currently 1,372 1,088 1,832 ----- ----- ----- Deferred income tax expense (credit) - net U.S. federal (246) 742 1,008 Foreign (401) 281 244 U.S. state and local 43 282 34 ---- ------ ------ Total deferred (604) 1,305 1,286 --- ----- ----- Total income taxes $768 $2,393 $3,118 === ===== ===== Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ materially from the amount accrued. Provisions are made for estimated U.S. and foreign income taxes, less available tax credits and deductions, which may be incurred on the remittance of the Corporation's share of subsidiaries' undistributed earnings not deemed to be permanently invested. Taxes have not been provided on foreign subsidiaries' earnings, which are deemed essentially permanently reinvested, of $13.1 billion at December 31, 2001 and $13.4 billion at December 31, 2000. Quantification of the deferred tax liability, if any, associated with permanently reinvested earnings is not practicable. A reconciliation of the provision for income taxes compared with the amounts at the U.S. federal statutory rate was as follows (dollars in millions): Years Ended December 31, ------------------------------ 2001 2000 1999 ---- ---- ---- Tax at U.S. federal statutory income tax rate $485 $2,507 $3,166 Foreign rates other than 35% 134 78 (109) Taxes on unremitted earnings of subsidiaries 29 - 138 Tax credits (50) (45) (207) Raytheon settlement (1) 180 - - Other adjustments (10) (147) 130 ---- ------ ------ Total income tax $768 $2,393 $3,118 === ===== ===== (1) Non-tax deductible settlement with the Raytheon Company on a purchase price adjustment related to Raytheon's 1997 merger with Hughes Defense. Deferred income tax assets and liabilities for 2001 and 2000 reflect the impact of temporary differences between amounts of assets, liabilities, and equity for financial reporting purposes and the bases of such assets, liabilities, and equity as measured by tax laws, as well as tax loss and tax credit carryforwards. II-36 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 8. Income Taxes (concluded) Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities included the following (dollars in millions): December 31, 2001 2000 ---- ---- Deferred Tax Deferred Tax ------------------- ------------------- Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- Postretirement benefits other than pensions $15,057 $ - $14,393 $ - Employee benefit plans 8,721 8,046 2,884 8,182 Warranties, dealer and customer allowances, claims, and discounts 4,376 - 4,952 - Depreciation and amortization 412 3,671 652 3,742 Tax carryforwards 3,993 - 3,125 - Lease transactions - 4,044 - 3,911 Miscellaneous foreign 4,465 1,463 4,150 1,372 Other 7,683 4,948 7,287 4,493 ------ ------ ------ ------ Subtotal 44,707 22,172 37,443 21,700 Valuation allowances (604) - (640) - ------ ------ ------ ------ Total deferred taxes $44,103 $22,172 $36,803 $21,700 ====== ====== ====== ====== Of the tax carryforwards, approximately 20% relates to the alternative minimum tax credit (which can be carried forward indefinitely) and approximately 14% relates to the U.S. state net operating loss carryforwards, which will expire in the years 2002-2021 if not used. However, a substantial portion of the U.S. state net operating loss carryforwards will not expire until after the year 2005. The other tax credit carryforwards, consisting primarily of research and experimentation credits, will expire in the years 2004, 2011-2012, and 2018-2021 if not used. NOTE 9. Property - Net Property - net included the following for Automotive, Communications Services, and Other Operations (dollars in millions): Estimated December 31, Useful ----------------- Lives (Years) 2001 2000 ------------- ------- ------ Land - $899 $924 Buildings and land improvements 2-40 13,294 12,997 Machinery and equipment 3-30 41,091 40,900 Construction in progress - 4,464 4,664 ------- ------- Real estate, plants, and equipment 59,748 59,485 Less accumulated depreciation (33,404) (32,875) ------ ------ Real estate, plants, and equipment - net 26,344 26,610 Special tools - net 8,564 7,367 ------- ------- Total property - net $34,908 $33,977 ====== ====== Financing and Insurance Operations had net property of $1.5 billion and $1.4 billion recorded in other assets at December 31, 2001 and 2000, respectively. Depreciation and amortization expense was as follows (dollars in millions): Years Ended December 31, Automotive, Communications Services, and ---------------------------- Other Operations 2001 2000 1999 - ---------------------------------------- ------ ------ ------ Depreciation $4,383 $4,368 $4,155 Amortization of special tools 2,360 2,753 2,492 Amortization of intangible assets (Note 10) 308 308 226 ----- ------ ------ Total $7,051 $7,429 $6,873 ===== ===== ===== Financing and Insurance Operations Depreciation and amortization expense $5,857 $5,982 $5,445 ===== ===== ===== II-37 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 10. Intangible Assets - Net Automotive, Communications Services, and Other Operations had net intangible assets of $13.7 billion and $7.6 billion at December 31, 2001 and December 31, 2000, respectively. At December 31, 2001, net intangible assets consisted primarily of goodwill ($6.8 billion) and pension intangible assets ($6.2 billion). Goodwill is the cost of acquired businesses in excess of the fair value of their identifiable net assets. The pension intangible asset resulted from the U.S. hourly pension plan becoming underfunded in 2001. At December 31, 2000, net intangible assets consisted primarily of goodwill ($6.8 billion). Financing and Insurance Operations had net intangible assets of $3.2 billion recorded in other assets, consisting primarily of goodwill, at December 31, 2001 and 2000. NOTE 11. Other Assets Automotive, Communications Services, and Other Operations - --------------------------------------------------------- Other assets included the following (dollars in millions): December 31, -------------------- 2001 2000 ------ ------ Equipment on operating leases - noncurrent (Note 7) $4,816 $4,234 Investments in equity securities 3,408 4,666 U.S. prepaid pension assets (Note 14) 7,006 20,184 Other 2,044 3,159 ------ ------ Total other assets $17,274 $32,243 ====== ====== The balance in Investments in equity securities at December 31, 2001 and 2000 includes GM's 20% interest in Fiat Auto of $2.4 billion. In connection with GM's acquisition of a 20% interest in Fiat Auto, GM did not acquire the ability or right to appoint any directors to the board of Fiat Auto, its controlling stockholder, Fiat S.p.A., or any of the companies in the Fiat group. In fact, no officer, director, or employee of GM or any controlled affiliate of GM serves as a director, officer, or employee of Fiat Auto, Fiat S.p.A., or any of the companies in the Fiat group. Accordingly, because GM is not able to exercise significant influence over the operating and financial decisions of Fiat Auto, this investment is accounted for using the cost method of accounting. (See Note 15 for further discussion.) The balance in Investments in equity securities at December 31, 2001 and 2000 also includes the fair value of investments in equity securities classified as available-for-sale for all periods presented. It is GM's intent to hold these securities for longer than one year. Balances include historical costs of $704 million and $1.9 billion with unrealized gains of $311 million and $495 million and unrealized losses of $38 million and $146 million at December 31, 2001 and 2000, respectively. Financing and Insurance Operations - ---------------------------------- Other assets included the following (dollars in millions): December 31, -------------------- 2001 2000 ------ ------ Mortgage servicing rights $4,840 $3,985 Real estate mortgages - held for sale 10,187 5,759 - held for investment 3,384 1,895 - lending receivables 4,521 2,960 Other mortgage - related assets 1,800 1,451 Receivables purchased from factoring clients 1,419 2,291 Due and deferred from receivables sales 2,260 1,097 Rental car buybacks 235 826 Intangible assets 3,206 3,188 Other 5,127 4,394 ------ ------ Total other assets $36,979 $27,846 ====== ====== II-38 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 12. Accrued Expenses, Other Liabilities, and Deferred Income Taxes Automotive, Communications Services, and Other Operations Accrued expenses, other liabilities, and deferred income taxes included the following (dollars in millions): December 31, -------------------- 2001 2000 ------ ------ Warranties, dealer and customer allowances, claims, and discounts $16,421 $15,993 Deferred revenue (1) 8,331 9,974 Payrolls and employee benefits (excludes postemployment) 6,069 4,609 Unpaid losses under self-insurance programs 2,016 2,031 Taxes, other than income taxes 1,082 1,009 Interest 904 1,401 Deferred income taxes 2,420 2,430 Postemployment benefits (including extended disability benefits) 2,218 2,380 Other 8,423 9,193 ------ ------ Total accrued expenses, other liabilities, and deferred income taxes $47,884 $49,020 ====== ====== Financing and Insurance Operations Other liabilities and deferred income taxes included the following (dollars in millions): December 31, -------------------- 2001 2000 ------ ------ Unpaid insurance losses, loss adjustment expenses, and unearned insurance premiums 4,375 $3,870 Postemployment benefits 766 761 Income taxes 483 571 Deferred income taxes 4,305 4,021 Interest 2,428 1,828 Interest rate derivatives (2) 2,942 - Other 960 1,871 ------ ------ Total other liabilities and deferred income taxes $16,259 $12,922 ====== ====== - ------------------------ (1) Principally relates to sales of vehicles to rental companies. (2) Effective January 1, 2001, the Corporation began recording the fair market value of its derivatives on the balance sheet due to the implementation of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." (See Note 1 for further discussion.) NOTE 13. Long-Term Debt and Loans Payable Automotive, Communications Services, and Other Operations Long-term debt and loans payable were as follows (dollars in millions): Weighted-Average Interest Rate December 31, ---------------- ------------------ 2001 2000 2001 2000 ---- ---- ------ ------ Long-term debt and loans payable Payable within one year Current portion of long-term debt (1) 2.5% 6.3% $64 $415 Commercial paper (1) 2.7% 5.8% 129 519 All other 3.8% 4.8% 2,209 1,274 ----- ----- Total loans payable - - 2,402 2,208 Payable beyond one year (1) 8.2% 8.1% 10,720 7,438 Unamortized discount (27) (28) Mark to Market Adjustment 33 - ------ ----- Total long-term debt and loans payable 13,128 9,618 ====== ===== - --------------- (1) The weighted-average interest rates include the impact of interest rate swap agreements. II-39 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 13. Long-Term Debt and Loans Payable (continued) Long-term debt payable beyond one year at December 31, 2001 included maturities as follows: 2003 - $767 million; 2004 - $620 million; 2005 - $796 million; 2006 - $311 million; 2007 and after - $8.2 billion. Amounts payable beyond one year after consideration of foreign currency swaps at December 31, 2001 included $840 million in currencies other than the U.S. dollar, primarily the Japanese yen ($601 million), the Brazilian real ($149 million), and the Canadian dollar ($65 million). At December 31, 2001 and 2000, long-term debt and loans payable for Automotive, Communications Services, and Other Operations included $10.9 billion and $8.3 billion, respectively, of obligations with fixed interest rates and $2.2 billion and $1.3 billion, respectively, of obligations with variable interest rates (predominantly LIBOR), after considering the impact of interest rate swap agreements. To achieve its desired balance between fixed and variable rate debt, GM has entered into interest rate swap and cap agreements. The notional amounts of such agreements as of December 31, 2001 for Automotive, Communications Services, and Other Operations were approximately $1.7 billion ($239 million pay fixed and $1.5 billion pay variable) and $90 million, respectively. The notional amounts of such agreements as of December 31, 2000 for Automotive, Communications Services, and Other Operations were approximately $1.2 billion ($200 million pay fixed and $1.0 billion pay variable) and $90 million, respectively. GM and its subsidiaries maintain substantial lines of credit with various banks that totaled $11.0 billion at December 31, 2001, of which $2.3 billion represented short-term credit facilities and $8.7 billion represented long-term credit facilities. At December 31, 2000, bank lines of credit totaled $11.6 billion, of which $4.3 billion represented short-term credit facilities and $7.3 billion represented long-term credit facilities. The unused short-term and long-term portions of the credit lines totaled $1.8 billion and $6.7 billion at December 31, 2001, compared with $3.1 billion and $6.2 billion at December 31, 2000. Certain bank lines of credit contain covenants with which the Corporation and applicable subsidiaries were in compliance during the year ended December 31, 2001. Financing and Insurance Operations - ---------------------------------- Debt was as follows (dollars in millions): Weighted-Average Interest Rate December 31, ---------------- ------------------ 2001 2000 2001 2000 ---- ---- ------ ------ Debt Payable within one year Current portion of debt (1) 4.3% 6.5% $22,014 $18,603 Commercial paper (1) 2.7% 6.5% 16,620 43,634 All other 3.1% 4.6% 20,640 14,506 ------ ------ Total loans payable - - 59,274 76,743 Payable beyond one year (1) 5.5% 6.4% 93,717 58,846 Unamortized discount (693) (552) Mark to Market Adjustment (2) 888 - ------- ------- Total debt $153,186 $135,037 ======= ======= - ---------------------- (1) The weighted-average interest rates include the impact of interest rate swap agreements. (2) Effective January 1, 2001, the Corporation began recording its hedged debt at fair market value on the balance sheet due to the implementation of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Debt payable beyond one year at December 31, 2001 included maturities as follows: 2003 - $23.5 billion; 2004 - $18.5 billion; 2005 - $7.5 billion; 2006 - $15.7 billion; 2007 and after - $28.5 billion. Amounts payable beyond one year after consideration of foreign currency swaps at December 31, 2001 included $12.0 billion in currencies other than the U.S. dollar, primarily the Canadian dollar ($6.3 billion), the Euro ($3.1 billion), the G.B. pound sterling ($995 million), and the Australian dollar ($769 million). At December 31, 2001 and 2000, debt for Financing and Insurance Operations included $65.7 billion and $86.1 billion, respectively, of obligations with fixed interest rates and $87.3 billion and $48.9 billion, respectively, of obligations with variable interest rates (predominantly LIBOR), after considering the impact of interest rate swap agreements. II-40 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 13. Long-Term Debt and Loans Payable (concluded) To achieve its desired balance between fixed and variable rate debt, GM has entered into interest rate swap, cap, and floor agreements. The notional amounts of such agreements as of December 31, 2001 for Financing and Insurance Operations were approximately $46.2 billion ($41.3 billion pay variable and $4.9 billion pay fixed), $23 million, and $73 million, respectively. The notional amounts of such agreements as of December 31, 2000 for Financing and Insurance Operations were approximately $35.2 billion ($24.0 billion pay variable and $11.2 billion pay fixed), $74 million, and $83 million, respectively. GM's financing and insurance subsidiaries maintain substantial lines of credit with various banks that totaled $49.8 billion at December 31, 2001, of which $26.4 billion represented short-term credit facilities and $23.4 billion represented long-term credit facilities. At December 31, 2000, bank lines of credit totaled $48.5 billion, of which $17.5 billion represented short-term credit facilities and $31.0 billion represented long-term credit facilities. The unused short-term and long-term portions of the credit lines totaled $15.7 billion and $23.3 billion at December 31, 2001 compared with $8.1 billion and $30.5 billion at December 31, 2000. Certain bank lines of credit contain covenants with which the Corporation and applicable subsidiaries were in compliance during the year ended December 31, 2001. NOTE 14. Pensions and Other Postretirement Benefits GM has a number of defined benefit pension plans covering substantially all employees. Plans covering U.S. and Canadian represented employees generally provide benefits of negotiated, stated amounts for each year of service as well as significant supplemental benefits for employees who retire with 30 years of service before normal retirement age. The benefits provided by the plans covering U.S. and Canadian salaried employees and employees in certain foreign locations are generally based on years of service and salary history. GM also has certain nonqualified pension plans covering executives that are based on targeted wage replacement percentages and are unfunded. Pension plan assets are primarily invested in U.S. Government obligations, equity and fixed income securities, commingled pension trust funds, insurance contracts, GM $1-2/3 par value common stock (valued at December 31, 2001 at $50 million), and GM Class H common stock (valued at December 31, 2001 at $2.3 billion). GM's funding policy with respect to its qualified pension plans is to contribute annually not less than the minimum required by applicable law and regulations. GM made no pension contributions to the U.S. hourly and salary plans in 2001 and made contributions of $5.0 billion in 2000 (consisting entirely of GM Class H common stock contributed during the second quarter of 2000), and $794 million in 1999. In addition, GM made pension contributions to all other U.S. plans of $99 million, $69 million, and $67 million in 2001, 2000, and 1999, respectively. Additionally, GM maintains hourly and salary benefit plans that provide postretirement medical, dental, vision, and life insurance to most U.S. retirees and eligible dependents. The cost of such benefits is recognized in the consolidated financial statements during the period employees provide service to GM. Postretirement plan assets in GM's VEBA trust are invested primarily in fixed income securities and GM Class H common stock (valued at December 31, 2001 at $296 million). Certain of the Corporation's non-U.S. subsidiaries have postretirement plans, although most participants are covered by government-sponsored or administered programs. The cost of such programs generally is not significant to GM. II-41 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 14. Pensions and Other Postretirement Benefits (continued)
U.S. Plans Non-U.S. Plans Pension Benefits Pension Benefits Other Benefits ----------------- ---------------- ------------------ 2001 2000 2001 2000 2001 2000 -------- -------- ------- ------- -------- -------- (dollars in millions) Change in benefit obligations Benefit obligation at beginning of year $76,131 $73,269 $9,911 $9,728 49,889 $44,683 Service cost 901 900 176 177 480 448 Interest cost 5,294 5,425 638 630 3,733 3,346 Plan participants' contributions 25 32 24 25 50 47 Amendments 33 5 2 3 - (49) Actuarial losses 152 4,269 346 251 1,582 4,392 Benefits paid (6,321) (6,299) (549) (503) (3,173) (2,805) Divestitures - Hughes' satellite systems - (1,263) - - - - Curtailment charges and other 168 (207) (598) (400) (72) (173) ------ ------ ----- ----- ------ ------ Benefit obligation at end of year 76,383 76,131 9,950 9,911 52,489 49,889 ------ ------ ----- ----- ------ ------ Change in plan assets Fair value of plan assets at beginning of year 77,866 80,462 7,397 7,062 6,724 6,291 Actual return on plan assets (4,444) 634 (391) 821 (479) 421 Employer contributions 99 5,031 92 187 - 743 Plan participants' contributions 25 32 24 25 - - Benefits paid (6,321) (6,299) (417) (386) (1,300) (731) Divestitures - Hughes' satellite systems - (1,841) - - - - Settlement charges and other 97 (153) (365) (312) - - ----- ----- --- --- ----- --- Fair value of plan assets at end of year 67,322 77,866 6,340 7,397 4,945 6,724 ------ ------ ----- ----- ------ ------- Funded status (9,061) 1,735 (3,610) (2,514) (47,544) (43,165) Unrecognized actuarial loss 21,207 9,195 1,808 555 8,902 6,444 Unrecognized prior service cost 7,174 8,442 740 909 249 207 Unrecognized transition obligation - 1 54 63 - - ------ ------ ----- --- ------ ------ Net amount recognized $19,320 $19,373 $(1,008) $(987) (38,393) $(36,514) ====== ====== ===== === ====== ====== Amounts recognized in the consolidated balance sheets consist of: Prepaid benefit cost $7,006 $20,184 $521 $1,676 $ - $ - Accrued benefit liability (7,613) (936) (3,209) (2,668) 38,393) (36,514) Intangible asset 5,625 56 606 1 - - Accumulated other comprehensive income 14,302 69 1,074 4 - - ------ ------ ----- --- ------ ------ Net amount recognized $19,320 $19,373 $(1,008) $(987) $(38,393) $(36,514) ====== ====== ===== === ====== ======
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $59.3 billion, $58.8 billion, and $48.2 billion, respectively, as of December 31, 2001, and $4.0 billion, $3.4 billion, and $0, respectively, as of December 31, 2000.
U.S. Plans Non-U.S. Plans Pension Benefits Pension Benefits Other Benefits ------------------------ ---------------------- ---------------------- 2001 2000 1999 2001 2000 1999 2001 2000 1999 ------- ------- ------ ------ ------ ------ ------ ------ ------ (dollars in millions) Components of expense Service cost $901 $900 $1,007 $176 $177 $202 $480 $448 $502 Interest cost 5,294 5,425 4,722 638 630 604 3,733 3,346 2,802 Expected return on plan assets (7,521) (7,666) (6,726) (605) (578) (526) (542) (650) (377) Amortization of prior service cost 1,325 1,416 926 93 97 99 (45) (42) (104) Amortization of transition asset 82 (48) (37) 3 (17) (17) - - - Recognized net actuarial loss/(gain) - 8 348 (1) 2 79 96 70 124 Curtailments, settlements, and other 65 235 2,351 100 24 22 - - - Discontinued operations - - (2,349) - - - - - - --- --- ----- --- --- --- ----- ----- ----- Net expense $146 $270 $242 $404 $335 $463 $3,722 $3,172 $2,947 === === === === === === ===== ===== =====
II-42 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 14. Pensions and Other Postretirement Benefits (concluded) Non-US U.S. Plans Plans Pension Pension Benefits Benefits Other Benefits ---------------- -------------- -------------- 2001 2000 1999 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- ---- ---- ---- Weighted-average assumptions Discount rate 7.3% 7.3% 7.8% 6.8% 7.1% 7.1% 7.3% 7.7% 7.7% Expected return on plan assets 10.0% 10.0% 10.0% 8.9% 9.0% 9.0% 7.9% 8.1% 8.3% Rate of compensation increase 5.0% 5.0% 5.0% 3.8% 4.0% 4.0% 4.7% 4.3% 4.4% For measurement purposes, an approximate 6% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002 and 7.3% was assumed for 2003. The rate was assumed to decrease on a linear basis to 5.0% through 2008 and remain at that level thereafter. The lower assumed rate for 2002 and 2003 compared to the assumed rate for 2001 of 8.6% reflects the impact of various initiatives put in place in 2001 to lower 2002 claims experience. A one percentage point increase in the assumed health care trend rate would have increased the Accumulated Projected Benefit Obligation (APBO) by $5.4 billion at December 31, 2001 and increased the aggregate service and interest cost components of non-pension postretirement benefit expense for 2001 by $472 million. A one percentage point decrease would have decreased the APBO by $4.5 billion and decreased the aggregate service and interest cost components of non-pension postretirement benefit expense for 2001 by $394 million. GM's asset return assumption is derived from a detailed study conducted by GM's actuaries and GM's asset management group and is based on long-term historical data. Although in 2000 and 2001 asset returns have been below GM's long-term asset return assumption, in any 10 year period over the last 15 years, GM has achieved pension asset returns of 10% per annum or greater. NOTE 15. Commitments and Contingent Matters Commitments GM had the following minimum commitments under noncancelable operating leases having remaining terms in excess of one year, primarily for property: 2002-$630 million; 2003-$566 million; 2004-$464 million; 2005-$411 million; 2006-$468 million and $2.1 billion in 2007 and thereafter. Certain of these minimum commitments fund the obligations of non-consolidated SPEs. Certain of the leases contain escalation clauses and renewal or purchase options. Rental expenses under operating leases were $849 million, $861 million, and $825 million in 2001, 2000, and 1999, respectively. GM sponsors a credit card program, entitled the GM Card program, that offers rebates that can be applied primarily against the purchase or lease of GM vehicles. The amount of rebates available to qualified cardholders (net of deferred program income) was $3.9 billion, $3.8 billion, and $3.7 billion at December 31, 2001, 2000, and 1999, respectively. As part of a marketing agreement entered into with America Online, Inc. (AOL) on June 21, 1999, Hughes committed to increase its sales and marketing expenditures through 2002 by approximately $1.5 billion related to DirecPC/AOL-Plus, DIRECTV, DIRECTV/AOL TV, and DirecDuo. At December 31, 2001, Hughes' remaining commitment under this agreement was approximately $1.0 billion. 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 would be material to Hughes. In connection with a dispute between Hughes and General Electric Capital Corporation ("GECC"), a judgment, currently being appealed by Hughes, was entered into in GECC's favor that, if not overturned, 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 December 31, 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. II-43 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 15. Commitments and Contingent Matters (concluded) Beginning January 2004, Fiat S.p.A. (Fiat) has the right to exercise a put option to require GM to purchase 80% of Fiat Auto B.V. (Fiat Auto) at fair market value. The put expires on July 24, 2009. The process for establishing the value that would be paid by GM to Fiat involves the determination of "Fair Market Value" by investment banks that would be retained by the parties pursuant to provisions set out in the Master Agreement between GM and Fiat, which has been made public in filings with the SEC. If the put were exercised, GM would have the option to pay for the 80% interest in Fiat Auto entirely in shares of GM $1-2/3 common stock, entirely in cash, or in whatever combination thereof GM may choose. To the extent GM chooses to pay in cash, that portion of the purchase price may be paid to Fiat in four installments over a three-year period. NOTE 16. Preferred Securities of Subsidiary Trust General Motors - Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust In July 1997, the General Motors Capital Trust G (Trust) issued approximately $143 million of its 9.87% Trust Originated Preferred Securities sm (TOPrS sm), Series G (Series G Preferred Securities), in a one-for-one exchange for approximately 5 million of the outstanding GM Series G 9.12% Depositary Shares, each representing one-fourth of a share of GM Series G Preference Stock, $0.10 par value per share. Concurrently with the exchange and the related purchase by GM from the Trust of the common securities of the Trust, which represent approximately 3% of the total assets of the Trust, GM issued to the wholly-owned Trust, as the Trust's sole assets, its 9.87% Junior Subordinated Deferrable Interest Debentures, Series G, due July 1, 2012 (the "Series G Debentures"), having an aggregate principal amount equal to the aggregate stated liquidation amount of the Series G Preferred Securities and the related common securities ($131 million with respect to the Series G Debentures). 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% TOPrS. 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 9.12% Depositary Shares, each of which represents a one-fourth interest in a GM Series G Preference Stock, 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 17. Stockholders' Equity The following table presents changes in capital stock for the period from January 1, 1999 to December 31, 2001 (dollars in millions): Common Stocks ------------------- Total Preference $1-2/3 Capital Stocks par value Class H Stock ---------- --------- ------- ------- Balance at January 1, 1999 $ 1 $1,092 $11 $1,104 Shares reacquired (1) (75) - (76) Shares issued - 16 3 19 -- ----- --- ----- Balance at December 31, 1999 - 1,033 14 1,047 Shares reacquired - (184) - (184) Shares issued - 65 74 139 -- ----- -- ----- Balance at December 31, 2000 - 914 88 1,002 Shares reacquired - - - - Shares issued - 18 - 18 -- --- ---- ----- Balance at December 31, 2001 $ - $932 $88 $1,020 == === == ===== II-44 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 17. Stockholders' Equity (continued) Preference Stocks On June 24, 1999, as part of a strategic alliance with Hughes, AOL invested $1.5 billion in return for approximately 2.7 million shares of GM Series H 6.25% Automatically Convertible Preference Stock, par value $0.10 per share. This preference stock will automatically convert into GM Class H common stock in June 2002, based upon a variable conversion factor linked to the GM Class H common stock price at the time of conversion, and accrues quarterly dividends at a rate of 6.25% per year. It may be converted earlier in certain limited circumstances. GM immediately invested the $1.5 billion received from AOL into shares of Hughes Series A Preferred Stock designed to correspond to the financial terms of the GM Series H 6.25% Automatically Convertible Preference Stock. Dividends on the Hughes Series A Preferred Stock are payable to GM quarterly at an annual rate of 6.25%. Upon conversion of the GM Series H 6.25% Automatically Convertible Preference Stock into GM Class H common stock, Hughes will redeem the Series A Preferred Stock through a cash payment to GM equal to the fair market value of GM Class H common stock issuable upon the conversion. Simultaneous with GM's receipt of the cash redemption proceeds, GM will make a capital contribution to Hughes of the same amount. Common Stocks During the second quarter of 2000, GM completed an exchange offer in which GM repurchased 86 million shares of GM $1-2/3 par value common stock and issued 92 million shares of GM Class H common stock. In addition, on June 12, 2000, GM contributed approximately 54 million shares and approximately 7 million shares of GM Class H common stock to the U.S. Hourly-Rate Employees Pension Plan and VEBA trust, respectively. The total value of the contributions was approximately $5.6 billion. As a result of the exchange offer and employee benefit plan contributions, the economic interest in Hughes attributable to GM $1-2/3 par value common stock decreased from approximately 62% to approximately 30% and the economic interest in Hughes attributable to GM Class H common stock increased from approximately 38% to 70% on a fully diluted basis. On June 6, 2000, the GM Board declared a three-for-one stock split of the GM Class H common stock. The stock split was in the form of a 200% stock dividend, paid on June 30, 2000 to GM Class H common stockholders of record on June 13, 2000. All GM Class H common stock per share amounts and numbers of shares for all periods presented have been adjusted to reflect the stock split. Furthermore, as a result of this stock split, the voting and liquidation rights of the GM Class H common stock were reduced from 0.6 votes per share and 0.6 liquidation units per share, to 0.2 votes per share and 0.2 liquidation units per share in order to avoid dilution in the aggregate voting or liquidation rights of any class. The voting and liquidation rights of the GM $1-2/3 par value common stock were not changed. The voting and liquidation rights of GM $1-2/3 par value common stock are one vote per share and one liquidation unit per share. On July 24, 2000, Fiat S.p.A. purchased for $2.4 billion approximately 32 million shares of GM $1-2/3 par value common stock, or approximately 5.4% of GM's $1-2/3 par value common stock outstanding as of that date. The liquidation rights of the GM $1-2/3 par value and GM Class H common stocks are subject to certain adjustments if outstanding common stock is subdivided, by stock split or otherwise, or if shares of one class of common stock are issued as a dividend to holders of another class of common stock. Holders of GM Class H common stock have no direct rights in the equity or assets of Hughes, but rather have rights in the equity and assets of GM (which includes 100% of the stock of Hughes). The outstanding shares of GM Class H common stock may be recapitalized as shares of GM $1-2/3 par value common stock at any time after December 31, 2002, at the sole discretion of the GM Board, or automatically, if at any time the Corporation should sell, liquidate, or otherwise dispose of 80% or more of the business of Hughes, based on the fair market value of the assets, both tangible and intangible, of Hughes as of the date that such proposed transaction is approved by the GM Board. In the event of any recapitalization, all outstanding shares of GM Class H common stock will automatically be converted into GM's $1-2/3 par value common stock at an exchange rate that would provide GM Class H common stockholders with that number of shares of GM $1-2/3 par value common stock that would have a value equal to 120% of the value of their GM Class H common stock, on such date. A recapitalization of the type described in the prior sentence would occur if any of the triggering events took place unless the holders of GM common stock (including the holders of GM $1-2/3 par value common stock and holders of the GM Class H common stock voting separately as individual classes) vote to approve an alternative proposal from the GM Board. II-45 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 17. Stockholders' Equity (concluded) Other Comprehensive Income The changes in the components of other comprehensive income (loss) are reported net of income taxes, as follows (dollars in millions):
Years Ended December 31, -------------------------------------------------------------------------------- 2001 2000 1999 ------------------------- ------------------------- ------------------------- Pre-tax Tax Exp. Net Pre-tax Tax Exp. Net Pre-tax Tax Exp. Net Amount (Credit) Amount Amount (Credit) Amount Amount (Credit) Amount ------- -------- ------ ------- -------- ------ ------- -------- ------ Foreign currency translation adjustments $(565) $(148) $(417) $(741) $(272) (469) $(1,519) $(575) $(944) Unrealized (loss) gain on securities: Unrealized holding (loss) gain (41) (26) (15) (481) (179) (302) 998 372 626 Reclassification adjustment (81) (27) (54) (175) (62) (113) (171) (60) (111) --- -- --- --- --- --- --- --- --- Net unrealized (loss) gain (122) (53) (69) (656) (241) (415) 827 312 515 --- -- --- --- --- --- --- --- --- Minimum pension liability adjustment (15,303) (5,767) (9,536) 118 42 76 7,980 3,012 4,968 Net unrealized loss on derivatives (387) (80) (307) - - - - - - ------ ----- ----- --- --- --- ----- ----- ----- Other comprehensive (loss) income from continuing operations $(16,377) (6,048) $(10,329) $(1,279) $(471) $(808) $7,288 $2,749 $4,539 ====== ===== ====== ===== === === ===== ===== =====
NOTE 18. 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. All GM Class H common stock per share amounts and numbers of shares for 2000 and 1999 have been adjusted to reflect the three-for-one stock split, in the form of a 200% stock dividend, paid on June 30, 2000. The attribution of earnings to each class of GM common stock was as follows (dollars in millions): Years Ended December 31, ---------------------------- 2001 2000 1999 ---- ---- ---- Earnings attributable to common stocks $1-2/3 par value Continuing operations $984 $3,957 $5,592 Discontinued operations - - 426 --- ----- ----- Earnings attributable to $1-2/3 par value $984 $3,957 $6,018 === ===== ===== Earnings (losses) attributable to Class H $(482) $385 $(96) === === == 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. Earnings (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, 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 earnings (losses) used for computation of the ASCNI of Hughes is then multiplied by a fraction, the numerator of which is equal to the weighted-average number of shares of GM Class H common stock outstanding (876 million, 681 million, and 374 million, for 2001, 2000, and 1999, 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 during 2001, 2000, and 1999, respectively. Upon conversion of the GM Series H 6.25% Automatically Convertible Preference Stock into GM Class H common stock, and the redemption of Series A Preferred Stock and simultaneous capital contribution to Hughes, both the numerator and the denominator used in the computation of ASCNI will increase by the number of shares of the GM Class H common stock issued. . II-46 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 18. Earnings Per Share Attributable to Common Stocks (concluded) In addition, the denominator used in determining the ASCNI of Hughes may be adjusted on occasion 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. Shares of GM Class H common stock delivered by GM in connection with the award of such shares to and the exercise of stock options by employees of Hughes increase the numerator and denominator of the fraction referred to above. On occasion, in anticipation of exercises of stock options, Hughes purchases GM Class H common stock from the open market. Upon purchase, these shares are retired and therefore decrease the numerator and denominator of the fraction referred to above The reconciliation of the amounts used in the basic and diluted earnings per share computations for income from continuing operations was as follows (dollars in millions except per share amounts):
$1-2/3 Par Value Common Stock Class H Common Stock ----------------------------- -------------------------- Per Share Per Share Income Shares Amount ASCNI Shares Amount ------ ------ --------- ----- ------ --------- Year ended December 31, 2001 Income (loss) from continuing operations $1,018 $(417) Less:Dividends on preference stocks 34 65 ------ ---- Basic EPS Income (loss) from continuing operations attributable to common stocks $984 551 $1.78 $(482) 876 $(0.55) ==== ---- Effect of Dilutive Securities Assumed exercise of dilutive stock options - 5 - - --- --- --- --- Diluted EPS Adjusted income (loss) from continuing operations attributable to common stocks $984 556 $1.77 $(482) 876 $(0.55) === === ==== === === ==== Year ended December 31, 2000 Income from continuing operations $4,016 $436 Less:Dividends on preference stocks 59 51 ----- --- Basic EPS Income from continuing operations attributable to common stocks $3,957 582 $6.80 $385 681 $0.56 ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options (7) 9 7 27 ----- --- --- --- Diluted EPS Adjusted income from continuing operations attributable to common stocks $3,950 591 $6.68 $392 708 $0.55 ===== === ==== === === ==== Year ended December 31, 1999 Income (loss) from continuing operations $5,657 $(81) Less:Dividends on preference stocks 65 15 ----- -- Basic EPS Income (loss) from continuing operations attributable to common stocks 5,592 643 $8.70 (96) 374 $(0.26) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 12 - - ----- --- --- --- Diluted EPS Adjusted income (loss) from continuing operations attributable to common stocks $5,592 655 $8.53 $(96) 374 $(0.26) ===== === ==== === === ====
II-47 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 19. Derivative Financial Instruments and Risk Management Effective January 1, 2001, GM adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which requires that all derivatives be recorded at fair value on the balance sheet and establishes criteria for designation and effectiveness of derivative transactions for which hedge accounting is applied. GM assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its documented policies. The adoption of this standard did not have a material impact on GM's consolidated financial position or results of operations. GM is exposed to market risk from changes in foreign currency exchange rates, interest rates, and certain commodity and equity security prices. In the normal course of business, GM enters into a variety of foreign exchange, interest rate, and commodity forward contracts, swaps, and options, with the objective of minimizing exposure arising from these risks. A risk management control system is utilized to monitor foreign exchange, interest rate, commodity and equity price risks, and related hedge positions. Cash Flow Hedges GM uses financial instruments designated as cash flow hedges to hedge the Corporation's exposure to foreign currency exchange risk associated with buying, selling, and financing in currencies other than the local currencies in which it operates, and its exposure to commodity price risk associated with changes in prices of commodities used in its automotive business, primarily non-ferrous metals used in the manufacture of automotive components. For transactions denominated in foreign currencies GM typically hedges forecasted and firm commitment exposures up to one year in the future. For commodities, GM hedges exposures up to 6 years in the future. For the year ended December 31, 2001, hedge ineffectiveness associated with instruments designated as cash flow hedges, and changes in the time value of the instruments (which are excluded from the assessment of hedge effectiveness), increased cost of sales and other expenses by $5 million and $101 million, respectively. Derivative gains and losses included in other comprehensive income are reclassified into earnings at the time that the associated hedged transactions impact the income statement. For the year ended December 31, 2001, net derivative gains of $2 million were reclassified to cost of sales and other expenses. These net gains were offset by net losses on the transactions being hedged. Approximately $139 million of net derivative losses included in other comprehensive income at December 31, 2001 will be reclassified into earnings within twelve months from that date. Fair Value Hedges GM uses financial instruments designated as fair value hedges to manage certain of the Corporation's exposure to interest rate risk. GM is subject to market risk from exposures to changes in interest rates due to its financing, investing, and cash management activities. A variety of instruments are used to hedge GM's exposure associated with its fixed rate debt and mortgage servicing rights (MSR's). For the year ended December 31, 2001, hedge ineffectiveness associated with instruments designated as fair value hedges, primarily due to the hedging of MSR's, increased selling, general, and administrative expenses by $218 million. During the same period, no fair value hedges were derecognized. Undesignated Derivative Instruments Forward contracts and options not designated as hedging instruments under SFAS No. 133 are also used to hedge certain foreign currency, commodity, and interest rate exposures. Unrealized gains and losses on such instruments are recognized currently in earnings. II-48 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 20. Fair Value of Financial Instruments The estimated fair value of financial instruments has been determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value; therefore, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair value amounts. Book and estimated fair values of financial instruments, for which it is practicable to estimate fair value, were as follows (dollars in millions): December 31, ----------------------------------- 2001 2000 ----------------- ---------------- Book Fair Book Fair Value Value Value Value ------- ------- ------- ------- Automotive, Communications Services, and Other Operations - ------------------------------------ Assets Other assets (1) $4,076 $4,040 $5,431 $5,433 Derivative assets $187 $187 $46 $144 Liabilities Long-term debt (2) $10,726 $11,817 $7,410 $7,019 Other liabilities (1) $487 $510 $516 $548 Derivative liabilities $281 $281 $30 $106 Preferred securities of subsidiary trusts (3) (Note 16) $ - $ - $139 $136 Financing and Insurance Operations - ---------------------------------- Assets Finance receivables - net (4) $99,813 $101,368 $92,415 $92,343 Other assets (1) $21,770 $21,971 $14,260 $14,285 Derivative assets $1,673 $1,673 $408 $1,290 Liabilities Debt (payable beyond one year) (2) $93,024 $93,398 $58,295 $57,863 Derivative liabilities $2,942 $2,942 $987 $1,840 (1) Other assets include various financial instruments (e.g., long-term receivables and certain investments) that have fair values based on discounted cash flows, market quotations, and other appropriate valuation techniques. The fair values of retained subordinated interests in trusts and excess servicing assets (net of deferred costs) were derived by discounting expected cash flows using current market rates. Estimated values of Industrial Development Bonds, included in other liabilities, were based on quoted market prices for the same or similar issues. (2) Long-term debt has an estimated fair value based on quoted market prices for the same or similar issues or based on the current rates offered to GM for debt of similar remaining maturities. (3) The fair value of the GM-obligated mandatorily redeemable preferred securities of subsidiary trusts (see Note 16) was determined based on quoted market prices. (4) The fair value was estimated by discounting the future cash flows using applicable spreads to approximate current rates applicable to each category of finance receivables. Due to their short-term nature, the book value approximates fair value for cash and marketable securities, accounts and notes receivable (less allowances), accounts payable (principally trade), Automotive, Communications Services, and Other Operations' loans payable and Financing and Insurance Operations' debt payable within one year for the periods ending December 31, 2001 and 2000. II-49 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 21. Stock Incentive Plans Stock-Based Compensation If compensation cost for stock options and other stock-based employee compensation awards had been determined based on the fair value at the grant date, consistent with the method prescribed by SFAS No. 123, GM's pro forma net income, earnings attributable to common stocks, and basic and diluted earnings per share attributable to common stocks would have been as follows (dollars in millions except per share amounts): 2001 2000 1999 ---- ---- ---- Net income - as reported $601 $4,452 $6,002 - pro forma $227 $4,125 $5,788 Earnings (losses) attributable to common stocks $1-2/3 - as reported $984 $3,957 $6,018 - pro forma $769 $3,709 $5,823 Class H - as reported $(482) $385 $(96) - pro forma $(642) $306 $(115) Basic earnings (losses) per share attributable to common stocks $1-2/3 - as reported $1.78 $6.80 $9.36 - pro forma $1.39 $6.38 $9.06 Class H - as reported $(0.55) $0.56 $(0.26) - pro forma $(0.73) $0.45 $(0.31) Diluted earnings (losses) per share attributable to common stocks $1-2/3 - as reported $1.77 $6.68 $9.18 - pro forma $1.38 $6.26 $8.88 Class H - as reported $(0.55) $0.55 $(0.26) - pro forma $(0.73) $0.44 $(0.31) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2001 2000 1999 ------------------ ------------------ ------------------ GM Hughes GM GM Hughes GM GM Hughes GM SIP Plan SSOP SIP Plan SSOP SIP Plan SSOP ----- ------ ----- ----- ------ ----- ----- ------ ----- Interest rate 4.6% 5.1% 4.6% 6.4% 6.5% 6.5% 4.8% 5.2% 4.8% Expected life (years) 5.0 7.0 5.0 5.0 6.9 5.0 5.0 7.0 5.0 Expected volatility 31.2% 51.3% 31.1% 27.8% 42.1% 27.6% 27.9% 38.0% 27.9% Dividend yield 3.8% - 3.8% 2.7% - 2.7% 2.3% - 2.3% The effects of the Delphi spin-off adjustment on the number of options and related exercise prices, as described below, are considered, under SFAS No. 123, to be modifications of the terms of the outstanding options. Accordingly, the pro forma disclosure includes compensation cost for the incremental fair value, under SFAS No. 123, resulting from such modifications. The pro forma amounts for compensation cost are not indicative of the effects on operating results for future periods. GM's stock incentive plans consist of the General Motors 1997 Stock Incentive Plan, formerly the General Motors Amended Stock Incentive Plan (the "GMSIP"), the Hughes Electronics Corporation Incentive Plan (the "Hughes Plan"), and the General Motors 1998 Salaried Stock Option Plan (the "GMSSOP"). The GMSIP and GMSSOP are administered by the Executive Compensation Committee of the GM Board. The Hughes Plan is administered by the Executive Compensation Committee of the Board of Directors of Hughes. Under the GMSIP, 60 million shares of GM $1-2/3 par value and 7.5 million shares of GM Class H common stocks may be granted from June 1, 1997 through May 31, 2002, of which approximately 15.3 million and 6.9 million were available for grants at December 31, 2001. Options granted prior to 1997 under the GMSIP generally are exercisable one-half after one year and one-half after two years from the dates of grant. Stock option grants awarded since 1997 vest ratably over three years from the date of grant. Option prices are 100% of fair market value on the dates of grant and the options generally expire 10 years from the dates of grant, subject to earlier termination under certain conditions. II-50 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 21. Stock Incentive Plans - (continued) Under the Hughes Plan, Hughes may grant shares, rights, or options to acquire up to 233 million shares of GM Class H common stock through December 31, 2001, of which 75 million were available for grants at December 31, 2001. Option prices are 100% of fair market value on the dates of grant and the options generally vest over two to five years and expire 10 years from the dates of grant, subject to earlier termination under certain conditions. Under the GMSSOP, 50 million shares of GM $1-2/3 par value common stock may be granted from January 1, 1998 through December 31, 2007, of which approximately 34 million were available for grants at December 31, 2001. Stock options vest one year following the date of grant and are exercisable two years from the date of grant. Option prices are 100% of fair market value on the dates of grant and the options generally expire 10 years and two days from the dates of grant subject to earlier termination under certain conditions. In connection with the Delphi spin-off, the number of options and related exercise prices for outstanding options under the affected plans were adjusted to reflect the change in the fair market value of GM $1-2/3 par value common stock that resulted from this transaction. The number of shares under option and the exercise price were adjusted such that the aggregate intrinsic value of the options immediately before and immediately after the transaction remained unchanged. Class H common stock share amounts and numbers of shares for 2000 and 1999 have been adjusted to reflect the three-for-one stock split in the form of a 200% stock dividend paid on June 30, 2000. II-51 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 21. Stock Incentive Plans (concluded) Changes in the status of outstanding options were as follows:
GMSIP and GMSIP Hughes Plan GMSSOP $1-2/3 Par Value Common Class H Common $1-2/3 Par Value Common ------------------------------------------------------------------------- Weighted- Weighted- Weighted Shares Average Shares Average Shares Average under Exercise under Exercise under Exercise Option Price Option Price Option Price - ------------------------------------------------------------------------------------------------- Options outstanding at January 1,1999 33,524,280 $50.72 50,080,851 $11.62 4,295,623 $56.00 - ------------------------------------------------------------------------------------------------- Granted 9,811,209 $85.79 15,277,260 $16.05 4,764,052 $85.97 Exercised 7,902,380 $46.04 10,798,119 $9.83 - $ - Terminated 3,198,739 $55.25 4,294,746 $13.49 2,285,969 $73.56 Delphi Spin-Off adjustment 6,774,777 $ - - $ - 1,288,914 $ - - ------------------------------------------------------------------------------------------------- Options outstanding at December 31, 1999 39,009,147 $51.30 50,265,246 $13.10 8,062,620 $58.73 - ------------------------------------------------------------------------------------------------- Granted 11,231,004 $74.14 35,641,517 $37.05 4,182,955 $75.50 Exercised 6,831,078 $42.95 6,545,206 $11.45 1,635,248 $46.59 Terminated 283,967 $64.48 11,249,673 $30.96 242,863 $63.46 - ------------------------------------------------------------------------------------------------- Options outstanding at December 31, 2000 43,125,106 $58.49 68,111,884 $22.76 10,367,464 $67.30 - ------------------------------------------------------------------------------------------------- Granted 13,141,725 $52.49 38,029,467 $23.34 3,902,862 $52.35 Exercised 1,682,731 $39.66 2,068,506 $11.25 37,655 $46.59 Terminated 1,641,974 $61.08 6,565,541 $27.66 154,690 $66.27 - ------------------------------------------------------------------------------------------------- Options outstanding at December 31, 2001 52,942,126 $57.52 97,507,304 $22.90 14,077,981 $63.22 - ------------------------------------------------------------------------------------------------- Options exercisable at December 31, 2001 29,890,175 $53.93 38,333,135 $15.75 6,148,695 $61.97 - -------------------------------------------------------------------------------------------------
The following table summarizes information about GM's stock option plans at December 31, 2001:
Weighted-Average Remaining Weighted-Avg. Weighted-Average Range of Options Contractual Exercise Options Exercise Exercise Prices Outstanding Life (yrs.) Price Exercisable Price ------------------------------------------------------------------------------------------------- GMSIP $1-2/3 Par Value Common $19.00 to $39.99 1,858,662 2.3 $31.23 1,858,662 $31.23 40.00 to 49.99 17,356,656 5.1 $44.85 17,225,726 $44.85 50.00 to 83.50 33,726,808 8.1 $65.48 10,805,787 $72.31 ------------------------------------------------------------------------------------------------- $19.00 to $83.50 52,942,126 6.9 $57.52 29,890,175 $53.93 ------------------------------------------------------------------------------------------------- GMSIP and Hughes Plan Class H Common $3.00 to $8.99 2,024,462 2.5 $6.95 2,024,462 $6.95 9.00 to 16.99 29,837,702 5.5 $12.57 26,096,895 $12.21 17.00 to 24.99 23,729,349 8.5 $19.61 6,150,151 $18.32 25.00 to 32.99 18,055,604 8.9 $27.81 266,599 $30.23 33.00 to 41.50 23,860,187 7.9 $37.11 3,795,028 $40.67 ------------------------------------------------------------------------------------------------ $3.00 to $42.50 97,507,304 7.4 $22.90 38,333,135 $15.75 ------------------------------------------------------------------------------------------------- GMSSOP $1-2/3 Par Value Common $46.59 2,356,590 6.0 $46.59 2,356,590 $46.59 52.35 3,872,111 9.0 $52.35 - $- 71.53 3,792,105 7.0 $71.53 3,792,105 $71.53 75.50 4,057,175 8.0 $75.50 - $- ------------------------------------------------------------------------------------------------- $46.59 to $75.50 14,077,981 7.7 $63.22 6,148,695 $61.97 -------------------------------------------------------------------------------------------------
II-52 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 22: Hughes/EchoStar Transactions On October 28, 2001, GM and its wholly owned subsidiary Hughes, together with EchoStar Communications Corporation (EchoStar), announced the signing of definitive agreements that, subject to stockholder approval, regulatory clearance, and certain other conditions, provide for the split-off of Hughes from GM and the subsequent merger of the Hughes business with EchoStar. These transactions are designed to address strategic challenges currently facing the Hughes business and to provide liquidity and value to GM, which would help to support the credit position of GM after the transactions. The split-off of Hughes from GM would occur by means of a distribution to the holders of GM Class H common stock of one share of Class C common stock of a Hughes holding company (that will own all of the stock of Hughes at the time of the split-off) in exchange for each share of GM Class H common stock held immediately prior to the split-off. Immediately following the split-off, the businesses of Hughes and EchoStar would be combined in the Hughes/EchoStar merger to form New EchoStar. Each share of the Hughes holding company Class C common stock shares would remain outstanding and become a share of Class C common stock of New EchoStar. Holders of Class A and Class B common stock of EchoStar would receive 1/0.73, or about 1.3699 shares of stock of the merged entity in exchange for each share of Class A or Class B common stock of EchoStar held prior to the Hughes/EchoStar merger. The transactions are structured in a manner that will not result in the recapitalization of GM Class H common stock into GM $1-2/3 par value common stock at a 120% exchange ratio, as currently provided for under certain circumstances in the General Motors Restated Certificate of Incorporation, as amended. The GM $1-2/3 par value common stock would remain outstanding and would be GM's only class of common stock after the transactions. As part of the transactions, GM would receive a dividend from Hughes of up to $4.2 billion in cash and its approximately 30% retained economic interest in Hughes would be reduced by a commensurate amount. In addition, GM may achieve additional liquidity with respect to a portion of its retained economic interest in Hughes represented by up to 100 million shares of GM Class H common stock (or, after the transactions, New EchoStar Class C common stock), including by exchanging such shares for GM outstanding obligations. Following these transactions, subject to IRS approval, and based on a number of assumptions, GM may retain an interest in the merged entity. GM, Hughes, and EchoStar have agreed that, in the event that the transactions do not occur because certain specified regulatory-related conditions have not been satisfied, EchoStar will be required to purchase Hughes' interest in PanAmSat Corporation for an aggregate purchase price of approximately $2.7 billion, which is payable, depending on the circumstances, solely in cash or in a combination of cash and either debt or equity securities of EchoStar. In addition, in the event that the transactions do not occur because certain of the specified regulatory clearances or approvals relating to United States antitrust and or federal communication commission matters have not been satisfied, EchoStar will be required to pay a $600 million termination fee to Hughes. II-53 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 23. Other Income and Other Expenses Other income (included in Total net sales and revenues) and other expenses (included in Cost of sales and other expenses) consisted of the following (dollars in millions): Years Ended December 31, ------------------------ 2001 2000 1999 ----- ----- ---- Automotive, Communications Services, and Other Operations - ---------------------------------------- Other income Interest income $771 $619 $769 Rental car lease revenue 1,424 1,584 1,632 Gain on sale of Hughes' satellite systems (1) - 2,036 - Claims, commissions, and grants 767 756 782 Other 369 247 289 --- --- --- Total other income $3,331 $5,242 $3,472 ===== ===== ===== Total other expenses $316 $348 $503 === === === (1) Represents the gain on the sale of Hughes' satellite systems manufacturing businesses to The Boeing Company for $3.8 billion in cash. Financing and Insurance Operations - ---------------------------------- Other income Interest income $2,269 $1,794 $1,479 Insurance premiums 1,524 1,394 1,339 Mortgage operations investment income and servicing fees 4,800 3,445 2,742 Other 1,082 870 157 ----- ------ ------ Total other income $9,675 $7,503 $5,717 ===== ===== ===== Other expenses Provision for financing losses 1,347 $552 $404 Insurance losses and loss adjustment expenses 1,180 1,028 882 ----- ----- ------ Total other expenses $2,527 $1,580 $1,286 ===== ===== ===== NOTE 24: Segment Reporting SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", established standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. GM's chief operating decision maker is the Chief Executive Officer. The operating segments are managed separately because each operating segment represents a strategic business unit that offers different products and serves different markets. 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: GMNA, GME, GMLAAM, GMAP), Hughes, and Other. GMNA designs, manufactures, and/or markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, Saturn, and Hummer. GME, GMLAAM, and GMAP meet the demands of customers outside North America with vehicles designed, manufactured, and marketed under the following nameplates: Opel, Vauxhall, Holden, Isuzu, Saab, Buick, Chevrolet, GMC, and Cadillac. Hughes includes activities relating to digital entertainment, information and communications services, and satellite-based private business networks. The Other segment 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. GMAC provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, commercial, vehicle and homeowners' insurance, and asset-based lending. The Financing and Insurance Operations' Other segment includes financing entities operating in the U.S., Canada, Brazil, and Mexico which are not associated with GMAC. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that the disaggregated financial results have been prepared using a management approach, which is consistent with the basis and manner in which GM management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. GM evaluates performance based on stand-alone operating segment net income and generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Revenues are attributed to geographic areas based on the location of the assets producing the revenues. II-54 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 24. Segment Reporting (continued)
Other Total GMNA GME GMLAAM GMAP GMA Hughes Other ACO GMAC Financing Financing -------- ------- ------ ------ --------- ----------- ------- --------- ------- --------- --------- (dollars in millions) 2001 Manufactured products sales and revenues: External customers $105,859 $22,249 $5,615 $3,262 $136,985 $8,236 $2,939 $148,160 $ - $ - $ - Intersegment (1,772) 820 200 752 - 25 (25) - - - - ------- ------ ----- ----- ------- ----- ----- ------- ------ ----- ------ Total manufactured products 104,087 23,069 5,815 4,014 136,985 8,261 2,914 148,160 - - - Financing revenue - - - - - - - - 15,083 1,011 16,094 Other income 2,851 631 49 187 3,718 57 (444) 3,331 10,389 (714) 9,675 ------- ------ ----- ----- ------- ----- ----- ------- ------ ----- ------ Total net sales and revenues $106,938 $23,700 $5,864 $4,201 $140,703 $8,318 $2,470 $151,491 $25,472 $297 $25,769 ======= ====== ===== ===== ======= ===== ===== ======= ====== === ====== Depreciation and amortization $4,515 $994 $146 $117 $5,772 $1,144(a) $135 $7,051 $5,305 $552 $5,857 Interest income $831 $369 $27 $14 $1,241 $57 $(527) $771 $2,696 $(427) $2,269 Interest expense $969 $349 $95 $8 $1,421 $196 $(866) $751 $7,606 $233 $7,839 Income tax expense (benefit) $423 $(282) $(18) $24 $147 $(326) $(91) $(270) $1,075 $(37) $1,038 (Losses) earnings of nonconsolidated associates $(37) $41 $(6) $(61) $(63) $(61) $(5) $(129) $(5) $3 $(2) Net income (loss) $1,270 $(765) $(81) $(57) $367 $(618)(a) $(916) $(1,167) $1,786 $(18) $1,768 Investments in nonconsolidated affiliates $665 $886 $614 $2,700 $4,865 $55 $30 $4,950 $1,062 $(1,062) $ - Segment assets $89,501 $18,552 $4,181 $896 $113,130 $19,154 $(2,074) $130,210 $192,721 $1,038 $193,759 Expenditures for property $5,771 $1,477 $125 $194 $7,567 $799(b) $245 $8,611 $13 $7 $20 2000 Manufactured products sales and revenues: External customers $111,481 $23,815 $5,470 $2,999 $143,765 $8,514 $3,106 $155,385 $ - $ - $ - Intersegment (1,659) 1,040 184 435 - 34 (34) - - - - ------- ------ ----- ----- ------- ----- ----- ------- -- -- -- Total manufactured products 109,822 24,855 5,654 3,434 143,765 8,548 3,072 155,385 - - - Financing revenue - - - - - - - - 15,493 1,009 16,502 Other income 2,901 503 59 172 3,635 2,141 (534) 5,242 8,168 (665) 7,503 ------- ------ ----- ----- ------- ------ ------ ------- ------ --- ------ Total net sales and revenues $112,723 $25,358 $5,713 $3,606 $147,400 $10,689 $2,538 $160,627 $23,661 $344 $24,005 ======= ====== ===== ===== ======= ====== ===== ======= ====== === ====== Depreciation and amortization $4,564 $1,357 $272 $107 $6,300 $996(a)(c) $133 $7,429 $5,505 $477 $5,982 Interest income $633 $403 $22 $13 $1,071 $106 $(558) $619 $2,231 $(437) $1,794 Interest expense $1,175 $408 $101 $4 $1,688 $218 $(1,091) $815 $8,295 $442 $8,737 Income tax expense (benefit) $1,218 $(209) $(122) $17 $904 $577 $(38) $1,443 $954 $(4) $950 (Losses) earnings of nonconsolidated associates $(74) $7 $69 $(195) $(193) $(142) $(1) $(336) $- $4 $4 Net income (loss) $3,174 $(676) $26 $(233) $2,291 $829(a)(c) $(281) $2,839 $1,602 $11 $1,613 Investments in nonconsolidated affiliates $780 $170 $436 $1,915 $3,301 $82 $114 $3,497 $982 $(982) $- Segment assets $90,502 $18,857 $4,166 $1,108 $114,633 $19,220 $(497) $133,356 $168,410 $1,334 $169,744 Expenditures for property $6,073 $1,517 $233 $168 $7,991 $993(b) $216 $9,200 $518 $4 $522
See notes on next page II-55 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 24. Segment Reporting (continued)
Other Total GMNA GME GMLAAM GMAP GMA Hughes Other ACO GMAC Financing Financing -------- ------- ------ ------ --------- ----------- ------- --------- ------- --------- --------- (dollars in millions) 1999 Manufactured products sales and revenues: External customers $110,388 $24,646 $4,445 $2,706 $142,185 $7,325 $3,125 $152,635 $ - $ - $ - Intersegment (1,595) 1,025 234 336 - 16 (16) - - - - ------- ------ ----- ----- ------- ----- ----- ------- --- --- --- Total manufactured products 108,793 25,671 4,679 3,042 142,185 7,341 3,109 152,635 - - - Financing revenue - - - - - - - - 13,778 956 14,734 Other income 3,142 554 30 145 3,871 253 (652) 3,472 6,440 (723) 5,717 ------- ------ ----- ----- ------- ----- ----- ------- ------ --- ------ Total net sales and revenues $111,935 $26,225 $4,709 $3,187 $146,056 $7,594 $2,457 $156,107 $20,218 $233 $20,451 ======= ====== ===== ===== ======= ===== ===== ======= ====== === ====== Depreciation and amortization $4,457 $1,086 $228 $154 $5,925 $706(a) $242 $6,873 $5,136 $309 $5,445 Interest income $929 $433 $45 $8 $1,415 $27 $(673) $769 $1,744 $(265) $1,479 Interest expense $1,223 $337 $95 $11 $1,666 $123 $(961) $828 $6,526 $396 $6,922 Income tax expense (benefit) $2,361 $220 $(156) $(7) $2,418 $(194) $(57) $2,167 $960 $(9) $951 (Losses) earnings of nonconsolidated associates $(30) $1 $45 $(149) $(133) $(189) $(3) $(325) $(1) $1 $ - Net income (loss) $4,857 $423 $(81) $(218) $4,981 $(270)(a) $(243)(d) $4,468 $1,527 $7 $1,534 Investments in nonconsolidated affiliates $539 $52 $332 $926 $1,849 $(11) $(127) $1,711 $2,257 $(2,257) $- Segment assets $82,851 $18,156 $4,102 $1,343 $106,452 $18,841 $268 $125,561 $148,789 $380 $149,169 Expenditures for property $4,604 $1,228 $358 $150 $6,340 $472(b) $249 $7,061 $321 $2 $323
(a) The amount reported for Hughes excludes amortization of GM purchase accounting adjustments related to GM's acquisition of Hughes Aircraft Company of approximately $3 million, $16 million ($3 million related to PanAmSat and $13 million related to the satellite systems manufacturing businesses prior to the sale to The Boeing Company on October 6, 2000), and $21 million for 2001, 2000, and 1999, respectively. These adjustments were allocated to GM's Other segment which is consistent with the basis upon which segments are evaluated. (b) Excludes satellite expenditures totaling $936 million, $766 million, and $789 million in 2001, 2000, and 1999, respectively. Also excludes expenditures related to the early buy-out of satellite sale-leasebacks totaling $0, $0, and $370 million in 2001, 2000, and 1999, respectively. (c) The amount reported for Hughes includes the write-off of approximately $329 million of unamortized goodwill related to the satellite systems manufacturing businesses at the time of the sale to The Boeing Company. (d) Other includes income (loss) from discontinued operations related to Delphi of $426 million for the year ended December 31, 1999. II-56 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 24. Segment Reporting (concluded) Information concerning principal geographic areas was as follows (dollars in millions): 2001 2000 1999 ------------------ ------------------ ------------------ Net Sales Net Sales Net Sales & Net & Net & Net Revenues Property Revenues Property Revenues Property --------- -------- --------- -------- --------- -------- North America United States $132,004 $25,123 $136,399 $22,798 $130,073 $20,634 Canada and Mexico 11,769 3,400 13,986 3,687 12,661 3,760 ------- ------ ------- ------ ------- ------ Total North America 143,773 28,523 150,385 26,485 142,734 24,394 Europe France 1,829 130 1,986 139 2,130 151 Germany 6,133 2,640 6,582 2,687 8,968 2,912 Spain 1,772 713 1,650 709 2,001 542 United Kingdom 5,024 582 5,035 834 5,390 1,070 Other 11,139 1,905 11,935 2,397 9,407 1,635 ------ ----- ------ ----- ------- ----- Total Europe 25,897 5,970 27,188 6,766 27,896 6,310 Latin America Brazil 2,889 946 3,395 1,047 2,830 1,409 Other Latin America 2,249 273 1,843 380 1,686 403 ----- ----- ----- ----- ----- ----- Total Latin America 5,138 1,219 5,238 1,427 4,516 1,812 All Other 2,452 728 1,821 698 1,412 759 ------- ------ ------- ------ ------- ------ Total $177,260 $36,440 $184,632 $35,376 $176,558 $33,275 ======= ====== ======= ====== ======= ====== Note 25: Subsequent Events In February 2002, Hughes completed a series of financing activities to fund certain future anticipated cash requirements and to expand available borrowing capacity. Hughes, through its consolidated subsidiary PanAmSat, borrowed $1.8 billion, consisting of a private placement debt offering in the amount of $800 million and $1.0 billion borrowed under a new $1.25 billion bank facility. The notes issued in the private placement bear interest at an annual rate of 8.5%, are payable semi-annually, mature in 2012, and are unsecured. The $1.25 billion bank facility is comprised of a $250 million revolving credit facility, a Tranche A Term Loan in the amount of $300 million, and a Tranche B Term Loan in the amount of $700 million. The revolving credit facility and the Tranche A Term Loan bear interest at LIBOR plus a 3.00% spread. The Tranche B Term Loan bears interest at LIBOR plus a 3.5% spread. The interest rate spreads on the revolving credit facility and Tranche A Term Loan may be increased or decreased based upon the terms of the credit agreement. The facilities are secured ratably by substantially all of PanAmSat's operating assets, including its satellites. The revolving credit facility will terminate in 2007, the Tranche A Term Loan matures in 2007, and the Tranche B Term Loan matures in 2008. Principal payments under the Tranche A Term Loan are due in varying amounts from 2004 to 2007. Principal payments under the Tranche B Term Loan are due primarily at maturity. Also in February 2002, Hughes utilized $1.7 billion of the proceeds from a $1.9 billion loan obtained from GMAC to repay (1) all amounts outstanding under an existing $750 million unsecured revolving credit facility, (2) the DIRECTV Latin America ("DLA") $450 million revolving credit facility and, (3) $613 million of SurFin revolving credit facilities. Hughes' existing $750 million multi-year revolving credit facility was amended and expanded to $1.2 billion and is secured by substantially all of Hughes' assets other than the assets of DLA and PanAmSat. In March 2002, Hughes was in the process of adding a term loan to the $1.2 billion multi-year revolving credit facility that would increase the total funding available to at least $1.8 billion. The term loan is expected to close in March 2002. Hughes secured the loan from GMAC with a $1.5 billion cash deposit. Hughes and GMAC intend to offset against each other the $1.5 billion cash deposit and amounts owed by Hughes to GMAC, and accordingly, these amounts will be offset in the ACO and Finance and Insurance Operations balance sheets. On March 6, 2002, GM issued $3.8 billion of convertible debt securities as part of a comprehensive effort to improve the Corporation's financial flexibility. The offering includes $1.2 billion principal amount of 4.5% Series A Convertible Senior Debentures due 2032 and $2.6 billion principal amount of 5.25% Series B Convertible Senior Debentures due 2032. The securities mature in 30 years and are convertible into GM $1-2/3 common stock once specific conditions are satisfied. The proceeds of the offering, combined with other cash generation initiatives, will be used to rebuild GM's liquidity position, reduce its underfunded pension liability, and fund its postretirement health care obligations. * * * * * * * * II-57 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION Selected Quarterly Data (Unaudited) 2001 Quarters -------------------------------------- 1st (1) 2nd (2) 3rd (3) 4th --- ---- --- --- (dollars in millions except per share amounts) Total net sales and revenues $42,615 $46,220 $42,475 $45,950 Income (losses) before income taxes and minority interests $504 $925 $(285) $374 Income tax expense 208 304 76 180 Minority interests (2) 7 (10) (13) Earnings (losses) of nonconsolidated associates (57) (151) 3 74 --- --- --- --- Net income (loss) 237 477 (368) 255 Dividends on preference stocks (28) (23) (25) (23) --- --- --- --- Earnings (losses) attributable to common stocks $209 $454 $(393) $232 === === === === Earnings (losses) attributable to $1-2/3 par value $296 $574 $(223) $337 Losses attributable to Class H $(87) $(120) $(170) $(105) Basic earnings (losses) per share attributable to $1-2/3 par value $0.54 $1.05 $(0.41) $0.61 Basic losses per share attributable to Class H $(0.10) $(0.14) $(0.19) $(0.12) Average number of shares of common stocks outstanding - basic (in millions) $1-2/3 par value 548 549 551 556 Class H 875 876 877 877 Diluted earnings (losses) per share attributable to $1-2/3 par value $0.53 $1.03 $(0.41) $0.60 Diluted losses per share attributable to Class H $(0.10) $(0.14) $(0.19) $(0.12) Average number of shares of common stocks outstanding - diluted (in millions) $1-2/3 par value 554 559 551 559 Class H 875 876 877 877 II-58 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION - continued Selected Quarterly Data (Unaudited) - continued (1) First quarter 2001 results include a $12 million increase to income on an after-tax basis for the net impact from initially adopting SFAS No. 133, "Accounting for Derivatives and Hedging Activities". (2) Second quarter 2001 results include a $133 million after-tax restructuring charge related to General Motors' portion of severance payments and asset impairments that were part of the second quarter restructuring of its affiliate Isuzu Motors Ltd. (3) Third quarter 2001 results include the following: - a $194 million after-tax charge for the announced closing of the Ste. Therese, Quebec assembly plant; - a $474 million after-tax charge related to Hughes' settlement with Raytheon on a purchase price adjustment related to Raytheon's 1997 merger with Hughes defense; - a $67 million after-tax gain related to Hughes' sale of 4.1 million shares of Thomson Multimedia common stock; - a $133 million after-tax charge related to Hughes' non-cash charge from the revaluation of its SkyPerfecTV! investment; - a $40 million after-tax severance charge related to Hughes' 10% company-wide workforce reduction in the U.S.; and - a $21 million after-tax favorable adjustment for the expected costs associated with the shutdown of Hughes' DIRECTV Japan business. II-59 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION Selected Quarterly Data (Unaudited) 2000 Quarters -------------------------------------- 1st 2nd 3rd 4th(4) --- --- --- --- (dollars in millions except per share amounts) Total net sales and revenues $46,858 $48,743 $42,690 $46,341 ====== ====== ====== ====== Income before income taxes and minority interests $2,632 $2,835 $1,266 $431 Income tax expense 783 929 436 245 Minority interests 2 2 (2) 11 Earnings (losses) of nonconsolidated associates (68) (157) 1 (108) ----- ----- ----- --- Net income 1,783 1,751 829 89 Dividends on preference stocks (29) (27) (27) (27) ----- ----- ----- -- Earnings attributable to common stocks $1,754 $1,724 $802 $62 ===== ===== === == Earnings (losses) attributable to $1-2/3 par value $1,786 $1,762 $878 $(635) Earnings (losses) attributable to Class H $(32) $(38) $(76) $697 Basic earnings (losses) per share attributable to $1-2/3 par value $2.88 $2.99 $1.57 $(1.14) Basic earnings (losses) per share attributable to Class H (5) $(0.08) $(0.07) $(0.09) $0.80 Average number of shares of common stocks outstanding - basic (in millions) $1-2/3 par value 620 590 559 559 Class H (5) 413 563 874 875 Diluted earnings (losses) per share attributable to $1-2/3 par value $2.80 $2.93 $1.55 $(1.16) Diluted earnings (losses) per share attributable to Class H (5) $(0.08) $(0.07) $(0.09) $0.76 Average number of shares of common stocks outstanding - diluted (in millions) $1-2/3 par value 637 602 567 559 Class H (5) 413 563 874 962 II-60 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION - continued Selected Quarterly Data (Unaudited) - continued (4) Fourth quarter 2000 results include: a $939 million after-tax charge for the phase-out of Oldsmobile; an after-tax charge of $294 million related to postemployment costs for termination and other postemployment benefits associated with the four North American manufacturing facilities slated for conversion and capacity reduction; a $419 million after-tax charge related to the reduction in production capacity at GME, including the restructuring of Vauxhall Motors Limited's manufacturing operations in the UK; and a $1.1 billion after-tax gain at Hughes related to the sale of its satellite systems manufacturing businesses to The Boeing Company for $3.8 billion in cash. (5) Adjusted to reflect the three-for-one stock split of the GM Class H common stock, in the form of a 200% stock dividend, paid on June 30, 2000. II-61 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 9. Changes in and disagreements with accountants on accounting and financial disclosure None II-62 PART III GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEMS 10, 11, 12, AND 13 Information required by Part III (Items 10, 11, 12, and 13) of this Form 10-K is incorporated by reference from General Motors Corporation's definitive Proxy Statement for its 2002 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year, all of which information is hereby incorporated by reference in, and made part of, this Form 10-K, except that the information required by Item 10 with respect to executive officers of the Registrant is included in Item 4A of Part I of this report. III-1 PART IV GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K Page Number ------ (a) 1. All Financial Statements See Part II 2. Financial Statement Schedule II - Allowances for the Years Ended December 31, 2001, 2000, and 1999 IV-3 3. Exhibits (Including Those Incorporated by Reference) Exhibit Number - ------ (3)(a) Restated Certificate of Incorporation, as amended, filed as Exhibit 3(i) to the Current Report on Form 8-K of General Motors Corporation dated June 6, 2000, and Amendment to Article Four of the Certificate of Incorporation - Division III - Preference Stock, by reason of the Certificates of Designations filed with the Secretary of State of the State of Delaware on September 14, 1987 and the Certificate of Decrease filed with the Secretary of State of the State of Delaware on September 29, 1987 (pertaining to the Six Series of Preference Stock contributed to the General Motors pension trusts), incorporated by reference to Exhibit 19 to the Quarterly Report on Form 10-Q of General Motors Corporation for the quarter ended June 30, 1990 in the Form SE of General Motors Corporation dated August 6, 1990; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on June 28, 1991 (pertaining to Series A Conversion Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-8 Registration Statement No. 33-43744 in the Form SE of General Motors Corporation dated November 1, 1991; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on December 9, 1991 (pertaining to Series B 9-1/8% Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-3 Registration Statement No. 33-45216 in the Form SE of General Motors Corporation dated January 27, 1992; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on February 14, 1992 (pertaining to Series C Convertible Preference Stock), incorporated by reference to Exhibit (3)(a) to the Annual Report on Form 10-K of General Motors Corporation for the year ended December 31, 1991 in the Form SE of General Motors Corporation dated March 20, 1992; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on July 15, 1992 (pertaining to Series D 7.92% Preference Stock), incorporated by reference to Exhibit 3(a)(2) to the Quarterly Report on Form 10-Q of General Motors Corporation for the quarter ended June 30, 1992 in the Form SE of General Motors Corporation dated August 10, 1992; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on December 15, 1992 (pertaining to Series G 9.12% Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-3 Registration Statement No. 33-49309 in the Form SE of General Motors Corporation dated January 25, 1993; and as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on June 24, 1999 (pertaining to Series H 6.25% Automatically Convertible Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-8 Registration Statement No. 333-31846 in the Form SE of General Motors Corporation dated March 6, 2000. N/A (3)(b) By-Laws, of General Motors Corporation, as amended, incorporated by reference to Exhibit 3(ii) to the Current Report on Form 8-K of General Motors Corporation dated March 2, 1998; as further amended, incorporated by reference to Exhibit 3(ii) to the Current Reports on Form 8-K of General Motors Corporation dated June 24, 1999, August 2, 1999, March 6, 2000, June 6, 2000, October 3, 2000, June 5, 2001, and December 4, 2001. N/A (4)(a) Form of Indenture relating to the $500,000,000 8-1/8% Debentures Due April 15, 2016 dated as of April 1, 1986 between General Motors Corporation and Citibank, N.A., Trustee, incorporated by reference to Exhibit 4 to Amendment No. 1 to Form S-3 Registration Statement No. 33-4452 and resolutions adopted by the Special Committee on April 15, 1986, incorporated by reference to Exhibit 4(a) to the Current Report on Form 8-K of General Motors Corporation dated April 24, 1986. N/A IV-1 GENERAL MOTORS CORPORATION AND SUBSIDIARIES PART IV - continued ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (continued) Exhibit Page Number Number - ------ ------ (4)(c) Form of Indenture relating to the $377,377,000 7.75% Debentures Due March 15, 2036 dated as of December 7, 1995 between General Motors Corporation and Citibank, N.A., Trustee, filed as Exhibit 4(a) to Amendment No. 1 to Form S-3 Registration Statement No. 33-64229. N/A (4)(d) Instruments defining the rights of holders of nonregistered debt of the Registrant have been omitted from this exhibit index because the amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its subsidiaries. The Registrant agrees to furnish a copy of any such instrument to the Commission upon request. N/A (4)(f)(i)Indenture between General Motors Corporation and Wilmington Trust Company, incorporated by reference to Exhibit 4(d)(i) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (4)(f)(ii)First Supplemental Indenture, dated March 4, 2002, between General Motors Corporation and Citibank, N.A. With Respect To The 4.50% Series A Convertible Senior Debentures due 2032 and 5.25% Series B Convertible Senior Debentures due 2032, incorporated by reference to Exhibit 2 to the Current Report on Form 8-K of General Motors Corporation dated March 6, 2002. N/A (10)(a)**General Motors 1997 Annual Incentive Plan, incorporated by reference to Exhibit B to the Proxy Statement of General Motors Corporation dated April 16,1997. N/A (10)(b)**General Motors 1997 Stock Incentive Plan, incorporated by reference to Exhibit B to the Proxy Statement of General Motors Corporation dated April 16, 1997. N/A (10)(c)**General Motors 1997 Performance Achievement Plan, incorporated by reference to Exhibit B to the Proxy Statement of General Motors Corporation dated April 16, 1997. N/A (10)(d)**Compensation Plan for Nonemployee Directors, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 16, 1997. N/A (10)(e) Employment Contract with John M. Devine dated December 12, 2000, incorporated by reference to Exhibit (10)(e) to the Annual Report on Form 10-K for the Year Ended December 31, 2000. N/A (10)(f) Employment Contract with Robert A. Lutz dated September 1, 2001. IV-6 (12) Computation of Ratios of Earnings to Fixed Charges for the Years Ended December 31, 2001, 2000, and 1999. IV-9 (21) Subsidiaries of the Registrant as of December 31, 2001 IV-10 (23) Consent of Independent Auditors IV-17 (99) Hughes Electronics Corporation Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations IV-18 * The registrant hereby undertakes to furnish supplementally a copy of any omitted schedule or other attachment to the Securities and Exchange Commission upon request. ** Required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (b) Reports on Form 8-K Fourteen reports on Form 8-K, were filed October 2, 2001, October 3, 2001, October 15, 2001, October 18, 2001, October 18, 2001*, October 19, 2001, October 24, 2001 (2), October 31, 2001, November 1, 2001, November 13, 2001, November 14, 2001*, December 3, 2001, and December 6, 2001 during the quarter ended December 31, 2001 reporting matters under Item 5, Other Events, reporting certain agreements under Item 7, Financial Statements, Pro Forma Financial Information, and Exhibits. - -------------------------- * Reports submitted to the Securities and Exchange Commission under Item 9, Regulation FD Disclosure. Pursuant to General Instruction B of Form 8-K the reports submitted under Item 9 are not deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 and we are not subject to the liabilities of that section. We are not incorporating, and will not incorporate by reference these reports into a filing under the Securities Act or the Exchange Act. IV-2 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SCHEDULE II - ALLOWANCES
Additions Additions Balance at charged to charged to beginning costs and other Balance at Description of year expenses accounts Deductions end of year - ----------- ---------- ---------- ---------- ---------- ----------- (dollars in millions) For the Year Ended December 31, 2001 Allowances Deducted from Assets Finance receivables (unearned income) $4,872 $ - $7,624(a) $6,730(b) $5,766 Allowance for credit losses 1,332 1,346 159(c) 777(d) 2,060 Accounts and notes receivable (for doubtful receivables) 241 227 83(c) 281(d) 270 Inventories (principally for obsolescence of service parts) 300 - - 53(e) 247 Other investments and miscellaneous assets (receivables and other) 6 - 2 - 8 Miscellaneous allowances (mortgage and other) 186 225 3 74 340 ----- ----- ----- ----- ----- Total Allowances Deducted from Assets $6,937 $1,798 $7,871 $7,915 $8,691 ===== ===== ===== ===== ===== For the Year Ended December 31, 2000 Allowances Deducted from Assets Finance receivables (unearned income) $4,153 $ - $3,942 $3,223 $4,872 Allowance for credit losses 1,114 552 169(c) 503(d) 1,332 Accounts and notes receivable (for doubtful receivables) 301 173 44(c) 277(d) 241 Inventories (principally for obsolescence of service parts) 364 - - 64(e) 300 Other investments and miscellaneous assets (receivables and other) 5 - 1 - 6 Miscellaneous allowances (mortgage and other) 225 35 1 75 186 ----- --- ----- ----- ----- Total Allowances Deducted from Assets $6,162 $760 $4,157 $4,142 $6,937 ===== === ===== ===== ===== For the Year Ended December 31, 1999 Allowances Deducted from Assets Finance receivables (unearned income) $4,027 $ - $3,411 $3,285 $4,153 Allowance for credit losses 1,021 404 109(c) 420(d) 1,114 Accounts and notes receivable (for doubtful receivables) 309 75 29(c) 112(d) 301 Inventories (principally for obsolescence of service parts) 257 107(e) - - 364 Other investments and miscellaneous assets (receivables and other) 14 - - 9 5 Miscellaneous allowances (mortgage and other) 252 54 1 82 225 ----- --- ----- ----- ----- Total Allowances Deducted from Assets $5,880 $640 $3,550 $3,908 $6,162 ===== === ===== ===== =====
- ------------------------- Notes:(a) Represents additional unearned income on newly originated finance receivables. (b) Represents income recognized. (c) Primarily reflects the recovery of accounts previously written-off. (d) Accounts written off. (e) Represents net change of inventory allowances. Reference should be made to the notes to the GM consolidated financial statements. IV-3 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 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: March 4, 2002 By /s/JOHN F. SMITH, JR. ---------------------------------- (John F. Smith, Jr. Chairman of the Board of Directors) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 4th day of March 2002 by the following persons on behalf of the Registrant and in the capacities indicated. Signature Title - -------------------------- ----------------------------------- /s/JOHN F. SMITH, JR. Chairman of the Board of Directors - --------------------- (John F. Smith, Jr.) /s/G. RICHARD WAGONER, JR. President, Chief Executive Officer, - ------------------------- and Director (G. Richard Wagoner, Jr.) /s/JOHN M. DEVINE Vice Chairman and ) - ----------------- Chief Financial Officer ) (John M. Devine) )Principal )Financial )Officers /s/ERIC A. FELDSTEIN Vice President and ) - -------------------- Treasurer ) (Eric A. Feldstein) ) /s/WALLACE W. CREEK Controller ) - ------------------- ) (Wallace W. Creek) )Principal )Accounting )Officers /s/PETER R. BIBLE Assistant Controller and ) - ----------------- Chief Accounting Officer ) (Peter R. Bible) ) IV-4 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SIGNATURES - concluded Signature Title - -------------------------- --------------------- /s/PERCY BARNEVIK Director - ----------------- (Percy Barnevik) /s/JOHN H. BRYAN Director - ---------------- (John H. Bryan) /s/ARMANDO M. CODINA Director - -------------------- (Armando Codina) /s/THOMAS E. EVERHART Director - --------------------- (Thomas E. Everhart) /s/GEORGE M. C. FISHER Director - ---------------------- (George M. C. Fisher) /s/ Director - --------------------- (Nobuyuki Idei) /s/KAREN KATEN Director - -------------- (Karen Katen) /s/ALAN G. LAFLEY Director - ----------------- (Alan G. Lafley) /s/J. WILLARD MARRIOTT, JR. Director - --------------------------- (J. Willard Marriott, Jr.) /s/E. STANLEY O'NEAL Director ------------------- (E. Stanley O'Neal) /s/ECKHARD PFEIFFER Director - ------------------- (Eckhard Pfeiffer) /s/LLOYD D. WARD Director - ---------------- (Lloyd D. Ward) IV-5 EX-10 3 exhibit10f.txt ROBERT LUTZ AGREEMENT EXHIBIT 10(f) August 16, 2001 Mr. Robert A. Lutz 3966 Pleasant Lake Road Ann Arbor, MI 48103 Dear Bob: I am extremely pleased to confirm our offer of employment to you. If you accept our offer, your employment with General Motors Corporation will commence on September 1, 2001 and you will assume the position of Vice Chairman in charge of Product Development and agree to serve in that capacity for three years. You will be located at our headquarters office in Detroit, Michigan and our Technical Center in Warren, Michigan and report to me as the Chief Executive Officer of the Company, and work closely with Ron Zarrella on North America product development matters. You will be a member of both the Global Automotive Strategy Board and the North America Strategy Board. Please indicate your acceptance by signing below and returning the original to me. Your starting base salary will be the same as that of the Company's current Vice Chairman as of the date of this letter. Your base salary, and other components of pay, will be reviewed periodically by the Executive Compensation Committee of the Board of Directors (the "Executive Compensation Committee") and, based on that review, may be adjusted. Your annual cash bonus will be dependent upon Corporate performance relative to the performance matrices approved by the Executive Compensation Committee, but in no case will your bonus be less than $1,500,000 for your first twelve months of employment and $1,000,000 for the second twelve months. You will be eligible to defer salary and/or bonus payments, to the extent permitted under the Company's deferred compensation program. You will be eligible to participate in the Company's Stock Incentive Plan, Stock Performance Program, and Net Margin Grant Program. Your stock option grant for 2001 will be commensurate with the Vice Chairman position and granted on September 1, 2001, with one-third of the grant vesting on each of the three annual anniversaries following the grant date. Subsequent grants will be made in 2003 and 2004 at the normal timing for executive grants. The 2004 grant will vest one-third on September 1, 2004 with subsequent equal vestings on the following grant anniversary dates. All options, following vesting, shall remain exercisable for the remainder of their original ten-year term. Your target share-value under the Stock Performance Program (the "SPP") for the 2000-2002 and 2001-2003 cycles will be commensurate with those of the Vice Chairman position. Awards under the SPP are delivered in shares at the end of a three-year period. Under the Net Margin Program, you will receive a one-time stock grant of 19,228 shares of $1-2/3 par value common stock if the Company meets its net margin goal (based on a four quarter rolling average) within the perfor-mance period of October 1, 2000 to December 31, 2003. IV-6 Mr. Robert A. Lutz Page Two August 16, 2001 You will also receive a special grant of approximately 80,000 restricted stock units, based on the average of the high and low trading price of $1-2/3 par value common stock on September 1, 2001. Provided you meet certain performance goals, as established by the Executive Compensation Committee after consultation with you, these restricted stock units will vest 33-1/3% on each of the first three anniversaries of your date of hire. Each quarter, you will receive a dividend equivalent payment in cash based on the number of your unvested restricted stock units commencing in December 2001. In case of your total and permanent disability, such vesting will continue; however, upon death, vesting will be accelerated and such shares will be delivered to your beneficiaries. You will be entitled to the Company's standard package of benefits and perquisites available to executives at your level. Your participation in these plans, as well as any other compensation or benefits plans referenced above, will be controlled by the terms of those plans. If your employment terminates prior to the end of your three-year agreement, we will work with you on a mutually satisfactory severance arrangement. As a condition of your acceptance of our offer of employment, you will be required to execute the attached Compensation Statement. Also, please note that executives at your level are normally expected under the Company's ownership guidelines to achieve a level of ownership equal to five times base salary. Reflecting your three-year employment term, you should achieve an ownership level at least three times your base salary. Bob, I am excited about the prospect of your joining our team, and confident that together we will succeed. Please feel free to call with any questions you may have. Sincerely, /s/ G. R. Wagoner, Jr. G. R. Wagoner, Jr. AGREED AND ACCEPTED BY: /s/ Robert A. Lutz - ------------------------- Robert A. Lutz 8/18/01 - ------------------------- Date IV-7 COMPENSATION STATEMENT Commencing: September 1, 2001 I agree I am classified as an exempt employee for purposes of the Fair Labor Standards Act, and the salary provided to me pursuant to the letter agreement of even date herewith will be my total salary during each monthly period in which GM continues it in effect for all hours worked, including overtime. I acknowledge that I will become aware of trade secrets or other confidential and/or proprietary information concerning GM, the disclosure of which will cause irreparable harm to the Corporation. I agree that I will not disclose to any person or entity any such trade secret, confidential and/or proprietary information and, upon termination of my employment with GM, I shall return all documents or other materials containing such information to GM. I also acknowledge that I will not disclose to GM or its employees any trade secrets or other confidential and/or proprietary information of any prior employer without the specific written authorization of the prior employer. I represent that I am not subject to any agreements that would preclude my employment with GM. For a period of one year immediately following my termination of employment with GM or any of its subsidiaries for any reason, I will not, without the prior written consent of the GM Chief Executive Officer, engage in or perform any services of a similar nature to those I performed at GM for any other corporation or business engaged in the design, manufacture, development, promotion, sale, or financing of automobiles or trucks within North America, Latin America, Asia, Australia, or Europe in competition with GM, any of its subsidiaries or affiliates, or any joint ventures to which GM or any of its subsidiaries or affiliates is a party. If the terms of this paragraph are found by a court to be unenforceable due to the duration, products or territory covered, such court shall be authorized to interpret these terms in a manner that makes the paragraph enforceable within that particular jurisdiction. This Statement reaffirms that my employment is from month-to-month on a calendar month basis and I acknowledge that except as provided in the letter agreements of even date herewith, GM retains the right in its discretion to increase or decrease my compensation. The parties agree Michigan law applies to this Compensation Statement even if I am employed outside the state. I agree that my job responsibilities with GM and a significant portion of my compensation as more fully described in the letter agreements of even date herewith are consideration for the confidentiality and non-compete agreements noted above. No modification or amendment of this Compensation Statement will be effective unless it is in writing and signed by both parties. /s/ Robert A. Lutz /s/ G. Richard Wagoner, Jr. - ------------------------------ ------------------------------------- Employee General Motors Corporation 8/18/01 8/16/01 - ------------------------------ ------------------------------------- Date Date IV -8 EX-12 4 exhibit12.txt RATIO OF EARNINGS EXHIBIT 12 GENERAL MOTORS CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Years Ended December 31, ---------------------------------- 2001 2000 1999 ---------- ---------- ---------- (dollars in millions) Income from continuing operations $601 $4,452 $5,576 Income taxes 768 2,393 3,118 Losses of nonconsolidated associates 131 332 325 Minority interests 18 (13) 28 Amortization of capitalized interest 73 69 66 ----- ----- ----- Income from continuing operations before income taxes, undistributed income of associates, and capitalized interest 1,591 7,233 9,113 ----- ----- ----- Fixed charges included in income from continuing operations Interest and related charges on debt 8,770 9,475 7,642 Portion of rentals deemed to be interest 330 341 284 ----- ----- ----- Total fixed charges included in income from continuing operations 9,100 9,816 7,926 ----- ----- ----- Earnings available for fixed charges $10,691 $17,049 $17,039 ====== ====== ====== Fixed charges Fixed charges included in income from continuing operations $9,100 $9,816 $7,926 Interest capitalized in the period 171 137 95 ----- ----- ----- Total fixed charges $9,271 $9,953 $8,021 ===== ===== ===== Ratios of earnings to fixed charges 1.15 1.71 2.12 ==== ==== ==== IV-9 EX-21 5 exhibit21.txt SUBSIDIARY LISTING EXHIBIT 21 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 2001 Subsidiary companies of the Registrant are listed below. State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- Subsidiaries included in the Registrant's consolidated financial statements Adam Opel Aktiengesellschaft.................................Germany Adam Opel Unterstuetzungskasse GmbH........................Germany Autohaus am Nordring GmbH, Berlin..........................Germany Carus Grundstucks-Vermietungsgesellschaft mbH & Co. Object Kuno 65 KG........................................Germany Carus Grundstucks-Vermietungsgesellschaft mbH & Co. Object Leo 40 KG.........................................Germany Edmund Becker und Co. AG...................................Germany GM Europe GmbH.............................................Germany GM Locomotive Group India Private Limited................India General Motors CIS.........................................Russia General Motors GmbH & Co. OHG..............................Germany General Motors Poland Spolka, zo.o.........................Poland Opel-Automobilwerk Eisenach-PKW GmbH.......................Germany Opel Bank GmbH.............................................Germany Opel Leasing GmbH........................................Germany Opel Finance Holding GmbH..................................Germany OPEL Guangzhou Precision Machining Co. Ltd.................China Opel Hellas, S.A...........................................Greece Opel Hungary Consulting Service Limited Liability Company..Hungary Opel International GmbH....................................France Opel Live GmbH.............................................Germany Opel Performance Center GmbH...............................Germany Opel Polen GmbH............................................Germany Opel Restrukturierungsgesellschaft mbH.....................Germany Opel Southeast Europe Automotive Distribution Limited Liability Company .......................................Hungary Opel Special Vehicles GmbH.................................Germany Opel Turkiye Limited Sirketi...............................Turkey Aisin GM Allison Co., Ltd....................................Japan Annunciata Corporation.......................................Delaware Argonaut Holdings, Inc.......................................Delaware Auto Lease Payment Corporation...............................Cayman Islands North American New Cars, Inc...............................Delaware Automotive Air Charter, Inc..................................Delaware Chevrolet Sociedad Anonima de Ahorro para Fines Determinados.Argentina Controladora General Motors, S.A. de C.V. ...................Mexico Electro-Motive de Mexico, S.A. de C. V. ...................Mexico General Motors de Mexico, S. de R.L. de C.V. ..............Mexico GMAC Holding S.A. de C.V...................................Mexico Sistemas Para Automotores de Mexico, S.A. de C.V. .........Mexico Convesco Vehicle Sales GmbH..................................Germany Dealership Liquidations, Inc.................................Delaware Doraville Bond Corporation...................................Delaware Electro-Motive Maintenance Operations Pty Ltd. ..............Australia EL-MO Leasing II Corporation.................................Delaware EL-MO Leasing III Corporation................................Delaware El-Mo-Mex, Inc...............................................Delaware Edmun, Inc.................................................Canada EMD Holding Corporation......................................Delaware Environmental Corporate Remediation Company, Inc.............Delaware Fiat GM Powertrain Ltda......................................Brazil GM Powertrain Ltda.........................................Brazil Opel Powertrain GmbH.......................................Germany Opel Powertrain Holding B.V................................Netherlands GMAC Auto Lease Payment Corp.................................Cayman Islands IV-10 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- GM Auslandsprojekte GmbH.....................................Germany GM Automotive Services Belgium...............................Belgium GM Auto Receivables Co. .....................................Delaware GM Automotive UK Limited.....................................England GM Credit AB.................................................Sweden GMC Truck Motors Development Corporation.....................Delaware GM-DI Leasing Corporation....................................Delaware GM-Fiat Worldwide Purchasing Opel Hungary Limited Liability Company Ltd................................................Hungary GM Imports & Trading Ltd.....................................Bermuda GM International Sales Ltd.................................Cayman Islands GM Plats (Proprietary ) Limited..............................South Africa General International Limited................................Bermuda General Motors Acceptance Corporation........................Delaware AccuTel, Inc...............................................Delaware Bankruptcy Solutions, Inc..................................Delaware Basic Credit Holding Company, L.L.C........................Delaware Nuvell Credit Corporation................................Delaware Nuvell Financial Services Corp...........................Delaware Saab Financial Services Corporation......................Delaware Capital Auto Receivables, Inc. ............................Delaware Facilities Real Estate LLC.................................Delaware GMAC, a.s. ................................................Czech Republic GMAC Arrendamiento S.A. de C.V.............................Mexico GMAC, Australia (Finance) Limited..........................Australia GMAC Bank GbmH.............................................Austria GMAC Bank Polska S.A.......................................Poland GMAC Banque S.A............................................France GMAC Bank Hungary Rt.....................................Hungary GMAC Business Credit, L.L.C................................Delaware GMAC Comercial Automotriz Chile S.A. ......................Chile GMAC Automotriz Limitada.................................Chile GMAC Commercial Corporation................................Delaware GMAC Commercial Credit LLC.................................New York Commercial Credit Land One LLC...........................New York Commercial Credit Land Two LLC...........................New York Commercial Credit Land Three LLC.........................New York GMAC Commercial Credit (HK) Limited......................Hong Kong GMAC Commercial Credit Corporation-Canada/Societe De Credit Commercial GMAC-Canada...................................Canada G.M.A.C. Comercio e Aluguer de Veiculos, Lta...............Portugal GMAC Compania Financiera S.A...............................Argentina GMAC del Ecuador S.A.......................................Ecuador GMAC d.o.o.................................................Croatia GMAC d.o.o.................................................Slovenia GMAC Insurance Holdings, Inc...............................Delaware CoverageOne Corporation / Societe Protection Premiere....Canada CoverageOne, Inc.........................................Delaware CoverageOne Purchasing Group, Inc........................Michigan GMAC RE Corp.............................................Delaware GMAC Risk Services, Inc,.................................Delaware GMAC Securities Corporation, Inc.........................Delaware GMAC Service Agreement Corporation.......................Michigan GM Motor Club, Inc.......................................North Carolina Integon Corporation......................................Delaware Motors Insurance Corporation ............................Michigan MRP Service Agreement Corporation........................Michigan SmartCoverage Insurance Agency Inc.......................Canada Trinity General Agency, Inc..............................Texas Universal Warrenty Corporation...........................Michigan GMAC International Corporation.............................Delaware GMAC International Finance B.V.............................Netherlands IV-11 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- GMAC Italia Leasing S.p.A. ................................Italy GMAC Lease B.V.............................................Netherlands GMAC Leasing Corporation ..................................Delaware Patlan Corporation ......................................Delaware GMAC Leasing Holding GmbH..................................Austria GMAC Leasing GmbH........................................Austria GMAC Mexicana, S.A. de C.V. Sociedad Financiera de Objeto Limitado Filial..........................................Mexico GMAC Mortgage Group, Inc...................................Michigan GMAC Commercial Holding Corp.............................Nevada GMAC Mortgage Holdings, Inc. ............................Delaware GMAC Residential Holding Corp............................Nevada GMAC-RFC Holding Corp. ..................................Michigan HELM Company, LLC........................................Delaware GMAC Sverige AB............................................Sweden GMAC Taiwan, Inc...........................................Delaware Standard Leasing Motors..................................Taiwan GMAC-TCFC Finance Limited..................................India General Motors Acceptance Corporation, Australia...........Delaware Holden National Leasing Limited..........................Australia General Motors Acceptance Corporation of Canada, Limited...Canada GMAC Leaseco Limited.....................................Canada General Motors Acceptance Corporation, Colombia S.A. ......Delaware G.M.A.C. Financiera de Colombia S.A. Compania de Financiamiento Comercial...............................Colombia General Motors Acceptance Corporation, Continental.........Delaware GMAC Finansiering A/S....................................Denmark GM Finance HB............................................Sweden General Motors Acceptance Corporation Hungary Commercial Limited Liability Company................................Hungary General Motors Acceptance Corporation Italia S.p.A. .......Italy General Motors Acceptance Corporation Nederland N.V. ......Netherlands GMAC Espana, Sociedad Anonima de Financiacion, E.F.C.....Spain General Motors Acceptance Corporation, North America.......Delaware General Motors Acceptance Corporation (N.Z.) Limited.......New Zealand General Motors Acceptance Corporation de Portugal - Servicos Financeiros, S.A................................Portugal General Motors Acceptance Corporation, South America.......Delaware General Motors Acceptance Corporation de Venezuela, C.A..Venezuela Servicios, Representacion y Asesoramiento de Personal Persoserv S.A..........................................Ecuador General Motors Acceptance Corporation Suisse S.A. .........Switzerland General Motors Acceptance Corporation (Thailand) Limited...Thailand Lease Auto Receivables, Inc................................Delaware Master Lease Austria GmbH..................................Germany On:Line Finance Holdings Limited...........................England Arros Finance Limited....................................England On:Line Finance Limited..................................England P.T. GMAC Lippo Finance*...................................Indonesia SA Holding One LLC.........................................Delaware SA Holding Two LLC.........................................Delaware Servicios GMAC S.A. de C.V.................................Mexico Wholesale Auto Receivables Corporation.....................Delaware * Joint Venture Partnership IV-12 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- General Motors Asia, Inc. ...................................Delaware GM Autoworld Korea Company, Ltd............................Japan General Motors Asia Pacific (Pte) Ltd........................Singapore General Motors Asia Pacific Holdings, LLC....................Delaware General Motors Automobiles Philippines, Inc..................Philippines General Motors de Argentina S.A..............................Argentina General Motors do Brasil Ltda. ..............................Brazil Banco General Motors S.A...................................Brazil Consorcio Nacional GM Ltda...............................Brazil Brazauto Industria e Comercio Ltda.........................Cayman Islands Brazauto Trading (Cayman) Limited..........................Cayman Islands Compass Investimentos e Participacoes Ltda.................Brazil GM Factoring Sociedade de Fomento Comercial Ltda. .........Brazil General Motors of Canada Limited (Active)....................Canada MOWAG Motorwagenfabrik AG..................................Switzerland Saab Automobile AB.........................................Sweden Saab Financial Auto Receivables Corp III.................Delaware General Motors Chile S.A., Industria Automotriz..............Chile General Motors China, Inc. ..................................Delaware General Motors Warehousing and Trading (Shanghai) Co. Ltd..China General Motors (China) Investment Company Limited..........China TaiJin International Automotive Distribution Co., Ltd......Taiwan General Motors Colmotores, S.A...............................Colombia General Motors Commercial Corporation........................Delaware General Motors Coordination Center N.V.......................Belgium General Motors del Ecuador S.A...............................Ecuador General Motors Europe AG.....................................Switzerland General Motors Export Corporation............................Delaware General Motors Foreign Sales Corporation.....................Virgin Islands General Motors Finance (Barbados) Ltd......................Barbados General Motors Global Industries Co. Ltd. ...................Taiwan General Motors Holding Espana, S.A...........................Spain Opel Espana de Automoviles, S.A............................Spain Opel Polska Sp. z oo.......................................Poland General Motors Holdings (U.K.) Limited.......................England Fit4Fleet Holdings (U.K.) Limited..........................England Fit4Fleet Limited........................................England General International (UK) Limited.........................England General Motors Acceptance Corporation (U.K.) plc...........England General Motors Acceptance Corporation (U.K.) Finance plc.England GMAC Leasing (U.K.) Limited..............................England GMAC Leasing (U.K.) (No. 1) Limited......................England GMAC Leasing (U.K.) (No. 2) Limited......................England GMAC Leasing (U.K.) (No. 3) Limited......................England IBC Vehicles Limited.......................................England Millbrook Land and Co. Ltd. ...............................England Millbrook Pension Management Ltd...........................England Millbrook Proving Ground Ltd. .............................England VHC Sub-Holdings (UK)......................................England Vauxhall Motors (Finance) Plc............................England Vauxhall Motors Limited..................................England General Motors India Private Limited.........................India General Motors Indonesia, Inc. ..............................Delaware General Motors Interamerica Corporation......................Delaware General Motors International Operations, Inc. ...............Delaware General Motors Investment Management Corporation.............Delaware General Motors Investment Services Company N.V. .............Belgium General Motors Japan Ltd. ...................................Japan General Motors Kenya Limited.................................Kenya General Motors Korea, Inc....................................Delaware GM Korea Co., Ltd..........................................Korea IV-13 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- General Motors Nederland B.V. ...............................Netherlands Allison Transmission Europe B.V. ..........................Netherlands General Motors Yugoslavia, d.o.o. .........................Yugoslavia Opel C&S spol. s.r.o. .....................................Czech Republic Opel Nederland B.V. .......................................Netherlands General Motors Nordiska AB...................................Sweden General Motors Norge AS......................................Norway General Motors Nova Scotia Finance Company...................Canada General Motors Nova Scotia Investments Ltd...................Canada General Motors Overseas Corporation..........................Delaware GMOC Administrative Services Corporation...................Delaware GMOC Australia Pty. Ltd. ..................................Australia General Motors Overseas Commercial Vehicle Corporation.....Delaware General Motors Venezolana, C.A. ...........................Venezuela Holden Ltd.................................................Australia General Motors-Holden's Sales Pty Limited................Australia Lidlington Engineering Company, Ltd. ......................Delaware Truck and Bus Engineering U.K., Limited....................Delaware General Motors Overseas Distribution Corporation.............Delaware GMODC Finance N.V. ........................................Netherlands Antilles General Motors Peru S.A. ....................................Peru General Motors Receivables Corporation.......................Delaware General Motors (Thailand) Ltd. ..............................Thailand General Motors Trust Company.................................New Hampshire General Motors Uruguay, S.A. ................................Uruguay General Motors U.S. Trading Corp. ...........................Nevada Hughes Electronics Corporation...............................Delaware Baja Hughes S. de R.L. de C.V..............................Mexico DIRECTV Broadband, Inc.....................................Delaware Aspen Internet Systems, Inc..............................California PDO Communications, Inc..................................California DIRECTV Global, Inc........................................Delaware DIRECTV Global Digital Media, Inc........................Delaware DIRECTV Enterprises, Inc...................................Delaware DIRECTV Customer Services, Inc...........................Delaware DIRECTV, Inc.............................................California DIRECTV Merchandising, Inc...............................Delaware DIRECTV Operations, Inc..................................California USSB II, Inc.............................................Minnesota First HNS Mauritius , Ltd..................................Mauritius Kellerton Corporation....................................Virgin Islands HNS-Clairtel CP, Inc.......................................Delaware HNS-India, Inc.............................................Delaware HNS-Mauritius Holdings...................................Mauritius HNS India Private Limited (India)..........................India HNS-India VSAT, Inc........................................Delaware HNS-Shanghai, Inc..........................................Delaware Shanghai Hughes Network Systems Co., Ltd.................China Hughes Aircraft Holdings Canada Ltd........................England Hughes-Avicom International, Inc...........................California Hughes do Brasil Electronics e Comunicacoes S.A............Brazil Hughes Electronics Foreign Sales Corporation...............Barbados Hughes Electronics International Corporation...............Delaware Hughes Electronics Realty, Inc.............................Delaware Hughes Electronics Systems International...................California Hughes Foreign Sales Corporation...........................Virgin Islands Hughes International de Mexico, S.A. de C.V. ..............Mexico HNS de Mexico, S.A. de C.V...............................Mexico Hughes Investment Management Company.......................California Hughes Network Systems Europe S.r.L........................Italy Hughes Network Systems France S.a.r.L......................France IV-14 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- Hughes Network Systems, Inc................................Delaware Hughes Network Systems International Service Company.......Delaware Hughes Network Systems Limited.............................England HOT Telecommunications, N.V..............................Netherlands Hughes Telecommunications & Space Company..................Delaware Hughes Communications, Inc...............................California Hughes Global Services, Inc..............................Delaware Interactive Distance Learning, Inc.........................Delaware One Touch Systems, Inc...................................California P.T. Hughes Network Systems Co., Ltd.......................Indonesia Holden New Zealand Limited...................................New Zealand General Motors New Zealand Pensions Limited................New Zealand IBC Pension Trustees Limited.................................England IBC Vehicles (Distribution) Limited..........................England Jennings Motors, Inc.........................................Delaware Metal Casting Technology, INC................................Delaware Motors Enterprise, Inc.......................................Delaware Motors Holding San Fernando Valley, Inc......................Delaware Multiple Dealerships Holdings of Albany, Inc.................Delaware GMRH Kansas City, Inc......................................Delaware GMRH Philadelphia, Inc.....................................Delaware GMRH Pittsburgh, Inc.......................................Delaware GMRH Seattle, Inc..........................................Delaware GMRH St. Louis, Inc........................................Delaware GMRHLA, Inc................................................Delaware Omnibus BB Transportes, S. A.................................Ecuador HOLDCORP S.A...............................................Ecuador OnStar Corporation...........................................Delaware Opel Austria GmbH............................................Austria Opel Belgium N.V. ...........................................Belgium Opel Ireland Limited.........................................Ireland Opel Italia S.p.A............................................Italy Opel Oy......................................................Finland Opel Portugal - Comerico e Industria de Veiculos S.A.........Portugal Opel Suisse S.A. ............................................Switzerland GM-Saab Communication GmbH.................................Switzerland Pims Co......................................................Delaware Premier Investment Group, Inc................................Delaware PT General Motors Indonesia..................................Indonesia Radiadores Richard, S.A......................................Argentina Renaissance Center Management Company........................Michigan Riverfront Development Corporation...........................Delaware Riverfront Holdings, Inc.....................................Delaware Riverfront Holdings Phase II, Inc............................Delaware Saab Automobile Powertrain AB................................Sweden Saab Cars USA, Inc...........................................Connecticut Saab Cars Holding Corp.......................................Delaware Saab Opel Sverige AB.........................................Sweden Saturn Corporation...........................................Delaware Daniels/Florida Automotive Group, LLC......................Delaware East Bay Auto Group, LLC...................................Delaware LDG Acquisition Corporation................................Texas Saturn Distribution Corp...................................Delaware Smith/Florida Group, LLC...................................Delaware Saturn County Bond Corporation...............................Delaware Sistemas de Compra Programada Chevrolet, CA..................Venezuela TX Holdco, LLC...............................................Delaware WRE, Inc.....................................................Michigan Grand Pointe Holdings, Inc. ...............................Michigan 342 directly or indirectly owned subsidiaries IV-15 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Companies not included in the Registrant's consolidated financial statements, for which no financial statements are submitted: 39 other directly or indirectly owned domestic and foreign subsidiaries 6 active subsidiaries 33 inactive subsidiaries 10 fifty-percent owned companies and 64 less than fifty-percent owned companies the investments in which are accounted for by the equity method. In addition, the Registrant owns 100% of the voting control of the following companies: 275 dealerships, including certain dealerships operating under dealership assistance plans, engaged in retail distribution of General Motors products 201 dealerships operating in the United States 74 dealerships operating in foreign countries * * * * * * * The number of dealerships operating under dealership assistance plans decreased by a net of 12 during 2001. Companies not shown by name, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. During 2001, there were changes in the number of subsidiaries and companies of the Registrant, as follows: 4 directly and 47 indirectly owned domestic subsidiaries, and 3 directly and 68 indirectly owned foreign subsidiaries were organized or acquired. 1 directly and 12 indirectly owned domestic subsidiaries, and 11 indirectly owned foreign subsidiaries were dissolved, sold, or spun-off. 1 domestic and 1 foreign 50% owned company were organized or acquired. A less than 50% interest was acquired in 28 companies, while interests in 8 less than 50% owned companies were terminated. 3 indirectly owned foreign subsidiaries went from 50% owned to greater than 50% owned. 1 domestic and 3 foreign companies moved from GMAC owned to GMC owned. 4 indirectly owned foreign companies were placed on the inactive list. 1 indirectly owned company went from inactive to 50% owned. 1 foreign less than 50% owned company moved to inactive. 2 domestic and 12 foreign companies moved from active to inactive companies. 1 domestic and 9 foreign companies changed ownership. There were 23 company name changes in domestic and foreign subsidiaries. * * * * * * * IV-16 EX-23 6 exhibit23.txt AUDITORS CONSENT EXHIBIT 23 GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSENT OF INDEPENDENT AUDITORS The Board of Directors General Motors Corporation: We consent to the incorporation by reference of our report on page II-19 dated January 16, 2002 (March 6, 2002 as to Note 25) and of our report on page IV-44 dated January 15, 2002 (March 7, 2002 as to Note 21) appearing in this Annual Report on Form 10-K of General Motors Corporation for the year ended December 31, 2001, in the following Registration Statements: Registration Form Statement No. Description - ---- ------------- ----------- S-3 333-75534 General Motors Corporation and GM Nova Scotia Finance Company Debt Securities, Preferred Stock, Preference Stock and Common Stock S-3 33-47343 General Motors Corporation $1-2/3 Par Value Common (Post-Effective Stock Amendment No.1) S-3 33-49035 General Motors Corporation $1-2/3 Par Value Common (Amendment No.1) Stock S-3 33-56671 General Motors Corporation $1-2/3 Par Value Common (Amendment No.1) Stock S-3 33-49309 General Motors Corporation Dividend Reinvestment Plan S-3 333-45104 General Motors Corporation $1-2/3 Par Value Common Stock S-8 333-47198 The General Motors Personal Savings Plan for Hourly-Rate Employees in the United States S-8 333-90097 General Motors Stock Incentive Plan S-8 333-47204 General Motors Savings-Stock Purchase Program for Salaried Employees in the United States S-8 333-76441 The Hughes Non-Bargaining Employees Thrift and Savings Plan The Hughes Bargaining Employees Thrift and Savings Plan S-8 333-74488 The GMAC Mortgage Group Savings Incentive Plan S-8 333-90087 Hughes Electronics Corporation Incentive Plan S-8 333-47200 Saturn Individual Savings Plan for Represented Members S-8 333-17937 Saturn Personal Choices Savings Plan for Non-Represented Members S-8 333-44957 General Motors 1998 Stock Option Plan S-8 333-66653 ASEC Manufacturing Savings Plan S-8 333-31846 General Motors Deferred Compensation Plan for Executive Employees S-8 333-55118 The GMAC Insurance Personal Lines Retirement Savings Plan S-8 333-55122 The Holden Employee Share Ownership Plan /s/DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Detroit, Michigan March 12, 2002 IV-17 EX-99 7 exhibit99.txt HUGHES ELECTROINCS INFORMATION EXHIBIT 99 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, ---------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in Millions) Consolidated Statements of Operations Data: Total revenues $8,262.0 $7,287.6 $5,560.3 Total operating costs and expenses 9,019.8 7,641.7 5,974.8 -------- -------- -------- Operating loss (757.8) (354.1) (414.5) Other expenses, net (231.9) (461.5) (245.5) Income tax benefit 325.6 406.1 236.9 Minority interests in net losses of subsidiaries 49.9 54.1 32.0 -------- -------- -------- Loss from continuing operations before cumulative effect of accounting change (614.2) (355.4) (391.1) Income from discontinued operations, net of taxes -- 36.1 99.8 Gain on sale of discontinued operations, net of taxes -- 1,132.3 -- Cumulative effect of accounting change, net of taxes (7.4) -- -- -------- -------- -------- Net income (loss) (621.6) 813.0 (291.3) Adjustment to exclude the effect of GM purchase accounting 3.3 16.9 21.0 Preferred stock dividends (96.4) (97.0) (50.9) -------- -------- -------- Earnings (Loss) Used for Computation of Available Separate Consolidated Net Income (Loss) $ (714.7) $ 732.9 $ (321.2) ======== ======== ========
- ------------------- IV-18 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) SELECTED SEGMENT DATA
Years Ended December 31, ------------------------------- 2001 2000 1999 --------- --------- --------- (Dollars in Millions) Direct-To-Home Broadcast Total Revenues $ 6,304.4 $ 5,238.0 $ 3,785.0 Operating Loss (749.9) (557.9) (289.6) EBITDA(1) (74.8) (24.5) 22.4 Depreciation and Amortization 675.1 533.4 312.0 Segment Assets 9,484.1 9,278.3 8,452.2 Capital Expenditures 734.3 913.5 516.9 Satellite Services Total Revenues $ 870.1 $ 1,023.6 $ 810.6 Operating Profit 165.3 356.6 338.3 Operating Profit Margin 19.0% 34.8% 41.7% EBITDA(1) $ 580.0 $ 694.0 $ 618.8 EBITDA Margin(1) 66.7% 67.8% 76.3% Depreciation and Amortization $ 414.7 $ 337.4 $ 280.5 Segment Assets 6,296.8 6,178.4 5,984.7 Capital Expenditures 338.2 449.5 956.4 Network Systems Total Revenues $ 1,325.8 $ 1,409.8 $ 1,384.7 Operating Loss (171.8) (63.5) (234.1) EBITDA(1) (111.8) 0.1 (156.7) Depreciation and Amortization 60.0 63.6 77.4 Segment Assets 2,339.1 1,789.9 1,167.3 Capital Expenditures 664.6 369.5 175.0 Eliminations and Other Total Revenues $ (238.3) $ (383.8) $ (420.0) Operating Loss (1.4) (89.3) (229.1) EBITDA(1) (3.5) (75.6) (220.1) Depreciation and Amortization (2.1) 13.7 9.0 Segment Assets 1,090.1 2,032.7 2,992.8 Capital Expenditures 6.4 (16.4) 17.0 Total Total Revenues $ 8,262.0 $ 7,287.6 $ 5,560.3 Operating Loss (757.8) (354.1) (414.5) EBITDA(1) 389.9 594.0 264.4 EBITDA Margin(1) 4.7% 8.2% 4.8% Depreciation and Amortization $ 1,147.7 $ 948.1 $ 678.9 Total Assets 19,210.1 19,279.3 18,597.0 Capital Expenditures 1,743.5 1,716.1 1,665.3
- ------------------- (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. IV-19 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) The following discussion excludes purchase accounting adjustments related to General Motors' acquisition of Hughes. Proposed Merger Transaction On October 28, 2001, Hughes Electronics Corporation ("Hughes") and General Motors Corporation ("GM"), together with EchoStar Communications Corporation ("EchoStar"), announced the signing of definitive agreements that provide for the split-off of Hughes (or a company holding all of the capital stock of Hughes) from GM and the combination of the Hughes business with EchoStar by means of a merger (the "Merger"). The surviving entity is sometimes referred to as New EchoStar. The Merger is subject to a number of conditions and no assurances can be given that the transactions will be completed. See further discussion of the Merger below in "Acquisitions, Investments and Divestitures - Merger Transaction." The financial and other information regarding Hughes contained in this Annual Report do not give any effect to or make any adjustment for the anticipated completion of the Merger. Use of Estimates in the Preparation of the Consolidated Financial Statements The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported therein, including the financial information reported in Management's Discussion and Analysis of Financial Condition and Results of Operations. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. The following represent what Hughes believes are the critical accounting policies most affected by significant management estimates and judgements: Valuation of Long-Lived Assets. Hughes evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal. The cash flows used in such analyses are typically derived from the expected cash flows associated with the asset under review, which is determined from management estimates and judgments of expected future results. Should the actual cash flows vary from the estimated amount, a write-down of the asset may be warranted in a future period. Financial Instruments and Investments. Hughes maintains investments in equity securities of unaffiliated companies. Marketable equity securities are considered available-for-sale and carried at current fair value based on quoted market prices with unrealized gains or losses (excluding other-than-temporary losses), net of taxes, reported as part of accumulated other comprehensive income (loss) ("OCI"), a separate component of stockholder's equity. Hughes continually reviews its investments to determine whether a decline in fair value below the cost basis is "other-than-temporary." Hughes considers, among other factors: the magnitude and duration of the decline; the financial health of and business outlook of the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors; and Hughes' intent and ability to hold the investment. If the decline in fair value is judged to be other-than-temporary, the cost basis of the security is written-down to fair value and the amount recognized in the statement of operations as part of "Other, net." Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover an investments carrying value, thereby possibly requiring a charge in a future period. Contingent Matters. A significant amount of management estimate and judgement is required in determining when, or if, an accrual should be recorded for a contingent matter, particularly for those contingent matters described in "Commitments and Contingencies" below and in Note 20 to the consolidated financial statements, and the amount of such accrual, if any. Due to the uncertainty of determining the likelihood of a future event occurring and IV-20 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) the potential financial statement impact of such an event, it is possible that upon further development or resolution of a contingent matter, a charge could be recorded in a future period that would be material to Hughes' continuing operations and financial position. 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 all prior years presented. This transaction is discussed more fully in Note 17 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 known 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. The DIRECTV U.S. operations were significantly affected during 1999 with Hughes' acquisition of the direct broadcast satellite medium-power business of PRIMESTAR in April 1999 and Hughes' acquisition of United States Satellite Broadcasting Company, Inc. ("USSB"), a provider of premium subscription programming services, in May 1999. DIRECTV transitioned a total of about 1.5 million of the 2.3 million PRIMESTAR subscribers acquired through the shut-down of the business at September 30, 2000. As a result of the USSB acquisition, Hughes acquired the rights to distribute and offer 25 channels of video programming to DIRECTV's subscribers, including premium networks such as HBO(R), Showtime(R), Cinemax(R) and The Movie Channel(R). The results of operations for PRIMESTAR, USSB and Telocity have been included in Hughes' financial information since their dates of acquisition. See Note 17 to the consolidated financial statements and "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures" below, for further discussion of these transactions. In the fourth quarter of 1999, DIRECTV U.S. began providing local broadcast network services to its subscribers and as of December 31, 2001 was offering those services in 41 U.S. markets representing approximately 60 million television households or 56% of total U.S. television households. During the fourth quarter of 2001, DIRECTV successfully launched and commenced service of the DIRECTV 4S spot beam satellite at 101 degrees west longitude. DIRECTV 4S enabled DIRECTV to increase its capacity to about 750 channels, which resulted in more than 300 local channels being added to its existing local channel programming in the 41 U.S. markets, and comply with the federal "must carry" provisions of the Satellite Home Viewer Improvement Act of 1999. The "must carry" provisions obligate DIRECTV and other direct-to-home operators to carry all local channels in any market where the direct-to-home operator broadcasts any local channels. During the first quarter of 2002 DIRECTV announced that with the expected launch of the DIRECTV 5 satellite it would expand its local channel offerings to an additional 10 markets by the end of 2002. This will bring the total number of markets capable of receiving local channels to 51, reaching approximately 62% of all television households in the United States. The operating results for the Latin America DIRECTV businesses are comprised of DIRECTV Latin America, LLC ("DLA"), Hughes' 74.7% owned subsidiary that provides DIRECTV(R) programming to local operating companies located in Latin America and the Caribbean Basin; the exclusive distributors of DIRECTV located in Mexico, Brazil, Argentina, Colombia, Trinidad and Tobago and Uruguay; and SurFin Ltd. ("SurFin"), a company that provides financing of subscriber receiver equipment to certain DLA local operating companies. The non-operating results of the Latin America DIRECTV businesses include Hughes' share of the results of unconsolidated local operating companies that are the exclusive distributors of DIRECTV in Venezuela and Puerto Rico. During 2001, Hughes began recording 100% of the losses incurred by DLA and certain other affiliated local operating companies due to the accumulation of operating losses in excess of the minority investors investment and Hughes' continued funding of those businesses. In May 2001, due to the acquisition of a majority interest of Galaxy Entertainment Argentina S.A. ("GEA"), DLA began to consolidate the results of GEA. Previously, DLA's interest in GEA was accounted for under the equity IV-21 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) method. The GEA transaction and other DLA transactions are discussed below in "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures-- Acquisitions and Investments." In the fourth quarter of 2001, DLA recognized a $29.1 million charge to operations due to the devaluation of the Argentinean Peso. Also in 2001, DLA secured the exclusive rights to broadcast and re-sell the FIFA World Cup soccer competitions, occurring in 2002 and 2006, in Argentina, Chile, Colombia, Mexico, Uruguay and Venezuela. Because of the World Cup's popularity across Latin America, DLA expects World Cup soccer to be an important differentiator of its service and a key subscriber acquisition tool. The costs of the live sporting events, which is contingent upon the events occurring, will result in higher operating costs in the period the events are broadcast. As a result, the cost of the events of $145 million and $267 million will be charged to operations in the second quarters of 2002 and 2006, respectively. A loss may result to the extent the costs of the events are not recovered from incremental revenues from pay-per-view sales to subscribers and the re-sale of broadcast rights to third parties. Also included as part of the non-operating results of the Direct-To-Home Broadcast segment is DIRECTV Japan Management, Inc., DIRECTV Japan, Inc., certain related companies (collectively "DIRECTV Japan") and Hughes affiliates that provided DIRECTV services in Japan. DIRECTV Japan's operations were discontinued and it ceased broadcasting on September 30, 2000. See Note 17 to the consolidated financial statements and "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures" below, for further discussion. The Satellite Services segment represents the results of PanAmSat Corporation ("PanAmSat"), Hughes' approximately 81% owned subsidiary. PanAmSat is a leading provider of video, broadcasting and network services via satellite. PanAmSat leases capacity on its satellites, which it owns and operates, to its customers and delivers entertainment and information to cable television systems, television broadcast affiliates, direct-to-home 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 represents the results of Hughes Network Systems ("HNS"), which is a leading supplier of broadband satellite services and products. HNS designs, manufactures and installs advanced networking solutions for businesses and governments worldwide using very small aperture terminals ("VSATs"). HNS is a premier broadband products and services company with particular emphasis on providing broadband access. HNS is also a leading supplier of DIRECTV(TM) receiving equipment (set-top boxes and antennas). In January 2000, Hughes announced the discontinuation of its mobile cellular and narrowband local loop product lines at HNS. As a result of this decision, HNS recorded a fourth quarter 1999 pre-tax charge to continuing operations of $272.1 million. The charge represents the write-off of receivables and inventories, licenses, software and equipment with no alternative use. During 2001, Hughes announced a nearly 10% reduction of its approximately 7,900 employees, excluding DIRECTV customer service representatives, located in the United States. As a result 750 employees, across all business disciplines, were given notification of termination that resulted in a charge to operations of $87.5 million. Of that charge, $80.0 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. As of December 31, 2001, 668 employees had been terminated with the remaining employees expected to be terminated in the first quarter of 2002. The remaining accrual for employee severance and other costs amounted to $32.7 million and $4.7 million, respectively, at December 31, 2001. On October 12, 2001, Hughes reached a settlement with Raytheon Company ("Raytheon") on a purchase price adjustment related to the 1997 spin-off of Hughes' defense electronics business and the subsequent merger of that business with Raytheon. Under the terms of the settlement, Hughes agreed to reimburse Raytheon $635.5 million of the original $9.5 billion purchase price. Hughes paid $500 million of the settlement amount in October 2001 and the remainder was paid subsequent to December 31, 2001. In the third quarter of 2001, Hughes recorded a decrease to "Capital stock and additional paid-in capital" of $574.2 million because of the settlement. IV-22 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) Satellite Fleet Hughes has a fleet of 27 satellites, six owned by DIRECTV and 21 owned and operated by PanAmSat. Hughes' satellite fleet was expanded in the first quarter of 2000 with PanAmSat's launch and commencement of service of the Galaxy XR satellite, which provides voice and data communication services and cable programming throughout the United States as well as services for satellite-based telecommunications networks. In the second quarter of 2000, PanAmSat commenced service of the Galaxy XI satellite, which provides expansion and backup services for PanAmSat's Galaxy(R) cable neighborhood customers, and successfully launched Galaxy IVR, a replacement satellite for Galaxy IV. In the third quarter of 2000, PanAmSat successfully launched PAS-9, which delivers premium broadcast, Internet and data services throughout North and South America, the Caribbean and Europe. In the fourth quarter of 2000, PanAmSat successfully launched PAS-1R, which offers expanded and enhanced video and data broadcasting as well as broadband Internet services throughout the Americas, the Caribbean, Europe and Africa. Also during 2000, PanAmSat completed the planned retirement of its SBS-4 and SBS-5 satellites. In the first quarter of 2001, PanAmSat commenced service on the PAS-1R satellite. In the second quarter of 2001, PanAmSat launched and commenced service on its PAS-10 satellite. PAS-10 succeeded PAS-4, which was moved and put into service at a new orbital location. PAS-10 is located within the Company's Indian Ocean Region cable neighborhood and offers more robust C-band capacity as well as higher Ku-band transmission power for video and high-speed Internet and data applications throughout Europe, Asia, the Middle East and Africa. In the fourth quarter of 2001, DIRECTV launched and commenced service of DIRECTV 4S, a powerful new spot beam satellite that enables DIRECTV to provide hundreds of additional local channels to television households across the country. PanAmSat expects to add additional satellites as part of its construction and launch strategy. 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 strategy, six satellites have been successfully launched since December 1999 and six additional satellites are currently under construction. PanAmSat expects to launch two of these satellites in 2002, two in early 2003, and one to replace Galaxy IR prior to the end of its useful life in 2006. The sixth satellite will be available as a replacement or in-orbit spare. DIRECTV U.S. currently has one satellite under construction, the DIRECTV 7S satellite, a high-powered spot-beam satellite, which is expected to be launched in the second half of 2003. DIRECTV 7S will be positioned at 119 degrees west longitude and will provide additional capacity enabling DIRECTV to further expand its local channel coverage. Also, the already constructed high-power DIRECTV 5 satellite is expected to be launched in mid-2002 to replace DIRECTV 6 at 119 degrees west longitude. DIRECTV 6 will then serve as a back-up at 119 degrees west longitude. Other 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. Results of Operations 2001 compared to 2000 Overall Revenues. Revenues increased 13.4% to $8,262.0 million in 2001 compared with $7,287.6 million in 2000. The increase in revenues resulted primarily from $1,066.4 million of higher revenues at the Direct-To-Home Broadcast segment over 2000. This increase was due primarily to the addition of about 1.5 million net new DIRECTV subscribers in the United States and Latin America since December 31, 2000 and the added revenues from the consolidation of GEA beginning in May 2001. The increased revenues from the Direct-To-Home Broadcast segment were partially offset by a decrease in revenues of $153.5 million at the IV-23 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) Satellite Services segment and $84.0 million at the Network Systems segment. The decrease in revenues from the Satellite Services segment was principally due to a lower volume of new outright sales and sales-type lease transactions executed during 2001 compared to 2000. The decrease in revenues from the Network Systems segment was principally due to decreased shipments of DIRECTV(TM) receiving equipment that resulted from DIRECTV completing the conversion of the PRIMESTAR By DIRECTV customers to the DIRECTV service in the third quarter of 2000. Operating Costs and Expenses. Operating costs and expenses increased to $9,019.8 million in 2001 from $7,641.7 million in 2000. Broadcast programming and other costs increased by $441.4 million during 2001 due to higher costs at the Direct-To-Home Broadcast segment, resulting from the increase in subscribers and added costs from DIRECTV Broadband. 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 $85.1 million in 2001 from 2000 mainly due to higher costs associated with a mobile telephony contract and increased costs associated with the DIRECWAY service at the Network Systems segment. Selling, general and administrative expenses increased by $652.0 million in 2001 from 2000 due primarily to higher subscriber acquisition and marketing costs at the Direct-To-Home Broadcast segment in both the United States and Latin America, added costs from DIRECTV Broadband, and the $87.5 million charge related to the 2001 company-wide employee reductions. Depreciation and amortization increased by $199.6 million in 2001 over 2000 due primarily to the addition of property and satellites since December 31, 2000, a reduction 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 added goodwill amortization and depreciation that resulted from the DIRECTV Broadband and GEA transactions. EBITDA. EBITDA is defined as operating profit (loss), plus depreciation and amortization. EBITDA is not presented as an alternative measure of operating results or cash flow from operations, as determined in accordance with 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 2001 was $389.9 million and EBITDA margin was 4.7%, compared to EBITDA of $594.0 million and EBITDA margin of 8.2% for 2000. The change in EBITDA and EBITDA margin resulted from lower EBITDA at the Satellite Services segment principally due to decreased new outright sales and sales-type lease transactions executed during 2001 compared to 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(R) services and decreased shipments of DIRECTV receiving equipment; and lower EBITDA at the Direct-To-Home Broadcast segment due to negative EBITDA from DIRECTV Broadband and the company-wide $87.5 million charge primarily related to severance. Operating Loss. Hughes' operating loss was $757.8 million in 2001, compared to $354.1 million in 2000. The increased operating loss resulted from the decrease in EBITDA and the higher depreciation and amortization expense discussed above. Interest Income and Expense. Interest income increased to $56.7 million in 2001 compared to $49.3 million in 2000 due to an increase in cash and cash equivalents that resulted from the sale of the satellite businesses in October of 2000. Interest expense decreased to $195.9 million in 2001 from $218.2 million in 2000. The lower interest expense resulted primarily from lower average outstanding borrowings. Interest expense is net of capitalized interest of $76.3 million and $82.4 million in 2001 and 2000, respectively. 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 $92.7 million in 2001 from a net expense of $292.6 million in 2000. Other, net for 2001 resulted primarily from equity method losses of $61.3 million, a write-down of $212.0 million related to the Sky Perfect investment, partially offset by $130.6 million of net gains from the sale of certain marketable equity securities and the reversal of $32.0 million of accrued exit costs related to the IV-24 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) DIRECTV Japan business (see further discussion in "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures"). Including the write- down of the Sky Perfect investment, Hughes recognized $226.1 million of write-downs related to other-than-temporary declines in the fair value of equity investments in 2001. The net expense in 2000 included $164.2 million of equity method losses and $128.4 million of costs related to the exit of the DIRECTV Japan business. The change in equity method losses in 2001 compared to 2000 resulted from lower losses at DIRECTV Japan due to the shutdown of the business at September 30, 2000. Income Taxes. Hughes recognized an income tax benefit of $325.6 million in 2001 compared to $406.1 million in 2000. The lower tax benefit in 2001 was primarily due to an additional tax benefit in 2000 associated with the write-off of Hughes' historical investment in DIRECTV Japan as well as the effect of favorable tax settlements recorded in 2000. The 2000 tax benefits were partially offset by higher pre-tax losses in 2001 compared to 2000 and a 2001 tax benefit resulting from the write-off of an investment in Motient Corporation ("Motient"). For further discussion, see below in "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures." Loss from Continuing Operations. Hughes reported a loss from continuing operations before cumulative effect of accounting change of $614.2 million in 2001, compared to $355.4 million in 2000. For a discussion of the Satellite Businesses that Hughes sold to Boeing in October 2000, which comprise the discontinued operations for 2000 and 1999, see "Results of Operations--2000 compared to 1999--Discontinued Operations." Cumulative Effect of Accounting Change. Hughes adopted Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, on July 1, 2001. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and prohibits the amortization of goodwill and intangible assets with indefinite lives acquired thereafter. The adoption of SFAS No. 141 did not have a significant impact on Hughes' consolidated results of operations or financial position. Hughes adopted 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 OCI. SFAS No. 133 requires Hughes to carry all derivative financial instruments on the balance sheet at fair value based on quoted market prices. 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 the statement of operations 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. Direct-To-Home Broadcast Segment Direct-To-Home Broadcast segment revenues increased 20.4% to $6,304.4 million in 2001 from $5,238.0 million in 2000. The Direct-To-Home Broadcast segment had negative EBITDA of $74.8 million in 2001 compared with negative EBITDA of $24.5 million in 2000. The operating loss for the segment increased to $749.9 million in 2001 from $557.9 million in 2000. United States. The DIRECTV U.S. businesses were the biggest contributors to the segment's revenue growth with revenues of $5,550 million in 2001, an 18% increase over 2000 revenues of $4,694 million. The large increase in revenues resulted primarily from an increased number of DIRECTV subscribers since December 31, 2000. The DIRECTV U.S. businesses added 1.3 million net new subscribers in 2001, compared to 1.8 million net new subscribers in 2000. In addition, during the third quarter of 2001, DIRECTV made a one-time downward adjustment of approximately 143,000 subscribers. This adjustment corrected IV-25 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) errors that had accumulated over the preceding 18 months related to subscribers who disconnected service prior to June 30, 2001 but were counted as active subscribers in DIRECTV's database. As of December 31, 2001, DIRECTV had about 10.7 million high-power subscribers compared to about 9.5 million high-power subscribers at December 31, 2000. Average monthly revenue per subscriber was $56.10 and $55.30 in 2001 and 2000, respectively. EBITDA was $160 million in 2001 compared to $151 million in 2000. The operating loss in 2001 for the DIRECTV U.S. businesses was $279 million compared to $244 million in 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 related to 2001 employee reductions. The higher operating loss was principally due to increased depreciation primarily associated with customer leased DIRECTV receiving equipment. Latin America. Revenues for the Latin America DIRECTV businesses increased 34% to $727 million in 2001 from $541 million in 2000. The increase in revenues was primarily due to continued subscriber growth as well as the consolidation of GEA. Subscribers grew to 1.6 million at December 31, 2001 compared to 1.3 million in 2000. Latin America DIRECTV added 305,000 net new subscribers in 2001, compared to 501,000 net new subscribers added in 2000. During 2001 and 2000, the average revenue per subscriber for the Latin American businesses was about $43 and $45 per month, respectively, of which approximately $34 and $36 was generated from monthly programming subscriptions, respectively, with the remainder derived from fees associated with leased equipment. EBITDA was a negative $132 million in 2001 compared to negative EDITDA of $171 million in 2000. The change in EBITDA resulted primarily from the increased revenues discussed above, partially offset by a $29 million charge for the recent devaluation of the Argentinean peso, higher marketing costs and a $10 million charge related to 2001 employee reductions. The Latin America DIRECTV businesses incurred an operating loss of $331 million in 2001 compared to an operating loss of $309 million in 2000. The increased operating loss resulted from higher depreciation expense due to an increase in customer leased DIRECTV receiving equipment and amortization of goodwill that resulted primarily from the GEA transaction. DIRECTV Broadband. Revenues and EBITDA for DIRECTV Broadband were $27 million and negative $106 million for 2001, respectively. DIRECTV Broadband incurred an operating loss of $143 million for 2001. Since its April 3, 2001 acquisition, DIRECTV Broadband has added about 26,500 net subscribers. Net subscriber additions were negatively impacted by customer churn that resulted from the bankruptcy of two wholesale providers of DSL services. At December 31, 2001, DIRECTV Broadband had more than 91,000 residential broadband subscribers in the United States. Satellite Services Segment Revenues for the Satellite Services segment in 2001 decreased $153.5 million to $870.1 million from $1,023.6 million in 2000. 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 $67.9 million in 2001 compared to $243.3 million for 2000. Revenues from operating leases of transponders, satellite services and other were 92.2% of total 2001 revenues and increased by 2.8% to $802.2 million from $780.3 million in 2000. Generally, revenues from outright sales and sales-type lease agreements, equal to the net present value of the future minimum lease payments, are recognized at service commencement. Interest income from sales-type leases is recognized over the lease term. Revenues from operating leases are recognized monthly on a straight-line basis over the lease term. EBITDA in 2001 was $580.0 million compared to $694.0 million in 2000. 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 charge related to 2001 employee reductions. EBITDA margin for 2001 was 66.7% compared to 67.8% in 2000. The decrease in EBITDA margin was due to the lower sales and higher operating costs. Operating profit was $165.3 million for 2001, compared to $356.6 million in 2000. The decrease in operating profit resulted from the decrease in EBITDA and higher depreciation expense related to additional satellites placed into service since December 31, 2000, and increased depreciation expense that resulted from a reduction 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. IV-26 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) Backlog for the Satellite Services segment, which consists primarily of operating leases on satellite transponders, was about $5.8 billion in 2001 compared to about $6.0 billion in 2000. Network Systems Segment Revenues for the Network Systems segment decreased by 6.0% to $1,325.8 million in 2001 from $1,409.8 million in 2000. The lower revenues resulted primarily from decreased shipments of DIRECTV receiver equipment, which totaled about 2.0 million units in 2001 compared to about 3.0 million units in 2000, due primarily to DIRECTV completing the conversion of PRIMESTAR By DIRECTV customers to the DIRECTV service in the third quarter of 2000. The Network Systems segment reported negative EBITDA of $111.8 million for 2001 compared to EBITDA of $0.1 million in 2000. The Network Systems segment had an operating loss of $171.8 million in 2001 compared to an operating loss of $63.5 million in 2000. The change in EBITDA and operating loss resulted from increased costs associated with the rollout of new DIRECWAY services, including AOL Plus Powered by DIRECWAY and the decreased revenues discussed above. Backlog for the Network Systems segment, which consists primarily of private business networks and satellite-based mobile telephony equipment orders, was about $0.5 billion in 2001 compared to about $1.2 billion in 2000. Eliminations and Other The elimination of revenues decreased to $238.3 million in 2001 from $383.8 million in 2000 due primarily to the decline in intercompany purchases of DIRECTV receiving equipment and lower manufacturing subsidies paid by DIRECTV to HNS. Intercompany transactions include sales of receiving equipment from HNS to DIRECTV, and PanAmSat transponder leases to HNS and DIRECTV Latin America. Operating losses from "eliminations and other" improved to $1.4 million in 2001 from $89.3 million in 2000 due primarily to decreased corporate expenditures for employee benefits and lower margins on intercompany sales. 2000 compared to 1999 Overall Revenues. Revenues increased 31.1% to $7,287.6 million in 2000 compared with $5,560.3 million in 1999. The increased revenues resulted primarily from the Direct-To-Home Broadcast segment, which reported $1,453.0 million of higher revenues over 1999, and the Satellite Services segment, which reported $213.0 million of additional revenues from 1999. The higher revenues from the Direct-To-Home Broadcast segment resulted from the addition of about 2.3 million net new subscribers in the United States and Latin America since December 31, 1999 and added revenues from the PRIMESTAR By DIRECTV and premium channel services. The higher revenues from the Satellite Services segment resulted primarily from outright sales and sales-type lease transactions executed during 2000. Operating Costs and Expenses. Operating costs and expenses increased to $7,641.7 million in 2000 from $5,974.8 million in 1999. Broadcast programming and other costs increased by $773.8 million during 2000 due to higher costs at the Direct-To-Home Broadcast segment, resulting from the increase in subscribers and added costs for the premium channel services, and costs associated with the outright sales and sales-type leases at the Satellite Services segment. Costs of products sold decreased by $146.5 million in 2000 from 1999 mainly due to higher 1999 costs, which included a write-off of $91.5 million of inventory associated with the discontinuation of certain narrowband wireless product lines and the completion of several contracts at the Network Systems segment. Selling, general and administrative expenses increased by $770.4 million in 2000 from 1999 due primarily to higher marketing costs at the Direct-To-Home Broadcast segment resulting from increased subscriber growth in both the United States and Latin America, partially offset by a 1999 charge of $180.6 million at the Network Systems segment resulting from the write-off of receivables, licenses and equipment associated with the discontinuation of certain narrowband wireless product lines. Depreciation and amortization increased by $269.2 million in 2000 over 1999 due primarily to 1999 acquisitions, discussed more fully in "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures." IV-27 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) EBITDA for 2000 was $594.0 million and EBITDA margin was 8.2%, compared to EBITDA of $264.4 million and EBITDA margin of 4.8% for 1999. The large change resulted from the Network Systems segment, which experienced slightly positive EBITDA in 2000 compared to a large negative EBITDA in 1999 due to the $272.1 million charge in 1999 associated with the discontinuation of certain narrowband wireless product lines; higher EBITDA at the Satellite Services segment due to the increased outright sales and sale-type lease activity; partially offset by the Direct-To-Home Broadcast segment's EBITDA loss in 2000 compared to positive EBITDA for 1999 that resulted from increased losses at DIRECTV Latin America. The higher EBITDA margin in 2000 was mainly attributable to the 1999 EBITDA margin being negatively affected by the charge for the discontinuation of certain narrowband wireless product lines. The EBITDA margin for 2000 was negatively affected by increased losses at the Direct-To-Home Broadcast segment and lower margins associated with the Satellite Service segment's outright sales and sales-type leases. Operating Loss. Hughes' operating loss was $354.1 million in 2000, compared to $414.5 million in 1999. This decrease resulted from the improvement in EBITDA, which more than offset increased depreciation and amortization expense. Interest Income and Expense. Interest income increased to $49.3 million in 2000 compared to $27.0 million in 1999 due to an increase in cash and cash equivalents that resulted from the sale of the Satellite Businesses. Interest expense increased to $218.2 million in 2000 from $122.7 million in 1999. This increase primarily resulted from higher average outstanding borrowings and a full year of interest expense associated with liabilities for above-market programming contracts assumed in the acquisitions of PRIMESTAR and USSB. Interest expense is net of capitalized interest of $82.4 million and $65.1 million in 2000 and 1999, respectively. 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 a net expense of $292.6 million in 2000 from a net expense of $149.8 million in 1999. The net expense in 2000 included $164.2 million of equity method losses and $128.4 million of costs related to the exit of the DIRECTV Japan business, which is discussed below in "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures." The net expense for 1999 included $189.2 million of equity method losses offset by a gain of $39.4 million from the sale of Hughes Software Systems Private Limited securities. The change in equity method losses in 2000 compared to 1999 resulted from lower losses at DIRECTV Japan due to the shutdown of the business at September 30, 2000. Income Taxes. Hughes recognized a tax benefit of $406.1 million in 2000 compared to $236.9 million in 1999. The 2000 tax benefit reflects the tax benefit associated with the write-off of Hughes' historical investment in DIRECTV Japan and the higher pre-tax losses compared to 1999. Loss from Continuing Operations. Hughes reported a loss from continuing operations of $355.4 million in 2000, compared to $391.1 million in 1999. Discontinued Operations. Revenues for the Satellite Businesses decreased to $1,669.3 million in 2000 from $2,240.7 million in 1999. Revenues, excluding intercompany transactions, were $1,260.1 million in 2000 compared to $1,780.4 million in 1999. The 1999 results include a full year of revenues, while 2000 only includes revenues through October 6, 2000, the date of sale. The Satellite Businesses reported operating profit of $87.6 million in 2000 compared to $152.5 million in 1999. Operating profit, excluding intercompany transactions, amounted to $59.3 million in 2000 compared to $142.7 million in 1999. The 1999 results included a one-time pre-tax charge of $178.0 million before intercompany transactions and $125.0 million after intercompany transactions that resulted from increased development costs and schedule delays on several new product lines, a one-time pre-tax charge of $81.0 million resulting from the termination of a customer contract and decreased activity associated with ICO Global Communications (Operations) Ltd., partially offset by a $154.6 million pre-tax gain related to the settlement of a patent infringement case. Additionally, the 1999 results include a full year of operating results, while 2000 only includes operating results through October 6, 2000, the date of sale. Income from discontinued operations, net of taxes, was $36.1 million in 2000 compared to $99.8 million in 1999. Accounting Change. In September 1999, the Financial Accounting Standards Board ("FASB") issued Emerging Issues Task Force Issue 99-10 ("EITF 99-10"), Percentage Used to Determine the Amount of Equity Method Losses. EITF 99-10 addresses the percentage of ownership that should be used to compute equity IV-28 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) method losses when the investment has been reduced to zero and the investor holds other securities of the investee. EITF 99-10 requires that equity method losses should not be recognized solely on the percentage of common stock owned; rather, an entity-wide approach should be adopted. Under such an approach, equity method losses must be recognized based on the ownership level that includes other equity securities (e.g., preferred stock) and loans/advances to the investee or based on the change in the investor's claim on the investee's book value. Hughes adopted EITF 99-10 during the third quarter of 1999 which resulted in Hughes recording a higher percentage of DIRECTV Japan's losses subsequent to the effective date of September 23, 1999. The unfavorable impact of adopting EITF 99-10 was $39.0 million after-tax. Direct-To-Home Broadcast Segment Direct-To-Home Broadcast segment revenues increased 38.4% to $5,238.0 million in 2000 from $3,785.0 million in 1999. The Direct-To-Home Broadcast segment had negative EBITDA of $24.5 million in 2000 compared with positive EBITDA of $22.4 million in 1999. The operating loss for the segment increased to $557.9 million in 2000 from $289.6 million in 1999. United States. The DIRECTV U.S. businesses were the biggest contributors to the segment's revenue growth with revenues of $4,694 million in 2000, a 38% increase over 1999 revenues of $3,405 million. The large increase in revenues resulted primarily from an increased number of DIRECTV subscribers and added revenues from PRIMESTAR By DIRECTV and premium channel services. As of December 31, 2000, high-power DIRECTV subscribers totaled approximately 9.5 million compared to about 6.7 million at December 31, 1999. In addition to the high-power subscribers, there were also 1.3 million PRIMESTAR By DIRECTV medium-power subscribers at December 31, 1999. The large increase in high-power subscribers resulted from the addition of about 1.8 million net new subscribers to the DIRECTV service in 2000, a 14% growth rate over the 1.6 million net new subscribers added in 1999, and the conversion of about 1 million PRIMESTAR By DIRECTV medium-power subscribers to the high-power DIRECTV service in 2000. DIRECTV shut down the PRIMESTAR By DIRECTV medium-power service on September 30, 2000. Average monthly revenue per subscriber was $55.30 and $54.10 in 2000 and 1999, respectively. EBITDA was $151 million in 2000 compared to $150 million in 1999. The operating loss in 2000 for the DIRECTV U.S. businesses was $244 million compared to $99 million in 1999. The slight increase in EBITDA was due to the increased revenues discussed above offset by increased subscriber acquisition and programming costs associated with the record subscriber growth. The increased operating loss was principally due to increased amortization of goodwill and intangibles that resulted from the PRIMESTAR and USSB acquisitions. Latin America. Revenues for the Latin America DIRECTV businesses increased 72% to $541 million in 2000 from $315 million in 1999. The increase in revenues reflects an increase in subscribers and the consolidation of the Galaxy Brasil, Ltda. ("GLB") business. Subscribers grew to 1.3 million at December 31, 2000 compared to 0.8 million in 1999. Latin America DIRECTV added 501,000 net new subscribers in 2000, a 56.6% increase over the 320,000 net new subscribers added in 1999. In both 2000 and 1999, the average revenue per subscriber for the Latin American DIRECTV businesses was about $45 per month of which for both 2000 and 1999, $36 was generated from monthly programming subscriptions with the remainder derived from fees associated with leased equipment. EBITDA was a negative $171 million in 2000 compared to negative EDITDA of $106 million in 1999. The change in EBITDA resulted primarily from a full year of GLB losses in 2000 and higher marketing costs associated with the record subscriber growth, partially offset by the increased revenues discussed above. The Latin America DIRECTV businesses incurred an operating loss of $309 million in 2000 compared to an operating loss of $169 million in 1999. The increased operating loss resulted from the decline in EBITDA and higher depreciation of fixed assets and a full year of goodwill amortization that resulted from the GLB transaction. Satellite Services Segment Revenues for the Satellite Services segment in 2000 increased 26.3% to $1,023.6 million from $810.6 million in 1999. This increase was primarily due to increased revenues associated with outright sales and sales-type lease transactions executed during 2000. Revenues associated with outright sales and sales-type leases of transponders were $243.3 million for 2000 as compared to $23.1 million for 1999. Revenues from operating leases of transponders, IV-29 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) satellite services and other were 76.2% of total 2000 revenues and decreased by 0.9% to $780.3 million from $787.5 million in 1999. EBITDA in 2000 was $694.0 million, a 12.2% increase over EBITDA of $618.8 million in 1999. The higher EBITDA was due to the increased revenues discussed above, partially offset by a $70.8 million increase in direct operating and selling, general and administrative expenses that resulted from the continued satellite fleet expansion and costs associated with the NET-36 initiative. EBITDA margin for 2000 was 67.8% compared to 76.3% in 1999. The decline in EBITDA margin was due to lower margins associated with the increased outright sales and sales-type lease transactions and the higher direct operating and selling, general and administrative expenses. Excluding the outright sales and sales-type lease transactions, EBITDA for 2000 was $536.5 million or 68.8% of corresponding revenues. Operating profit was $356.6 million for 2000, an increase of $18.3 million over 1999. The higher operating profit resulted from the increase in EBITDA partially offset by higher depreciation expense related to additional satellites placed into service since 1999. Backlog for the Satellite Services segment, which consists primarily of operating leases on satellite transponders, was about $6.0 billion in 2000 compared to about $6.1 billion in 1999. Network Systems Segment Revenues for the Network Systems segment increased 1.8% to $1,409.8 million in 2000 from $1,384.7 million in 1999. The increase in revenues primarily resulted from greater shipments of DIRECTV receiver equipment, which totaled about 3.0 million units in 2000, compared to about 2.1 million units in 1999. This increase in revenues was partially offset by $40.0 million of lower revenues from the discontinuation of certain narrowband wireless product lines and lower manufacturing subsidies on DIRECTV receiver equipment. The Network Systems segment reported EBITDA of $0.1 million for 2000 compared to negative EBITDA of $156.7 million in 1999. The Network Systems segment had an operating loss of $63.5 million in 2000 compared to $234.1 million in 1999. The 1999 results included a $272.1 million charge for the discontinuation of certain narrowband wireless product lines. Excluding this charge, the Network Systems segment recorded 1999 EBITDA of $115.4 million and operating profit of $38.0 million. The change in EBITDA and operating results in 2000 from 1999, excluding the $272.1 million charge, resulted from the lower manufacturing subsidies and increased costs associated with the planned 2001 launch of new DirecPC(R) services, including AOL Plus Powered by DirecPC. Backlog for the Network Systems segment, which consists primarily of private business networks and satellite-based mobile telephony equipment orders, was about $1.2 billion in 2000 compared to about $1.0 billion in 1999. Eliminations and Other The elimination of revenues decreased to $383.8 million in 2000 from $420.0 million in 1999 due primarily to the termination of manufacturing subsidies paid by DIRECTV to HNS during the third quarter of 2000 and decreased intercompany revenues due to the sale of Hughes' Satellite Businesses. Operating losses from "eliminations and other" decreased to $89.3 million in 2000 from $229.1 million in 1999 due primarily to decreased corporate expenditures, primarily for employee benefits, and lower margins on intercompany sales. Liquidity and Capital Resources In 2001, Hughes used about $2,672.2 million of cash, which resulted primarily from investments in companies of $287.8 million, expenditures for satellites and property of $1,743.5 million and the settlement payment to Raytheon of $500.0 million. These uses of cash were funded primarily by cash on-hand at the beginning of the year of $1,508.1 million, additional net borrowings of $1,314.8 million, proceeds from the sale of investments and insurance proceeds of $337.3 million and cash provided by operations of $190.3 million. Cash and cash equivalents at December 31, 2001 were $700.1 million. Cash and cash equivalents are discussed more fully below. As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) at December 31, 2001 and 2000 was 0.76 and 1.54, respectively. Working capital decreased by $2,528.2 million to a IV-30 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) deficit of $1,065.4 million at December 31, 2001 from working capital of $1,462.8 million at December 31, 2000. The change resulted principally from a decrease in cash and cash equivalents of $808.0 million and increased short-term borrowings and current portion of long-term debt of $1,633.9 million. Hughes expects to have cash requirements in 2002 of about $1.5 billion to $1.7 billion primarily due to capital expenditures for satellites and property, a purchase price adjustment of $164 million plus interest owed to Boeing (see "Commitments and Contingencies" below for further discussion), the remaining payment for the Raytheon settlement, interest expense and preferred stock dividends. In addition, Hughes expects to increase its investment in affiliated companies, including the Latin America DIRECTV businesses. 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. However, Hughes' ability to obtain financing and the cost and terms of any such financing may be adversely affected by a reduction in Hughes' credit rating. In February 2002, Hughes completed a series of financing activities. PanAmSat borrowed $1,800 million, of which a portion was used to repay $1,725 million owed to Hughes; Hughes deposited $1,500 million of the proceeds received from PanAmSat with General Motors Acceptance Corporation ("GMAC") as collateral, with Hughes then borrowing $1,875 million under a GMAC revolving credit facility. Hughes used $1,682.5 million of the proceeds to repay all amounts outstanding under Hughes' $750 million unsecured revolving credit facility, DLA's $450 million revolving credit facility, and SurFin's $400 million and $212.5 million revolving credit facilities. The DLA and SurFin facilities were retired, while the Hughes facility was amended and expanded. Hughes' and PanAmSat's debt is more fully described below in "--Debt and Credit Facilities." As a result of these transactions, Hughes expects to have about $2,300 million of available borrowing capacity under those facilities. Hughes' and PanAmSat's ability to borrow under the credit facilities is contingent upon meeting financial and other covenants. The agreements also include certain operational restrictions. These covenants limit Hughes' and PanAmSat's ability to, among other things: incur or guarantee additional indebtedness; make restricted payments, including dividends; create or permit to exist certain liens; enter into business combinations and asset sale transactions; make investments; enter into transactions with affiliates; and enter into new businesses. Certain of Hughes' borrowings are required to be repaid upon the earlier of the effective date of the EchoStar merger or December 2002. If the Merger is not completed, Hughes will be required to obtain cash from other borrowings, asset sales, or equity transactions, as necessary, to repay the borrowings. Upon a failure of the Merger that results in the sale of Hughes' interest in PanAmSat to EchoStar, Hughes will utilize the cash proceeds received, as well as break-up fees that may be paid to Hughes by EchoStar, to repay its debt obligations. See "Acquisitions, Investments and Divestitures--Merger Transaction" below regarding the funding of the proposed EchoStar merger. Common Stock Dividend Policy. Dividends may be paid on the GM Class H common stock only when, as, and if declared by GM's Board of Directors in its sole discretion. As of December 31, 2001, the amount available for the payment of dividends by GM to holders of GM Class H common stock was $19.4 billion. 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. Cash and Cash Equivalents. Cash and cash equivalents were $700.1 million at December 31, 2001 compared to $1,508.1 million at December 31, 2000. The decrease in cash resulted primarily from $1,743.5 million of capital expenditures and a $500.0 million partial payment for the Raytheon settlement, partially offset by a net increase of $1,314.8 million in debt. Cash provided by operating activities was $190.3 million in 2001 compared to $1,090.7 million in 2000 and $379.5 million in 1999. The change in 2001 compared to 2000 resulted from $479.9 million of higher cash requirements for the change in operating assets and liabilities and $420.5 million of lower income from continuing operations excluding non-cash adjustments, such as deferred income taxes and other, depreciation and amortization, and net gain from sale of investments. The change in 2000 compared to 1999 resulted from $552.7 million of lower cash requirements for the change in operating assets and liabilities and $158.5 million of higher income from continuing operations excluding non- IV-31 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) cash adjustments, such as depreciation and amortization, equity losses on unconsolidated subsidiaries and the loss resulting from the discontinuation of the wireless product lines. Cash provided by (used in) investing activities was $(1,741.2) million in 2001 compared to $2,210.8 million in 2000 and $(3,941.8) million in 1999. The change from 2000 to 2001 is primarily from decreased proceeds from the sale of investments, which in 2000 included the proceeds from the sale of the Satellite Businesses to Boeing, and an increase in satellites and investment in companies in 2001, offset by lower expenditures for property and higher proceeds from insurance claims in 2001. The increase in 2000 from 1999 reflects the proceeds from the sale of the Satellite Businesses and a decrease in investment in companies, compared to 1999. Cash provided by (used in) financing activities was $742.9 million in 2001 compared to $(849.6) million in 2000 and $2,577.5 million in 1999. Financing activities in 2001 reflect an increase in borrowings partially offset by the $500 million partial payment of the Raytheon settlement and the payment of preferred stock dividends to GM. Financing activities in 2000 reflect the repayment of debt and payment of preferred stock dividends to GM. In 1999, financing activities include an increase in borrowings and proceeds from the issuance of preferred stock. Cash used in discontinued operations was $1,182.0 million in 2000 compared to $119.0 million in 1999. The increase in cash used in 2000 from 1999 was primarily due to $1.1 billion of taxes associated with the sale of the Satellite Businesses. Property and Satellites. Property, net of accumulated depreciation, increased $490.0 million to $2,197.8 million in 2001 from $1,707.8 million in 2000. The increase in property resulted primarily from capital expenditures of about $799.4 million, partially offset by depreciation. The change in capital expenditures for property of $139.6 million in 2001 compared to 2000 was primarily due to the completion in 2000 of converting customers leasing receiving equipment from the PRIMESTAR medium-power business to the DIRECTV high-power business. Satellites, net of accumulated depreciation, increased $576.6 million to $4,806.6 million in 2001 from $4,230.0 million in 2000. The increase in satellites resulted primarily from capital expenditures of $944.1 million for the construction of satellites, offset by depreciation of $361.1 million. Total capital expenditures increased to $1,743.5 million in 2001 from $1,716.1 million in 2000. Debt and Credit Facilities. Notes Payable. In February 2002, PanAmSat completed a private placement debt offering pursuant to Rule 144A of the Securities Act of 1933, as amended, in the amount of $800 million. The net proceeds from the notes were used to repay a portion of the $1,725 million of intercompany indebtedness owed to Hughes. The notes bear interest at an annual rate of 8.5%, payable semi-annually, mature in 2012 and are unsecured. In July 1999, in connection with the early buy-out of a satellite sale-leaseback, PanAmSat assumed $124.1 million of variable rate notes of which $46.5 million was outstanding at December 31, 2001. The weighted average interest rate on the notes was 2.75% at December 31, 2001. The notes were repaid, in accordance with their terms, 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 December 31, 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. In connection with a new secured bank facility entered into by PanAmSat in February 2002, described below, these notes were ratably secured by certain of the operating assets of PanAmSat that were pledged in connection with the secured bank facility. Credit Facilities. In February 2002, Hughes amended and increased its existing $750.0 million multi-year revolving credit facility (the "New Credit Agreement"). The New Credit Agreement provides availability of $1,235.25 million and was undrawn at March 11, 2002. Borrowings under the facility bear interest at the London Interbank Offer Rate ("LIBOR") plus 3%. The New Credit Agreement commitment terminates upon the earlier of December 5, 2002 or the effective date of the EchoStar merger. The facility is secured by substantially all of Hughes' assets other than the assets of DLA and PanAmSat. At March 11, 2002, Hughes was in the process of adding a term loan to the New Credit Agreement that would increase the total funding available to at least $1,800 million. The term loan is expected to close in March 2002. Also, in February 2002, PanAmSat obtained a bank facility in the amount of $1,250 million. The bank facility is comprised of a $250 million revolving credit facility, which was undrawn as of March 11, 2002, a $300 million IV-32 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) Tranche A Term Loan and a $700 million Tranche B Term Loan. The revolving credit facility and the Tranche A Term Loan bear interest at LIBOR plus a 3.00% spread. The Tranche B Term Loan bears interest at LIBOR plus a 3.5% spread. The interest rate spreads on the revolving credit facility and Tranche A Term Loan may be increased or decreased based upon changes in PanAmSat's total leverage ratio, as defined by the credit agreement. The revolving credit facility will terminate in 2007, the Tranche A Term Loan matures in 2007 and the Tranche B Term Loan matures in 2008. Principal payments under the Tranche A Term Loan are due in varying amounts from 2004 to 2007. Principal payments under the Tranche B Term Loan are due primarily at maturity. The facilities are secured ratably by substantially all of PanAmSat's operating assets, including its satellites. Of the total $1,000 million borrowed, $925 million was used to repay a portion of the $1,725 million intercompany loan from Hughes. On October 1, 2001, Hughes entered into a $2.0 billion revolving credit facility with GMAC. The facility was subsequently amended in February 2002. The amended facility provides for a commitment through December 5, 2002, and may be extended to March 31, 2003 at Hughes' option. The facility is split into two loan tranches: a $1,500 million tranche secured by a $1,500 million Hughes cash deposit and a $500 million tranche that shares security with the New Credit Agreement described above. Borrowings under the $1,500 million tranche bear interest at GMAC's cost of funds plus 0.125%. Borrowings under the $500 million tranche bear interest at GMAC's cost of funds plus 1.75%. The $1,500 million cash deposit earns interest at a rate equivalent to GMAC's cost of funds. As of December 31, 2001, no cash collateral had been provided to GMAC and the facility was unavailable for loans. In February 2002, Hughes deposited $1,500 million with GMAC and immediately borrowed $1,875.0 million. Hughes plans to offset the $1,500 million GMAC cash deposit against amounts borrowed from GMAC for balance sheet purposes regardless of whether the merger with EchoStar is completed. The facility must be repaid upon the effective date of the merger with EchoStar. On January 5, 2001, DLA entered into a $450.0 million revolving credit facility. As of December 31, 2001, the facility was fully drawn, with borrowings outstanding under the revolving credit facility bearing a weighted average interest rate of 3.49%. The DLA facility was repaid and retired in February 2002. As of December 31, 2001, Hughes had a $750.0 million multi-year unsecured revolving credit facility. As of December 31, 2001, the facility was fully drawn, with borrowings outstanding under the revolving credit facility bearing a weighted average interest rate of 2.99%. The Hughes multi-year facility was amended and expanded with the New Credit Agreement. At December 31, 2001, PanAmSat maintained a $500.0 million multi-year unsecured revolving credit facility. No amounts were outstanding under the facility at December 31, 2001. In February 2002 this facility was terminated and replaced with the $1,250 million bank facility described above. At December 31, 2001, SurFin had unsecured revolving credit facilities of $400.0 million and $212.5 million. $392.0 million was outstanding under the $400.0 million credit facility at December 31, 2001, with borrowings bearing a weighted average interest rate of 3.18%. $180.6 million was outstanding under the $212.5 million credit facility at December 31, 2001 with a weighted average interest rate of 3.29%. The SurFin credit facilities were repaid and retired in February 2002. $78.2 million in other short-term and long-term debt, related primarily to DLA and HNS' international subsidiaries was outstanding at December 31, 2001, bearing fixed and floating rates of interest of 3.04% to 12.37%. Principal on these borrowings is due in varying amounts through 2007. Acquisitions, Investments and Divestitures. Merger Transaction. On October 28, 2001, Hughes and GM, together with EchoStar, announced the signing of definitive agreements that, subject to stockholder approval, regulatory clearance, and certain other conditions, provide for the split-off of Hughes (or a company holding all of the capital stock of Hughes) from GM and the combination of the Hughes business with EchoStar by means of a merger (the "Merger"). The split-off of Hughes from GM would occur by means of a distribution to the holders of GM Class H common stock of one share of Class C common stock of a Hughes holding company (that will own all of the stock of Hughes at the time of the split-off) in exchange for each share of GM Class H common stock held immediately prior to the split-off. Immediately following the split-off, the businesses of Hughes and EchoStar would be combined in the Hughes/EchoStar merger to form New EchoStar. Each share of the Hughes holding company Class C common stock would remain outstanding and become a share of Class C common stock of New EchoStar. Holders of Class A and Class B common stock of EchoStar would IV-33 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) receive about 1.3699 shares of stock of the merged entity in exchange for each share of EchoStar Class A or Class B common stock held prior to the Hughes/EchoStar merger. The transactions are structured in a manner that will not result in the recapitalization of GM Class H common stock into GM $1- 2/3 par value common stock at a 120% exchange ratio, as currently provided for under certain circumstances in the General Motors Restated Certificate of Incorporation, as amended. The GM $1- 2/3 par value common stock would remain outstanding and would be GM's only class of common stock after the transactions. As part of the transactions, GM would receive a dividend from Hughes of up to $4.2 billion in cash, and its approximately 30% retained economic interest in Hughes would be reduced by a commensurate amount. Following these transactions, subject to IRS approval, and based on a number of assumptions, including the potential issuance or distribution of up to 100 million shares of GM Class H common stock or New EchoStar Class C common stock in exchange for certain debt of GM, GM currently may retain an interest in the merged entity. The $4.2 billion dividend to GM will be financed by Hughes through new and existing credit facilities or other borrowings. The transactions are subject to a number of conditions, including approval by a majority of each class of GM stockholders--GM $1 2/3 and GM Class H--voting both separately as distinct classes and also voting together as a single class based on their respective per share voting power. The proposed transactions also are subject to anti-trust clearance and approval by the Federal Communications Commission. In addition, the transactions are contingent upon the receipt of a favorable ruling from the IRS that the separation of Hughes from GM will be tax-free to GM and its stockholders for U.S. federal income tax purposes. The transactions are currently expected to close in the second half of 2002. GM, Hughes, and EchoStar have agreed that, in the event that the transactions do not occur because certain specified regulatory-related conditions have not been satisfied, EchoStar will be required to pay Hughes a $600 million termination fee and if the merger agreement is terminated for failure to obtain specified regulatory clearances or financing to complete the merger, purchase Hughes' interest in PanAmSat for an aggregate purchase price of approximately $2.7 billion, which is payable, depending on the circumstances, solely in cash or in a combination of cash and either debt or equity securities of EchoStar. The proceeds from the termination fee and the sale of Hughes' PanAmSat interest would result in the recognition of a gain that would be material to Hughes' financial position and results of operations. Cash proceeds, net of income taxes, would be retained by Hughes and used to repay certain outstanding borrowings and fund future operating requirements. The sale of Hughes' PanAmSat interest is subject to a number of conditions beyond the control of Hughes which must be satisfied before any sale could be completed, including, among other things, the expiration or termination of the waiting period applicable to the PanAmSat stock sale under the Hart-Scott-Rodino Act, the absence of any effective injunction or order which prevents the completion of the PanAmSat stock sale and the receipt of FCC approval for the transfer of licenses in connection with the PanAmSat stock sale. If these conditions were not fulfilled, EchoStar would not be obligated to complete the purchase, even though the Hughes/EchoStar merger was not completed for the specific reasons. If this were to happen, Hughes would remain a wholly owned subsidiary of GM, and Hughes would not have the benefit of the liquidity represented by the sale of Hughes' interest in PanAmSat. GM, Hughes and EchoStar have also agreed that, if the Hughes/EchoStar merger is not completed for certain limited reasons involving a competing transaction or a withdrawal by GM's Board of Directors of their recommendation of the EchoStar transaction, then Hughes will pay a termination fee of $600 million to EchoStar. The financial burden that such a payment would have on Hughes could affect Hughes' ability to raise new capital, or otherwise have an adverse effect on its financial condition, and Hughes will have incurred substantial transaction-related expenses and devoted substantial management resources to the proposed merger without realizing the anticipated benefits. In response to the announcement of the Hughes/EchoStar merger, the customers and strategic partners of Hughes may delay or defer decisions, which could have a material adverse effect on Hughes' businesses, regardless of whether the Hughes/EchoStar merger is ultimately completed. Similarly, current and prospective employees of Hughes may experience uncertainty about their future roles with the combined company, which may materially adversely affect Hughes' ability to attract and retain key management, sales, marketing and technical personnel. IV-34 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) Acquisitions and Investments. On November 19, 2001, Hughes repaid $74.9 million of debt pursuant to the terms of a debt guarantee provided by Hughes for the benefit of Motient. In connection with the payment, Hughes received from Motient 7.1 million common shares of XM Satellite Radio Holdings Inc. stock with a market value as of November 2001 of $67.9 million and $3.6 million in cash. The repayment of Motient's debt released Hughes of any further obligations related to Motient's indebtedness and therefore Hughes reversed a related reserve of $39.5 million. The net effect of these actions resulted in a credit of $36.1 million to "Other, net" in the statement of operations. On May 1, 2001, DLA acquired from Grupo Clarin S.A. ("Clarin") a 51% ownership interest in GEA, a local operating company located in Argentina that provides direct-to-home broadcast services, and other assets, consisting primarily of programming and advertising rights. The purchase price, valued at $169 million, consisted of a 3.98% ownership interest in DLA and a put option that will allow Clarin in certain circumstances 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 and is included as part of the Direct-To-Home Broadcast segment. The purchase price was $197.8 million and was paid in cash. On July 28, 1999, DLA acquired GLB, the exclusive distributor of DIRECTV services in Brazil, from Tevecap S.A. for approximately $114.0 million plus the assumption of debt. In connection with the transaction, Tevecap also sold its 10% equity interest in DLA to Hughes and Darlene Investments, LLC, which increased Hughes' ownership interest in DLA to 77.8%. As part of the transaction, Hughes also increased its ownership interest in SurFin, a company providing financing of subscriber receiver equipment for certain local operating companies located in Latin America, from 59.1% to 75%. The total consideration paid in the transactions amounted to approximately $101.1 million. On May 20, 1999, Hughes acquired by merger all of the outstanding capital stock of USSB, a provider of premium subscription television programming via the digital broadcasting system that it shared with DIRECTV. The total consideration of approximately $1.6 billion, paid in July 1999, consisted of approximately $0.4 billion in cash and 22.6 million shares of GM Class H common stock (prior to giving effect to the stock split during 2000). On April 28, 1999, Hughes completed the acquisition of PRIMESTAR's 2.3 million subscriber medium-power direct-to-home satellite business. The purchase price consisted of $1.1 billion in cash and 4.9 million shares of GM Class H common stock (prior to giving effect to the stock split during 2000), for a total purchase price of $1.3 billion. As part of the acquisition of PRIMESTAR, Hughes also purchased the high-power satellite assets, which consisted of an in-orbit satellite and a satellite that had not yet been launched, and related orbital frequencies of Tempo Satellite Inc., a wholly-owned subsidiary of TCI Satellite Entertainment Inc., for $500 million in cash. As part of the PRIMESTAR acquisition, Hughes formulated a detailed exit plan during the second quarter of 1999 and immediately began to migrate the medium-power customers to DIRECTV's high-power platform. Accordingly, Hughes accrued exit costs of $150 million in determining the purchase price allocated to the net assets acquired. The principal components of such exit costs include penalties to terminate assumed contracts and costs to remove medium-power equipment from customer premises. Since DIRECTV's acquisition of PRIMESTAR, DIRECTV converted a total of approximately 1.5 million customers to its high power service. The PRIMESTAR By DIRECTV service ceased operations, as planned, as of September 30, 2000. The amount of accrued exit costs remaining at December 31, 2001 and 2000 was $4.0 million and $25.9 million, respectively, which primarily represents the remaining obligations on certain contracts. In February 1999, Hughes acquired an additional ownership interest in GGM, a Latin America local operating company which is the exclusive distributor of DIRECTV in Mexico, from Grupo MVS, S.R.L. de C.V. ("Grupo MVS"). As a result, Hughes' equity ownership represents 49% of the voting equity and all of the non-voting equity of GGM. In October 1998, Hughes acquired from Grupo MVS an additional 10% interest in DLA, increasing Hughes' ownership interest to 70%. IV-35 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) Hughes also acquired an additional 19.8% interest in SurFin, increasing Hughes' ownership percentage from 39.3% to 59.1%. The aggregate purchase price for these transactions was $197.0 million in cash. The financial information included herein reflects the acquisitions discussed above from their respective dates of acquisition. The acquisitions were accounted for by the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair values of the net assets acquired has been recorded as goodwill, resulting in a goodwill addition of $278.2 million for the year ended December 31, 2001, none in 2000 and $3,612.4 million for the year ended December 31, 1999. Divestitures. On July 31, 2001, Hughes sold a 1.6% interest in Thomson Multimedia S. A. for approximately $132.0 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 systems manufacturing businesses for $3.75 billion in cash. 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 post retirement benefit plan assets and liabilities associated with the Satellite Businesses. The purchase price is subject to adjustment based upon the final closing date financial statements, as discussed in "Commitments and Contingencies" below and in Note 20 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 Hughes' interest in HRL at October 6, 2000. During September 2000, Hughes Tele.com (India) Limited ("HTIL") sold new common shares in a public offering in India. As a result of this transaction, Hughes' equity interest was reduced from 44.7% to 29.1% and Hughes recorded a $23.3 million increase to "Capital stock and additional paid-in capital." On March 1, 2000, Hughes announced that the operations of 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. DIRECTV Japan was paid a commission for each subscriber who actually migrated. Hughes also 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" in the statement of operations 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 $29.7 million was paid for accrued exit costs and $6.8 million was paid for involuntary termination benefits during 2001. The amount remaining for accrued exit costs was $47.6 million at December 31, 2001. No amounts were remaining for involuntary termination benefits at December 31, 2001. 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 IV-36 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) "other-than-temporary," resulting in a write-down of the carrying value of the investment by $212 million and $86 million, respectively. At December 31, 2001, the investment's market value approximated its carrying value. On January 13, 2000, Hughes announced the discontinuation of its mobile cellular and narrowband local loop product lines at HNS. As a result of this decision, Hughes recorded a fourth quarter 1999 pre-tax charge to continuing operations of $272.1 million. The charge represents the write-off of receivables and inventories, licenses, software and equipment with no alternative use. Commitments and Contingencies In connection with the 2000 sale by Hughes of its satellite systems manufacturing businesses to Boeing, the stock purchase agreement provides for potential adjustment to the purchase price based upon the final closing date financial statements of the satellite systems manufacturing businesses. The stock purchase agreement also provides for an arbitration process to resolve any disputes that arise in determining the purchase price adjustment. Based upon the final closing date financial statements of the satellite systems manufacturing businesses that were prepared by Hughes, Boeing is owed a purchase price adjustment of $164 million plus interest from the date of sale, the total amount of which has been provided for in Hughes' financial statements. However, Boeing has submitted additional proposed adjustments, of which about $750 million remain unresolved. Hughes believes that these additional proposed adjustments are without merit and intends to vigorously contest the matter in the arbitration process which will result in a binding decision unless the matter is otherwise settled. Although Hughes believes it has adequately provided for the disposition of this matter, the impact of its disposition cannot be determined at this time. It is possible that the final 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 systems manufacturing businesses, Hughes retained liability for certain possible fines and penalties and the financial consequences of debarment associated with potential violations of U.S. Export control laws related to the business now owned by Boeing should the State Department impose such sanctions against the satellite systems manufacturing businesses. Hughes does not expect sanctions imposed by the State Department, if any, to have a material adverse effect on its consolidated financial statements. In October 2001, Hughes reached a settlement with Raytheon on a purchase price adjustment related to the 1997 spin-off of Hughes' defense electronics business and the subsequent merger of that business with Raytheon. Under the terms of the settlement, Hughes agreed to reimburse Raytheon $635.5 million of the original $9.5 billion purchase price. Hughes paid $500 million of the settlement amount in October 2001 and the remainder was paid subsequent to December 31, 2001. In the third quarter of 2001, Hughes recorded a decrease to "Capital stock and additional paid-in capital" of $574.2 million as a result of the settlement. Hughes uses in-orbit and launch insurance to mitigate the potential financial impact of satellite fleet in-orbit and launch failures unless the premium costs are considered uneconomic relative to the risk of satellite failure. The insurance generally covers the unamortized book value of covered satellites. The insurance generally does not compensate for business interruption or loss of future revenues or customers, however Hughes relies on in-orbit spare satellites and excess transponder capacity at key orbital slots to mitigate the impact of satellite failure on Hughes' ability to provide service. Where insurance costs related to known satellite anomalies are prohibitive, Hughes' insurance policies contain coverage exclusions and Hughes is self-insured for certain other satellites. The book value of satellites that were insured with coverage exclusions amounted to $699.3 million and the book value of the satellites that were self-insured was $668.5 million at December 31, 2001. Hughes is contingently liable under standby letters of credit and bonds in the amount of $51.3 million at December 31, 2001 and has guaranteed up to $74.3 million of bank debt. Hughes has guaranteed a $55.4 million debt obligation of an investor in HTIL that matures in 2007. Hughes' performance obligation related to this guarantee can be triggered by a default by the investor beginning in 2002 and thereafter. The remaining obligation is related to DLA and SurFin guarantees of non-consolidated local operating company debt and is due in variable amounts over the next five years. Additionally, in the event that certain transactions do not occur, DLA may be required to repurchase an interest in DLA at the option of a minority partner for $195 million in cash in 2003. IV-37 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) The Hughes Board of Directors has approved several benefit plans, triggered by a change-in- control, designed to provide benefits for the retention of about 240 key employees and also provide benefits in the event of employee lay-offs. Generally, these benefits are only available if a qualified change-in-control of Hughes occurs. Upon a change-in-control, the retention benefits will be accrued and expensed when earned and the severance benefits will be accrued and expensed if an employee is identified for termination. A total of up to about $110 million for retention benefits will be paid, with approximately 50% paid at the time of a change-in-control and 50% paid up to 12 months following the date of a change-in-control. The amount of severance benefits to be paid will be based upon the decision to layoff employees, if any, following the date of a change-in-control. In addition, approximately 33.5 million employee stock options will vest upon a qualifying change-in-control and up to an additional 8.5 million employee stock options could vest if employees are laid off within one year of a change-in-control. For purposes of the above benefits and stock options, a successful completion of the Merger would qualify as a change-in-control. At December 31, 2001, minimum future commitments under noncancelable operating leases having lease terms in excess of one year were primarily for real property and aggregated $375.0 million, payable as follows: $92.8 million in 2002, $76.0 million in 2003, $49.3 million in 2004, $38.1 million in 2005, $32.8 million in 2006 and $86.0 million thereafter. Certain of these leases contain escalation clauses and renewal or purchase options. Rental expenses under operating leases, net of sublease rental income, were $59.7 million in 2001, $55.9 million in 2000 and $58.5 million in 1999. At December 31, 2001, the minimum commitments under noncancelable satellite construction and launch contracts totaled $1,061.5 million. In connection with the direct-to-home broadcast businesses, Hughes has commitments related to certain programming agreements which are variable based upon the number of underlying subscribers and market penetration rates. Minimum payments over the terms of applicable contracts are anticipated to be approximately $1.5 billion, payable as follows: $460.8 million in 2002, $258.2 million in 2003, $148.1 million in 2004, $149.3 million in 2005, $154.0 million in 2006 and $287.0 million thereafter. As part of a series of agreements entered into with America Online, Inc. ("AOL") on June 21, 1999, Hughes committed to spend up to approximately $1.5 billion in sales, marketing, development and promotion efforts in support of DirecPC(R)/AOL-Plus, DIRECTV(R), DIRECTV(TM)/AOL TV and DirecDuo(TM) products and services. At December 31, 2001, Hughes had spent approximately $500 million in support of these efforts. Consistent with the requirements of the agreements with AOL, additional funds will continue to be spent until the contractual spending limits have been satisfied or until applicable timeframes expire, which in some cases can be for periods of ten years or more. See Note 20 to the consolidated financial statements for further discussion of the above matters and various legal proceedings and claims that could be material, individually or in the aggregate, to Hughes' continuing operations or financial position. PanAmSat is currently in negotiations to revise a customer's sales-type lease agreements. Depending on the outcome of these negotiations, the sales-type lease agreements could be terminated and result in up to a $20 million non-cash charge in the statement of operations in the first quarter of 2002. In March 2002, PanAmSat reached an agreement with an insurance carrier to settle a claim related to circuit failures suffered on the PAS-7 satellite in October 2001. PanAmSat anticipates receiving approximately $215.0 million in cash by the end of the second quarter of 2002 as a result of this settlement. Certain Relationships and Related Party Transactions Satellite Procurement Agreements. Hughes is party to agreements with Boeing Satellite Systems, Inc., formerly Hughes Space and Communications Company ("HSC"), for the construction of six satellites with a total contract value of $1,772.5 million that were entered into prior to the sale of HSC to Boeing on October 6, 2000. Although Hughes believes the agreements are on commercially reasonable terms, there can be no assurance that Hughes will be able to procure satellites on similar terms in the future. At December 31, 2001, Hughes' remaining obligation under these contracts was $575.4 million. IV-38 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) Income Taxes. Hughes and its domestic subsidiaries join with GM in filing a consolidated U.S. federal income tax return. The terms of the current tax allocation agreement with GM generally require that Hughes provide for income taxes as if it filed on a separate return basis. At December 31, 2001, the balance sheet reflects deferred tax assets attributable to the future benefits from the utilization of certain foreign tax credits, alternative minimum tax credits and net operating losses of acquired subsidiaries available to be carried forward in the amounts of $61.4 million, $46.4 million, and $155.3 million, respectively. Under the terms of a revised tax allocation agreement that will become effective upon the split-off of Hughes from GM, Hughes will generally be compensated by GM for those tax attributes that have been recorded on a separate return basis and previously utilized by GM in its consolidated federal tax returns. Foreign tax credits will be compensated by GM at the time Hughes would have benefited from the utilization of such credits on a separate return basis. Upon its split-off from GM, Hughes would be entitled to carry forward the alternative minimum tax credits and net operating losses as to which benefits have been recorded at December 31, 2001. Any federal net operating losses incurred after December 31, 2001 and prior to its split-off from GM which are not carried back will be compensated by GM shortly following the filing of the GM federal income tax return that includes the split-off date at a rate of 20% rather than the federal statutory rate of 35%. New Accounting Standards In August 2001, the 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. The adoption of the statement on January 1, 2002 is not expected to have an impact on Hughes' consolidated results of operations or financial position. In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. 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 adopted 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. Management is currently assessing the impact of this provision of the standard on Hughes' results of operations and financial position. Management estimates that as a result of the new standard, amortization expense of $216 million pre-tax ($195 million after-tax) associated with goodwill and intangible assets with indefinite lives will not be charged to the statement of operations in 2002. Security Ratings On January 16, 2002, Moody's Investor Services ("Moody's") downgraded Hughes' long-term debt rating from Ba1 to Ba3. The ratings action noted rising leverage at Hughes and stated that while there may be margin expansion resulting from continued growth in DIRECTV subscribers, this would be offset by losses at DLA, HNS, and DIRECTV Broadband. Moody's added that if the announced merger with EchoStar did not receive regulatory approval, Hughes' longer term funding issues would be easily remedied by the contractually-obligated sale of its approximately 81% stake in PanAmSat and the merger transaction break-up fee. Hughes remains on review for further possible downgrade. On October 30, 2001, Moody's downgraded Hughes' long-term debt rating from Baa2 to Ba1, subsequent to the EchoStar merger announcement. The ratings action cited weak operating performance, rising leverage, and the unlikelihood that Hughes could maintain an investment grade rating under any merger scenario. On March 8, 2002, Standard and Poor's Rating Services ("S&P") downgraded Hughes' long-term rating from BB+ to BB-, with the rating remaining on Credit IV-39 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(continued) Watch negative, pending the outcome of the EchoStar merger. S&P also assigned a BB rating to Hughes' $1,235.25 million credit facilities (also Credit Watch negative). S&P noted that the action was based on Hughes' credit quality on a stand-alone basis if the EchoStar merger is not approved, with the ratings on Credit Watch negative because the corporate credit rating of a combined EchoStar/Hughes/PanAmSat would be B+ to BB-. On December 7, 2001, S&P downgraded Hughes' long-term credit rating from BBB- to BB+. This ratings action noted that Hughes needs to deliver planned operating performance improvements to receive an investment grade rating, despite Hughes' strong balance sheet in the event the EchoStar-Hughes merger does not receive regulatory approval. 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. Ratings below Baa3 and BBB- denote sub-investment grade status for Moody's and S&P, respectively. Ratings in the Ba/BB range generally indicate moderate protection of interest and principal payments, potentially outweighed by exposure to uncertainties or adverse conditions. 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. Market Risk Disclosure The following discussion and the estimated amounts generated from the sensitivity analyses referred to below include forward-looking statements of market risk which assume for analytical purposes that certain adverse market conditions may occur. Actual future market conditions may differ materially from such assumptions because the amounts noted below are the result of analyses used for the purpose of assessing possible risks and the mitigation thereof. Accordingly, the forward-looking statements should not be considered projections by Hughes of future events or losses. General Hughes' cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates, interest rates and changes in the market value of its equity investments. Hughes manages its exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Hughes enters into derivative instruments only to the extent considered necessary to meet its risk management objectives, and does not enter into derivative contracts for speculative purposes. Foreign Currency Risk 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. The impact of a hypothetical 10% adverse change in exchange rates on the fair values of foreign exchange contracts and foreign currency denominated assets and liabilities would be a charge of $11.6 million and $3.5 million, net of taxes at December 31, 2001 and December 31, 2000, respectively. Investments Hughes maintains investments in publicly-traded common stock of unaffiliated companies and is therefore subject to equity price risk. These investments are classified as available-for-sale and, consequently, are reflected in Hughes' consolidated balance sheets at fair value with unrealized gains or losses, net of taxes, recorded as part of accumulated other comprehensive income (loss), a separate component of stockholder's equity. Declines in market value that are judged to be "other-than-temporary" are charged to "Other, net" in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss). The fair values of the investments in such IV-40 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS--(concluded) common stock were $725.4 million and $973.9 million at December 31, 2001 and December 31, 2000, respectively, based on closing market prices. A 10% decline in the market price of these investments would cause the fair value of the investments in common stock to decrease by $72.5 million and $97.4 million at December 31, 2001 and December 31, 2000, respectively. No actions have been taken by Hughes to hedge this market risk exposure. Interest Rate Risk Hughes is subject to interest rate risk related to its outstanding debt of $2.6 billion at December 31, 2001, and $1.3 billion at December 31, 2000. As of December 31, 2001, debt consisted of PanAmSat's fixed rate borrowings of $750.0 million, SurFin's variable rate borrowings of $572.6 million, DLA's variable rate borrowings of $450.0 million, Hughes' variable rate borrowings of $750.0 million, and various other floating and fixed rate borrowings. Hughes is subject to fluctuating interest rates, which may adversely impact its results of operations and cash flows for its variable rate bank borrowings. At December 31, 2001, outstanding borrowings bore interest rates ranging from 2.75% to 12.37%. The potential fair market value loss resulting from a hypothetical 10% decrease in interest rates related to Hughes' outstanding debt would be approximately $22.5 million and $25.4 million at December 31, 2001 and December 31, 2000, respectively. Credit Risk Hughes is exposed to credit risk in the event of non-performance by the counterparties to its foreign exchange contracts. While Hughes believes this risk is remote, credit risk is managed through the periodic monitoring and approval of financially sound counterparties. * * * ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this section is included in Item 7, and is incorporated herein by reference. IV-41 HUGHES ELECTRONICS CORPORATION RESPONSIBILITIES FOR FINANCIAL STATEMENTS The following consolidated financial statements of Hughes Electronics Corporation were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America and, as such, include amounts based on judgments of management. Management is further responsible for maintaining internal control designed to provide reasonable assurance that the books and records reflect the transactions of the company and that established policies and procedures are carefully followed. Perhaps the most important feature in internal control is that it is continually reviewed for effectiveness and is augmented by written policies and guidelines, the careful selection and training of qualified personnel and a strong program of internal audit. Deloitte & Touche LLP, an independent auditing firm, is engaged to audit the consolidated financial statements of Hughes Electronics Corporation and issue reports thereon. The audit is conducted in accordance with auditing standards generally accepted in the United States of America that comprehend the consideration of internal control and tests of transactions to the extent necessary to form an independent opinion on the consolidated financial statements prepared by management. The Independent Auditors' Report appears on page IV-44. The Board of Directors, through its Audit Committee, is responsible for assuring that management fulfills its responsibilities in the preparation of the consolidated financial statements and engaging the independent auditors. The Audit Committee reviews the scope of the audits and the accounting principles being applied in financial reporting. The independent auditors, representatives of management, and the internal auditors meet regularly (separately and jointly) with the Audit Committee to review the activities of each, to ensure that each is properly discharging its responsibilities and to assess the effectiveness of internal control. It is management's conclusion that internal control at December 31, 2001 provides reasonable assurance that the books and records reflect the transactions of the company and that established policies and procedures are complied with. To reinforce complete independence, Deloitte & Touche LLP has full and free access to meet with the Audit Committee, without management representatives present, to discuss the results of the audit, the adequacy of internal control, and the quality of financial reporting. /s/ HARRY J. PEARCE /s/ JACK A. SHAW /s/ MICHAEL J. GAINES Harry J. Pearce Jack A. Shaw Michael J. Gaines Chairman of the Board Chief Executive Officer Corporate Vice President and of Directors and President Chief Financial Officer IV-42 HUGHES ELECTRONICS CORPORATION AUDIT COMMITTEE REPORT The Audit Committee of the Hughes Electronics Corporation Board of Directors (the Committee) is composed of four independent directors and operates under a written charter adopted by the Board of Directors. The members of the Committee are T. E. Everhart (Chair), J. M. Cornelius, P. A. Lund, and A. C. Sikes. The Committee recommends to the Board of Directors the selection of Hughes' independent auditors. Management is responsible for internal control and the financial reporting process. The independent auditors are responsible for performing an independent audit of Hughes' consolidated financial statements in accordance with auditing standards generally accepted in the United States of America and to issue a report thereon. The Committee's responsibility is to monitor and oversee these processes. In this context, the Committee has met and held discussions with management and the independent auditors. Management represented to the Committee that Hughes' consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, and the Committee has reviewed and discussed the audited consolidated financial statements with management and the independent auditors. The Committee discussed with the independent auditors matters required to be discussed by Statement on Auditing Standards No.61 (Communication with Audit Committees). Hughes' independent auditors also provided to the Committee the written disclosures required by Independence Standards Board Standard No.1 (Independence Discussions with Audit Committees), and the Committee discussed with the independent auditors that firm's independence. Based upon the Committee's discussions with management and the independent auditors and the Committee's review of the representation of management and the report of the independent auditors to the Committee, the Committee recommended that the Board of Directors include the audited consolidated financial statements in Hughes' Annual Report on Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission. /s/ T. E. Everhart, Chair /s/ J. M. Cornelius /s/ P. A. Lund /s/ A. C. Sikes IV-43 HUGHES ELECTRONICS CORPORATION INDEPENDENT AUDITORS' REPORT To the Board of Directors of Hughes Electronics Corporation: We have audited the accompanying Consolidated Balance Sheets of Hughes Electronics Corporation as of December 31, 2001 and 2000, and the related Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss), Consolidated Statements of Changes in Stockholder's Equity and Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of Hughes Electronics Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Hughes Electronics Corporation at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /S/ DELOITTE & TOUCHE LLP - ------------------------------------------------------------------------------- DELOITTE & TOUCHE LLP Los Angeles, California January 15, 2002 (March 7, 2002 as to Note 21) IV-44 HUGHES ELECTRONICS CORPORATION CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF OPERATIONS AND AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS)
Years Ended December 31, -------------------------- 2001 2000 1999 -------- -------- ------ (Dollars in Millions) Revenues Direct broadcast, leasing and other services $7,202.3 $6,262.2 $4,550.8 Product sales 1,059.7 1,025.4 1,009.5 -------- -------- -------- Total Revenues 8,262.0 7,287.6 5,560.3 -------- -------- -------- Operating Costs and Expenses Broadcast programming and other costs 3,254.2 2,812.8 2,039.0 Cost of products sold 900.2 815.1 961.6 Selling, general and administrative expenses 3,717.7 3,065.7 2,295.3 Depreciation and amortization 1,147.7 948.1 678.9 -------- -------- -------- Total Operating Costs and Expenses 9,019.8 7,641.7 5,974.8 -------- -------- -------- Operating Loss (757.8) (354.1) (414.5) Interest income 56.7 49.3 27.0 Interest expense (195.9) (218.2) (122.7) Other, net (92.7) (292.6) (149.8) -------- -------- -------- Loss From Continuing Operations Before Income Taxes, Minority Interest sand Cumulative Effect of Accounting Change (989.7) (815.6) (660.0) Income tax benefit 325.6 406.1 236.9 Minority interests in net losses of subsidiaries 49.9 54.1 32.0 -------- -------- -------- Loss from continuing operations before cumulative effect of accounting change (614.2) (355.4) (391.1) Income from discontinued operations, net of taxes -- 36.1 99.8 Gain on sale of discontinued operations, net of taxes -- 1,132.3 -- -------- -------- -------- Income (Loss) before cumulative effect of accounting change (614.2) 813.0 (291.3) Cumulative effect of accounting change, net of taxes (7.4) -- -- -------- -------- -------- Net Income (Loss) (621.6) 813.0 (291.3) Adjustment to exclude the effect of GM purchase accounting 3.3 16.9 21.0 -------- -------- -------- Earnings (Loss) excluding the effect of GM purchase accounting adjustment (618.3) 829.9 (270.3) Preferred stock dividends (96.4) (97.0) (50.9) -------- -------- -------- Earnings (Loss) Used for Computation of Available Separate Consolidated Net Income (Loss) $ (714.7) $ 732.9 $ (321.2) ======== ======== ======== Available Separate Consolidated Net Income (Loss) Average number of shares of General Motors Class H Common Stock outstanding (in millions) (Numerator) 876.3 681.2 374.1 Average Class H dividend base (in millions) (Denominator) 1,300.0 1,297.0 1,255.5 Available Separate Consolidated Net Income (Loss) $ (481.8) $ 384.9 $ (95.7) ======== ======== ========
- ------------------- Reference should be made to the Notes to the Consolidated Financial Statements. IV-45 HUGHES ELECTRONICS CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, -------------------- 2001 2000 --------- --------- (Dollars in Millions) ASSETS Current Assets Cash and cash equivalents $ 700.1 $ 1,508.1 Accounts and notes receivable, net of allowances of $113.6 and $88.3 1,090.5 1,253.0 Contracts in process 153.1 186.0 Inventories 360.1 338.0 Deferred income taxes 118.9 89.9 Prepaid expenses and other 918.4 778.7 --------- --------- Total Current Assets 3,341.1 4,153.7 Satellites, net 4,806.6 4,230.0 Property, net 2,197.8 1,707.8 Net Investment in Sales-type Leases 227.0 221.1 Intangible Assets, net 7,156.8 7,151.3 Investments and Other Assets 1,480.8 1,815.4 --------- --------- Total Assets $19,210.1 $19,279.3 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts payable $ 1,227.5 $ 1,224.2 Deferred revenues 178.5 137.6 Short-term borrowings and current portion of long-term debt 1,658.5 24.6 Accrued liabilities and other 1,342.0 1,304.5 --------- --------- Total Current Liabilities 4,406.5 2,690.9 --------- --------- Long-Term Debt 988.8 1,292.0 Other Liabilities and Deferred Credits 1,465.1 1,647.3 Deferred Income Taxes 746.5 769.3 Commitments and Contingencies Minority Interests 531.3 553.7 Stockholder's Equity Capital stock and additional paid-in capital 9,561.2 9,973.8 Preferred stock 1,498.4 1,495.7 Retained earnings (deficit) (86.4) 631.6 --------- --------- Subtotal Stockholder's Equity 10,973.2 12,101.1 --------- --------- Accumulated Other Comprehensive Income (Loss) Minimum pension liability adjustment (17.3) (16.1) Accumulated unrealized gains on securities 192.6 257.0 Accumulated foreign currency translation adjustments (76.6) (15.9) --------- --------- Accumulated other comprehensive income 98.7 225.0 --------- --------- Total Stockholder's Equity 11,071.9 12,326.1 --------- --------- Total Liabilities and Stockholder's Equity $19,210.1 $19,279.3 ========= =========
- ------------------- Reference should be made to the Notes to the Consolidated Financial Statements. IV-46 HUGHES ELECTRONICS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Capital Stock and Accumulated Additional Retained Other Total Paid-In Preferred Earnings Comprehensive Stockholder's Comprehensive Capital Stock (Deficit) Income (Loss) Equity Income (Loss) ------------- --------- --------- ------------- ------------- ------------- (Dollars in Millions) Balance at December 31, 1998 $8,146.1 $ 257.8 $ 8.3 $ 8,412.2 Net Loss (291.3) (291.3) $(291.3) Preferred stock $1,487.5 (2.5) 1,485.0 Preferred stock dividends (48.4) (48.4) GM Class H common stock acquired by Hughes and retired by GM (11.1) (11.1) Stock options exercised 114.4 114.4 Shares issued in connection with acquisitions 1,506.7 1,506.7 Tax benefit from exercise of GM Class H common stock options 53.4 53.4 Minimum pension liability adjustment (0.5) (0.5) (0.5) Foreign currency translation adjustments 11.0 11.0 11.0 Unrealized gains on securities 449.9 449.9 449.9 ------- Comprehensive income $ 169.1 -------- -------- ------- ------- --------- ======= Balance at December 31, 1999 9,809.5 1,487.5 (84.4) 468.7 11,681.3 Net Income 813.0 813.0 $ 813.0 Preferred stock 8.2 (3.2) 5.0 Preferred stock dividends (93.8) (93.8) Stock options exercised 78.4 78.4 Tax benefit from exercise of GM Class H common stock options 62.3 62.3 Subsidiary common stock issued in connection with acquisition and other 23.6 23.6 Minimum pension liability adjustment (8.8) (8.8) (8.8) Foreign currency translation adjustments (25.9) (25.9) (25.9) Unrealized loss on securities (209.0) (209.0) (209.0) ------- Comprehensive income $ 569.3 -------- -------- ------- ------- -------- ======= Balance at December 31, 2000 9,973.8 1,495.7 631.6 225.0 12,326.1 Net Loss (621.6) (621.6) $(621.6) Preferred stock 2.7 (2.7) Preferred stock dividends (93.7) (93.7) Stock options exercised 31.5 31.5 Tax benefit from exercise of GM Class H common stock options 7.1 7.1 Adjustment related to Raytheon purchase price settlement (574.2) (574.2) Subsidiary common stock issued in connection with acquisition and other 123.0 123.0 Minimum pension liability adjustment (1.2) (1.2) (1.2) Foreign currency translation adjustments (60.7) (60.7) (60.7) Cumulative effect of accounting change 0.4 0.4 0.4 Unrealized gains (losses) on securities and derivatives: Unrealized holding losses (121.4) (121.4) (121.4) Less: reclassification adjustment for net losses recognized during the period 56.6 56.6 56.6 ------- Comprehensive income $(747.9) -------- -------- ------- ------- --------- ======= Balance at December 31, 2001 $9,561.2 $1,498.4 $ (86.4) $ 98.7 $11,071.9 ======== ======== ======= ======= =========
- ------------------- Reference should be made to the Notes to the Consolidated Financial Statements. IV-47 HUGHES ELECTRONICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------- 2001 2000 1999 --------- --------- --------- (Dollars in Millions) Cash Flows from Operating Activities Loss from continuing operations before cumulative effect of accounting change $ (614.2) $ (355.4) $ (391.1) Adjustments to reconcile loss from continuing operations before cumulative effect of accounting change to net cash provided by operating activities Depreciation and amortization 1,147.7 948.1 678.9 Equity losses from unconsolidated affiliates 61.3 164.2 189.2 Loss on disposal of assets 15.3 14.6 2.7 Net gain from sale of investments (130.6) -- (30.0) Gross profit on sales-type leases (32.7) (136.4) -- Loss on discontinuation of DIRECTV Japan business and write down of Sky Perfect investment 180.0 128.4 -- Deferred income taxes and other 93.3 377.1 260.3 Loss on discontinuation of wireless product lines -- -- 272.1 Change in other operating assets and liabilities Accounts and notes receivable 49.9 (164.4) 35.0 Inventories (19.8) (101.9) (38.7) Prepaid expenses and other (23.3) 5.3 (494.0) Accounts payable (320.8) 162.0 101.4 Accrued liabilities (100.7) (132.1) 59.6 Other (115.1) 181.2 (265.9) --------- --------- -------- Net Cash Provided by Operating Activities 190.3 1,090.7 379.5 --------- --------- -------- Cash Flows from Investing Activities Investment in companies, net of cash acquired (287.8) (181.2) (2,443.7) Expenditures for property (799.4) (939.0) (506.4) Expenditures for satellites (944.1) (777.1) (789.4) Investment in convertible bonds -- -- (244.7) Early buy-out of satellite sale-leasebacks -- -- (245.4) Proceeds from sale of investments 204.9 4,040.3 -- Proceeds from insurance claims 132.4 36.2 272.0 Other, net (47.2) 31.6 15.8 --------- --------- --------- Net Cash Provided by (Used in) Investing Activities (1,741.2) 2,210.8 (3,941.8) --------- --------- --------- Cash Flows from Financing Activities Net increase (decrease) in notes and loans payable 1,187.4 (496.6) 343.0 Long-term debt borrowings 1,642.6 5,262.2 8,165.6 Repayment of long-term debt (1,515.2) (5,591.5) (7,494.4) Net proceeds from issuance of preferred stock -- -- 1,485.0 Stock options exercised 21.8 70.1 114.4 Purchase and retirement of GM Class H common stock -- -- (11.1) Preferred stock dividends paid to General Motors (93.7) (93.8) (25.0) Partial payment of Raytheon settlement (500.0) -- -- --------- --------- --------- Net Cash Provided by (Used in) Financing Activities 742.9 (849.6) 2,577.5 --------- --------- --------- Net cash provided by (used in) continuing operations (808.0) 2,451.9 (984.8) Net cash used in discontinued operations -- (1,182.0) (119.0) --------- --------- --------- Net increase (decrease) in cash and cash equivalents (808.0) 1,269.9 (1,103.8) Cash and cash equivalents at beginning of the year 1,508.1 238.2 1,342.0 --------- --------- --------- Cash and cash equivalents at end of the year $ 700.1 $ 1,508.1 $ 238.2 ========= ========= =========
- ------------------- Reference should be made to the Notes to the Consolidated Financial Statements. IV-48 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1: Basis of Presentation and Description of Business Hughes Electronics Corporation ("Hughes Electronics" or "Hughes") is a wholly-owned subsidiary of General Motors Corporation ("GM"). The GM Class H common stock tracks the financial performance of Hughes. Hughes is a leading provider of digital entertainment, information and communication services and satellite-based private business networks. Hughes is the world's leading digital multi-channel entertainment service provider with its programming distribution service known as DIRECTV(R), which was introduced in the U.S. in 1994 and was the first high-powered, all digital, direct-to-home television distribution service in North America. DIRECTV began service in Latin America in 1996. DIRECTV Broadband, Inc. ("DIRECTV Broadband"), formerly known as Telocity Delaware, Inc. ("Telocity"), which was acquired by Hughes in April 2001, provides digital subscriber line ("DSL") services purchased from wholesale providers. Hughes is also the owner and operator of the largest commercial satellite fleet in the world through its approximately 81% owned subsidiary, PanAmSat Corporation ("PanAmSat"). Hughes is also a leading provider of broadband services and products, including satellite wireless communications ground equipment and business communications services. Hughes' equipment and services are applied in, among other things, data, video and audio transmission, cable and network television distribution, private business networks, digital cellular communications and direct-to-home satellite broadcast distribution of television programming. 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 and prior years presented herein. Alternatively, the financial results 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 Consolidated Statements of Cash Flows as "Net cash used in discontinued operations." See further discussion in Note 17. The accompanying consolidated financial statements include the applicable portion of intangible assets, including goodwill, and related amortization resulting from purchase accounting adjustments associated with GM's purchase of Hughes in 1985, with certain amounts allocated to the Satellite Businesses. Merger Transaction On October 28, 2001, Hughes and GM, together with EchoStar Communications Corporation ("EchoStar"), announced the signing of definitive agreements that provide for the split-off of Hughes (or a company holding all of the capital stock of Hughes) from GM and the combination of the Hughes business with EchoStar by means of a merger (the "Merger"). The surviving entity is sometimes referred to as New EchoStar. The Merger is subject to a number of conditions and no assurances can be given that the transactions will be completed. See further discussion of the Merger in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Acquisitions, Investments and Divestitures--Merger Transaction." The financial and other information regarding Hughes contained in this Annual Report do not give any effect to or make any adjustment for the anticipated completion of the Merger. The split-off of Hughes from GM would occur by means of a distribution to the holders of GM Class H common stock of one share of Class C common stock of a Hughes holding company (that will own all of the stock of Hughes at the time of the split-off) in exchange for each share of GM Class H common stock held immediately prior to the split-off. Immediately following the split-off, the businesses of Hughes and EchoStar would be combined in the Hughes/EchoStar merger to form New EchoStar. Each share of the Hughes holding company Class C common stock would remain outstanding and become a share of Class C common stock of New EchoStar. Holders of Class A and Class B common stock of EchoStar would receive about 1.3699 shares of stock of the merged entity in exchange for each share of EchoStar Class A or Class B common stock held prior to the Hughes/EchoStar merger. The transactions are structured in a manner that will not result in the recapitalization of GM Class H common stock into GM $1 2/3 par value common stock at a 120% exchange ratio, as currently provided for under certain circumstances in the General Motors Restated Certificate of Incorporation, as amended. The GM $1 2/3 par value common stock would remain outstanding and would be GM's only class of common stock after the transactions. IV-49 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) As part of the transactions, GM would receive a dividend from Hughes of up to $4.2 billion in cash, and its approximately 30% retained economic interest in Hughes would be reduced by a commensurate amount. Following these transactions, subject to Internal Revenue Service ("IRS") approval, and based on a number of assumptions, including the potential issuance or distribution of up to 100 million shares of GM Class H common stock or New EchoStar Class C common stock in exchange for certain debt of GM, GM currently may retain an interest in the merged entity. The $4.2 billion dividend to GM will be financed by Hughes through new and existing credit facilities or other borrowings. The transactions are subject to a number of conditions, including approval by a majority of each class of GM stockholders--GM $1 2/3 and GM Class H--voting both separately as distinct classes and also voting together as a single class based on their respective per share voting power. The proposed transactions also are subject to anti-trust clearance and approval by the Federal Communications Commission. In addition, the transactions are contingent upon the receipt of a favorable ruling from the IRS that the separation of Hughes from GM will be tax-free to GM and its stockholders for U.S. federal income tax purposes. The transactions are currently expected to close in the second half of 2002. GM, Hughes, and EchoStar have agreed that, in the event that the transactions do not occur because certain specified regulatory-related conditions have not been satisfied, EchoStar will be required to pay Hughes a $600 million termination fee and if the merger agreement is terminated for failure to obtain specified regulatory clearances or financing to complete the merger, purchase Hughes' interest in PanAmSat for an aggregate purchase price of approximately $2.7 billion, which is payable, depending on the circumstances, solely in cash or in a combination of cash and either debt or equity securities of EchoStar. The proceeds from the termination fee and the sale of Hughes' PanAmSat interest would result in the recognition of a gain that would be material to Hughes' financial position and results of operations. Cash proceeds, net of income taxes, would be retained by Hughes and used to repay certain outstanding borrowings and fund future operating requirements. Note 2: Summary of Significant Accounting Policies Principles of Consolidation The accompanying financial statements are presented on a consolidated basis and include the accounts of Hughes and its domestic and foreign subsidiaries that are more than 50% owned or controlled by Hughes after elimination of intercompany accounts and transactions. Hughes allocates losses to minority interests only to the extent of a minority investor's investment in a subsidiary. Use of Estimates in the Preparation of the Consolidated Financial Statements The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Revenue Recognition Revenues are generated from sales of direct-to-home broadcast subscriptions, the sale of DSL services, the sale of transponder capacity and related services through outright sales, sales-type leases and operating lease contracts, and sales of communications equipment and services. Sales are generally recognized as products are shipped or services are rendered. Direct-To-Home subscription revenues and pay-per-view services are recognized when programming is broadcast to subscribers. Programming payments received from subscribers in advance of the broadcast are recorded as deferred revenues until earned. Advance payments in the form of cash and equity instruments from programming content providers for carriage of their signal on DIRECTV are deferred and recognized as revenue using the straight-line method over the related contract term. Equity instruments are recorded at fair value based on quoted market prices or appraised values when received. IV-50 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Satellite transponder lease contracts qualifying for capital lease treatment (typically based on the term of the lease) are accounted for as sales-type leases, with revenues recognized equal to the net present value of the future minimum lease payments. Upon entering into a sales-type lease, the cost basis of the transponder is charged to cost of products sold. The portion of each periodic lease payment deemed to be attributable to interest income is recognized in each respective period. Contracts for sales of transponders typically include telemetry, tracking and control ("TT&C") service agreements. Revenues related to TT&C service agreements are recognized as the services are performed. Transponder and other lease contracts that do not qualify as sales-type leases are accounted for as operating leases. Operating lease revenues are recognized on a straight-line basis over the respective lease term. Differences between operating lease payments received and revenues recognized are deferred and included in accounts and notes receivable or investments and other assets. A small percentage of revenues are derived from long-term contracts for the sale of large wireless communications systems. Sales under long-term contracts are recognized primarily using the percentage-of-completion (cost-to-cost) method of accounting. Under this method, sales are recorded equivalent to costs incurred plus a portion of the profit expected to be realized, determined based on the ratio of costs incurred to estimated total costs at completion. Profits expected to be realized on long-term contracts are based on estimates of total sales value and costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are recorded in the accounting period in which the revisions are made. Estimated losses on contracts are recorded in the period in which they are identified. Hughes has from time to time entered into agreements for the sale and leaseback of certain of its satellite transponders. However, as a result of early buy-out transactions described in Note 4, no obligations under sale-leaseback agreements remain at December 31, 2001. Prior to the completion of the early buy-out transactions, the leasebacks were classified as operating leases and, therefore, the capitalized cost and associated depreciation related to satellite transponders sold were not included in the accompanying consolidated financial statements. Gains resulting from the sale-leaseback transactions were deferred and amortized over the leaseback period. Leaseback expense was recorded using the straight-line method over the term of the lease, net of amortization of the deferred gains. Differences between operating leaseback payments made and expense recognized were deferred and included in other liabilities and deferred credits. Subscriber Acquisition Costs Subscriber acquisition costs consist of consumer promotional offers, such as the cost of subsidizing the consumers purchase of DIRECTV(TM) receiving equipment, subsidizing installation and programming, dealer commissions, print and television advertising, and subsidies paid to manufacturers of DIRECTV receiving equipment. The costs associated with advertising are expensed as services are provided. Promotional offers and manufacturer subsidies are expensed as incurred. Generally, dealer commissions are recognized on a straight-line basis over a one-year period. Dealers earn a pro-rata portion of the commission each month during the first year from the date of initial customer activation as long as a customer remains connected to the DIRECTV service. DIRECTV receiving equipment and installation costs are expensed as incurred or, when a contractual commitment exists, deferred and amortized over the related customer contract period, which is generally one-year. Subscriber acquisition costs are included in "Selling, general and administrative expenses" in the statement of operations. The deferred portion of the costs are included in "Prepaid expenses and other" in the balance sheet. Cash Flows Cash equivalents consist of highly liquid investments purchased with original maturities of three months or less. Net cash from operating activities includes cash payments made for interest of $268.4 million, $312.9 million and $174.6 million in 2001, 2000 and 1999, respectively. Net cash refunds received by Hughes for prior year income taxes amounted to $310.7 million, $290.5 million and $197.2 million in 2001, 2000 and 1999, respectively. IV-51 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Contracts in Process Contracts in process are stated at costs incurred plus estimated profit, less amounts billed to customers and advances and progress payments applied. Engineering, tooling, manufacturing, and applicable overhead costs, including administrative, research and development and selling expenses, are charged to costs and expenses when incurred. Amounts billed under retainage provisions of contracts are not significant. Advances offset against contract related receivables amounted to $37.6 million and $93.0 million at December 31, 2001 and 2000, respectively. Inventories Inventories are stated at the lower of cost or market principally using the average cost method.
Major Classes of Inventories 2001 2000 ---------------------------- ------ ------ (Dollars in Millions) Productive material and supplies............ $ 58.3 $ 89.5 Work in process............................. 118.6 128.3 Finished goods.............................. 183.2 120.2 ------ ------ Total.................................... $360.1 $338.0 ====== ======
Property, Satellites and Depreciation Property and satellites are carried at cost. Satellite costs include construction costs, launch costs, launch insurance and capitalized interest. Capitalized customer leased set-top box costs include the cost of hardware and installation. Depreciation is computed generally using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the life of the asset or term of the lease. Intangible Assets Goodwill, which represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses, and intangible assets are amortized using the straight-line method over periods not exceeding 40 years. As discussed below, with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, on January 1, 2002, Hughes will cease amortization of goodwill and intangible assets with indefinite lives. Broadcast Programming Rights The cost of television programming broadcast rights are recognized as programming is broadcast. The costs of rights to distribute live sporting events are charged to expense using the straight-line method as the events occur over the course of the season or tournament. These costs are included in "Broadcast programming and other costs" in the statement of operations. Software Development Costs Other assets include certain software development costs capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Capitalized software development costs at December 31, 2001 and 2000, net of accumulated amortization of $147.8 million and $125.2 million, respectively, totaled $85.1 million and $74.5 million, respectively. The software is amortized using the greater of the units of revenue method or the straight-line method over its estimated useful life, not in excess of five years. Software program reviews are conducted to ensure that capitalized software development costs are properly treated and costs associated with programs that are not generating revenues are appropriately written-off. Valuation of Long-Lived Assets Hughes evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such IV-52 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal. Foreign Currency Some of Hughes' foreign operations have determined the local currency to be their functional currency. Accordingly, these foreign entities translate assets and liabilities from their local currencies to U.S. dollars using year-end exchange rates while income and expense accounts are translated at the average rates in effect during the year. The resulting translation adjustment is recorded as part of accumulated other comprehensive income (loss) ("OCI"), a separate component of stockholder's equity. Hughes also holds foreign currency denominated equity investments for which translation adjustments are also recorded as part of OCI. Hughes also has foreign operations where the U.S. dollar has been determined as the functional currency. Gains and losses resulting from remeasurement of the foreign currency denominated assets, liabilities and transactions into the U.S. dollar are recognized currently, in the statement of operations. Financial Instruments and Investments Hughes maintains investments in equity securities of unaffiliated companies. Marketable equity securities are considered available-for-sale and carried at current fair value based on quoted market prices with unrealized gains or losses (excluding other-than-temporary losses), net of taxes, reported as part of OCI. Hughes continually reviews its investments to determine whether a decline in fair value below the cost basis is "other-than-temporary." Hughes considers, among other factors; the magnitude and duration of the decline; the financial health of and business outlook of the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors; and Hughes' intent and ability to hold the investment. If the decline in fair value is judged to be other-than-temporary, the cost basis of the security is written-down to fair value and the amount recognized in the statement of operations as part of "Other, net." Non-marketable equity securities are carried at cost. Investments in which Hughes owns at least 20% of the voting securities or has significant influence are accounted for under the equity method of accounting. Equity method investments are recorded at cost and adjusted for the appropriate share of the net earnings or losses of the investee. Investee losses are recorded up to the amount of the investment plus advances and loans made to the investee, and financial guarantees made on behalf of the investee. In certain instances, this can result in Hughes recognizing investee earnings or losses in excess of its ownership percentage. The carrying value of cash and cash equivalents, accounts and notes receivable, investments and other assets, accounts payable, amounts included in accrued liabilities and other meeting the definition of a financial instrument and debt approximated fair value at December 31, 2001 and 2000. Hughes carries all derivative financial instruments on the balance sheet at fair value based on quoted marked prices. 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 the statement of operations 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. The net deferred gain from effective cash flow hedges in OCI of $0.7 million at December 31, 2001 is expected to be recognized in earnings during the next twelve months. IV-53 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Stock Compensation Hughes issues GM Class H common stock options to employees with grant prices equal to the fair value of the underlying security at the date of grant. No compensation cost has been recognized for options in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. See Note 12 for information regarding the pro forma effect on earnings of recognizing compensation cost based on the estimated fair value of the stock options granted, as required by SFAS No. 123, Accounting for Stock-Based Compensation. Compensation expense related to stock awards is recognized ratably over the vesting period and, where required, periodically adjusted to reflect changes in the stock price of the underlying security. Product and Service Related Expenses Advertising and research and development costs are expensed as incurred. Advertising expenses were $126.6 million in 2001, $108.3 million in 2000 and $115.8 million in 1999. Expenditures for research and development were $85.8 million in 2001, $104.5 million in 2000 and $98.8 million in 1999. Market Concentrations and Credit Risk Hughes provides services and extends credit to a number of wireless communications equipment customers and to a large number of consumers. Management monitors its exposure to credit losses and maintains allowances for anticipated losses. Accounting Changes Hughes adopted SFAS No. 141, Business Combinations, on July 1, 2001. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and prohibits the amortization of goodwill and intangible assets with indefinite lives acquired thereafter. The adoption of SFAS No. 141 did not have a significant impact on Hughes' consolidated results of operations or financial position. Hughes adopted 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 OCI. In September 1999, the Financial Accounting Standards Board ("FASB") issued Emerging Issues Task Force Issue 99-10 ("EITF 99-10"), Percentage Used to Determine the Amount of Equity Method Losses. EITF 99-10 addresses the percentage of ownership that should be used to compute equity method losses when the investment has been reduced to zero and the investor holds other securities of the investee. EITF 99-10 requires that equity method losses should not be recognized solely on the percentage of common stock owned; rather, an entity-wide approach should be adopted. Under such an approach, equity method losses must be recognized based on the ownership level that includes other equity securities (e.g., preferred stock) and loans/advances to the investee or based on the change in the investor's claim on the investee's book value. Hughes adopted EITF 99-10 during the third quarter of 1999 which resulted in Hughes recording a higher percentage of DIRECTV Japan's losses subsequent to the effective date of September 23, 1999. The unfavorable impact of adopting EITF 99-10 was $39.0 million after-tax. New Accounting Standards In August 2001, the 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. The adoption of the statement on January 1, 2002 is not expected to have an impact on Hughes' consolidated results of operations or financial position. IV-54 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. 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 adopted 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. Management is currently assessing the impact of this provision of the standard on Hughes' results of operations and financial position. Management estimates that as a result of the new standard, amortization expense of $216 million pre-tax ($195 million after-tax) associated with goodwill and intangible assets with indefinite lives will not be charged to the statement of operations in 2002. Reclassifications Certain prior year amounts have been reclassified to conform to the 2001 presentation. Note 3: Property and Satellites, Net
Estimated Useful Lives (years) 2001 2000 ------------ -------- -------- (Dollars in Millions) Land and improvements 7-30 $ 54.4 $ 45.5 Buildings and leasehold improvements 2-40 290.9 189.1 Machinery and equipment 2-23 1,627.2 1,105.4 Customer leased set-top boxes 4-7 969.5 778.3 Furniture, fixtures and office machines 3-15 128.6 109.7 Construction in progress -- 450.8 386.0 -------- -------- Total 3,521.4 2,614.0 Less accumulated depreciation 1,323.6 906.2 -------- -------- Property, net $2,197.8 $1,707.8 ======== ======== Satellites 12-16 $6,215.4 $5,263.8 Less accumulated depreciation 1,408.8 1,033.8 -------- -------- Satellites, net $4,806.6 $4,230.0 ======== ========
Hughes capitalized interest costs of $76.3 million, $82.4 million and $65.1 million during 2001, 2000 and 1999, respectively, as part of the cost of its satellites under construction. Note 4: Leasing Activities Future minimum payments due from customers under sales-type leases and related service agreements, and noncancelable satellite transponder operating leases as of December 31, 2001 are as follows:
Sales-Type Leases ------------------ Minimum Service Lease Agreement Operating Payments Payments Leases -------- --------- --------- (Dollars in Millions) 2002 $ 47.0 $ 4.0 $ 718.2 2003 47.0 4.0 644.3 2004 45.5 3.7 606.8 2005 43.3 3.4 556.1 2006 28.6 1.2 516.0 Thereafter 169.3 5.2 2,398.5 ------ ----- -------- Total $380.7 $21.5 $5,439.9 ====== ===== ========
IV-55 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) The components of the net investment in sales-type leases are as follows:
2001 2000 ------ ------ (Dollars in Millions) Total minimum lease payments $380.7 $382.6 Less unearned interest income and allowance for doubtful accounts 128.8 136.5 ------ ------ Total net investment in sales-type leases 251.9 246.1 Less current portion 24.9 25.0 ------ ------ Total long-term net investment in sales-type leases $227.0 $221.1 ====== ======
In 1999, PanAmSat exercised early buy-out options on transponders leased under sale-leaseback agreements for $245.4 million in cash and $124.1 million of assumed debt. As a result, all deferred gains on sale-leaseback transactions were eliminated. Note 5: Intangible Assets At December 31, 2001 and 2000, Hughes had $6,500.3 million and $6,443.9 million, respectively, of goodwill, net of accumulated amortization. Accumulated amortization for goodwill was $700.0 million and $499.5 million at December 31, 2001 and 2000, respectively. Goodwill is amortized over 7 to 40 years. Hughes also had, net of accumulated amortization, $656.5 million and $707.4 million of intangible assets at December 31, 2001 and 2000, respectively, which are amortized over 2 to 40 years. Accumulated amortization for intangible assets was $182.2 million and $111.3 million at December 31, 2001 and 2000, respectively. Intangible assets consist mainly of Federal Communications Commission licenses, customer lists and dealer networks. As discussed in Note 2, Hughes will cease amortization of goodwill and intangible assets with indefinite lives with the adoption of SFAS No. 142 on January 1, 2002. Note 6: Investments Investments in marketable equity securities stated at current fair value and classified as available-for-sale totaled $725.4 million and $973.9 million at December 31, 2001 and 2000, respectively. Accumulated unrealized pre-tax holding gains recorded as part of OCI were $323.1 million and $433.6 million as of December 31, 2001 and 2000, respectively. During 2001, Hughes recognized other-than-temporary declines in certain marketable equity investments, which resulted in a charge of $226.1 million. Hughes also recognized a gain of $130.6 million from the sale of certain marketable equity securities during 2001. The net amount of gains and losses realized from the write-down of investments is reflected as a reclassification adjustment in OCI and included in the statement of operations in "Other, net." Aggregate investments in affiliated companies, including advances and loans, accounted for under the equity method at December 31, 2001 and 2000, amounted to $54.9 million and $121.1 million, respectively. Note 7: Accrued Liabilities and Other
2001 2000 -------- -------- (Dollars in Millions) Payroll and other compensation $ 216.8 $ 231.0 Provision for consumer finance and rebate programs 110.6 125.6 Exit costs and other liabilities related to discontinued businesses 386.3 386.5 Programming contract liabilities 106.3 90.7 Other 522.0 470.7 -------- -------- Total $1,342.0 $1,304.5 ======== ========
IV-56 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Included in Other Liabilities and Deferred Credits is a provision for long-term programming contracts with above-market rates, established as part of the United States Satellite Broadcasting Company, Inc. ("USSB") and PRIMESTAR acquisitions discussed in Note 17, which totaled $430.1 million and $536.6 million at December 31, 2001 and December 31, 2000, respectively. During 2001, Hughes announced a nearly 10% reduction of its approximately 7,900 employees, excluding DIRECTV customer service representatives, located in the United States. As a result 750 employees, across all business disciplines, were given notification of termination that resulted in a charge to operations of $87.5 million. Of that charge, $80.0 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. As of December 31, 2001, 668 employees had been terminated with the remaining employees expected to be terminated in the first quarter of 2002. The remaining accrual for employee severance and other costs amounted to $32.7 million and $4.7 million, respectively, at December 31, 2001. Note 8: Short-Term Borrowings and Long-Term Debt Short-Term Borrowings and Current Portion of Long-Term Debt
Interest Rates at December 31, 2001 2001 2000 ----------------- -------- ----- (Dollars in Millions) Revolving credit facilities 3.49% $ 450.0 Other short-term borrowings 4.18%- 11.50% 16.4 $ 3.4 Current portion of long-term debt 2.75%- 7.23% 1,192.1 21.2 -------- ----- Total short-term borrowings and current portion of long-term debt $1,658.5 $24.6 ======== =====
Long-Term Debt
Interest Rates at December 31, 2001 2001 2000 ----------------- -------- -------- (Dollars in Millions) Notes payable 2.75%- 6.88% $ 796.5 $ 817.7 Credit facilities 2.99%- 3.29% 1,322.6 464.9 Other debt 3.04%-12.37% 61.8 30.6 -------- -------- Total debt 2,180.9 1,313.2 Less current portion 1,192.1 21.2 -------- -------- Total long-term debt $ 988.8 $1,292.0 ======== ========
Notes Payable. In July 1999, in connection with the early buy-out of a satellite sale-leaseback, PanAmSat assumed $124.1 million of variable rate notes of which $46.5 million was outstanding at December 31, 2001. The weighted average interest rate on the notes was 2.75% at December 31, 2001. The notes were repaid 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 December 31, 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. Credit Facilities. On January 5, 2001, DIRECTV Latin America, LLC ("DLA") entered into a $450.0 million revolving credit facility. This facility provides for a commitment through the earlier of July 5, 2002 or the date of receipt of the cash proceeds from the issuance of any debt or equity security of DLA. Borrowings under the credit facility bear interest at a rate based on the London Interbank Offer Rate IV-57 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) ("LIBOR") plus an indicated spread. As of December 31, 2001, the facility was fully drawn, with borrowings outstanding under the revolving credit facility bearing a weighted average interest rate of 3.49%. As of December 31, 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. As of December 31, 2001, the facility was fully drawn, with borrowings outstanding under the revolving credit facility bearing a weighted average interest rate of 2.99%. On October 1, 2001, Hughes entered into a $2,000 million revolving credit facility with General Motors Acceptance Corporation ("GMAC"). The facility is split into two loan tranches: a $1,500 million tranche secured by a cash deposit from Huges of up to $1,500 million and a $500 million unsecured tranche. This facility provides for a commitment through September 30, 2002, and is renewable for up to six additional months at Hughes' option. Borrowings under the secured portion of the facility are only available up to the amount of cash collateral provided. Access to the unsecured portion of the facility is conditioned upon GMAC's receipt of the cash deposit. Borrowings under the unsecured portion of the facility bear an interest rate based on GMAC's cost of funds plus 1.75%. As of December 31, 2001, no cash collateral had been provided to GMAC and the facility was unavailable for loans. At December 31, 2001, PanAmSat maintained a $500.0 million multi-year unsecured revolving credit facility. The facility provides for a commitment through December 24, 2002. Borrowings under the credit facility bear interest at a rate equal to LIBOR plus a spread based on PanAmSat's credit rating. No amounts were outstanding under the facility at December 31, 2001. At December 31, 2001, SurFin Ltd. ("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. $392.0 million was outstanding under the $400.0 million credit facility at December 31, 2001, with borrowings bearing a weighted average interest rate of 3.18%. $180.6 million was outstanding under the $212.5 million credit facility at December 31, 2001. The weighted average interest rate on these borrowings was 3.29% at December 31, 2001. Other. $78.2 million in other short-term and long-term debt, related primarily to DLA and Hughes Network Systems' ("HNS") international subsidiaries, were outstanding at December 31, 2001, bearing fixed and floating rates of interest of 3.04% to 12.37%. Principal on these borrowings is due in varying amounts through 2007. The aggregate maturities of long-term debt for the five years subsequent to December 31, 2001 are $1,192.1 million in 2002, $385.1 million in 2003, $9.8 million in 2004, $283.4 million in 2005, $2.0 million in 2006 and $308.5 in 2007 and thereafter. See Note 21 for a discussion of financing activities subsequent to December 31, 2001. Note 9: Income Taxes The income tax benefit is based on the reported loss from continuing operations before income taxes, minority interests and cumulative effect of accounting change. Deferred income tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as measured by applying currently enacted tax laws. Hughes and its domestic subsidiaries join with GM in filing a consolidated U.S. federal income tax return. The portion of the consolidated income tax liability or receivable recorded by Hughes is generally equivalent to the amount that would have been recorded on a separate return basis. IV-58 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) The income tax benefit consisted of the following:
2001 2000 1999 ------- ------- ------- (Dollars in Millions) Taxes currently payable (refundable): U.S. federal $(422.2) $(757.9) $(406.5) Foreign 54.8 31.6 30.1 State and local (54.1) (52.0) (24.2) ------- ------- ------- Total (421.5) (778.3) (400.6) ------- ------- ------- Deferred tax liabilities (assets): U.S. federal 89.9 361.0 185.0 State and local 6.0 11.2 (21.3) ------- ------- ------- Total 95.9 372.2 163.7 ------- ------- ------- Total income tax benefit $(325.6) $(406.1) $(236.9) ======= ======= =======
Loss from continuing operations before income taxes, minority interests and cumulative effect of accounting change included the following components:
2001 2000 1999 ------- ------- ------- (Dollars in Millions) U.S. loss $(914.7) $(752.2) $(519.0) Foreign loss (75.0) (63.4) (141.0) ------- ------- ------- Total $(989.7) $(815.6) $(660.0) ======= ======= =======
The combined income tax benefit was different than the amount computed using the U.S. federal statutory income tax rate for the reasons set forth in the following table:
2001 2000 1999 ------- ------- ------- (Dollars in Millions) Expected refund at U.S. federal statutory income tax rate $(346.4) $(285.4) $(231.0) Research and experimentation tax benefits and resolution of tax contingencies (30.0) (80.9) (78.9) Extraterritorial income exclusion and foreign sales corporation tax benefit (37.1) (32.8) (13.6) U.S. state and local income taxes (20.9) (26.6) (29.5) DIRECTV Japan and other equity method investees 12.1 (81.2) 60.3 Tax benefit for investment in Motient (41.7) -- -- Minority interests in losses of partnership 33.9 27.8 19.0 Non-deductible goodwill amortization 46.3 40.3 31.0 Foreign taxes, net of credits 56.8 31.6 2.8 Other 1.4 1.1 3.0 ------- ------- ------- Total income tax benefit $(325.6) $(406.1) $(236.9) ======= ======= =======
IV-59 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities at December 31 were as follows:
2001 2000 --------------------- --------------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities -------- ----------- -------- ----------- (Dollars in Millions) Accruals and advances $ 316.5 $ 233.3 Customer deposits, rebates and commissions 172.3 $ 170.7 137.9 $ 185.1 State taxes 23.2 -- 29.4 -- Gain on PanAmSat merger -- 176.4 -- 181.2 Depreciation and amortization -- 1,065.1 -- 982.6 Net operating loss and tax credit carryforwards 351.6 -- 244.7 -- Programming contract liabilities 227.0 -- 251.0 -- Unrealized gains on securities -- 130.5 -- 176.6 Other 72.2 135.0 145.7 97.0 -------- -------- -------- -------- Subtotal 1,162.8 1,677.7 1,042.0 1,622.5 Valuation allowance (112.7) -- (98.9) -- -------- -------- -------- -------- Total deferred taxes $1,050.1 $1,677.7 $ 943.1 $1,622.5 ======== ======== ======== ========
No income tax provision has been made for the portion of undistributed earnings of foreign subsidiaries deemed permanently reinvested that amounted to approximately $87.4 million and $56.8 million at December 31, 2001 and 2000, respectively. Repatriation of all accumulated earnings would have resulted in tax liabilities of $30.6 million in 2001 and $19.9 million in 2000. At December 31, 2001, Hughes has $88.5 million of deferred tax assets relating to foreign operating loss carryforwards expiring in varying amounts between 2002 and 2006. A valuation allowance was provided for all foreign operating loss carryforwards. At December 31, 2001, Hughes has $24.2 million of foreign tax credits which will expire in 2005 and $37.2 million of foreign tax credits which will expire in 2006. A valuation allowance was provided for $24.2 million of foreign tax credits. At December 31, 2001, Hughes has $46.4 million of alternative minimum tax credits, which can be carried forward indefinitely. At December 31, 2001, Hughes' subsidiaries have $155.3 million of deferred tax assets relating to federal net operating loss carryforwards which will expire in varying amounts between 2009 and 2021. Hughes has an agreement with Raytheon Company ("Raytheon") which governs Hughes' rights and obligations with respect to U.S. federal and state income taxes for all periods prior to the spin-off and merger of Hughes' defense electronics business with Raytheon in 1997. Hughes is responsible for any income taxes pertaining to those periods prior to the merger, including any additional income taxes resulting from U.S. federal and state tax audits, and is entitled to any U.S. federal and state income tax refunds relating to those years. Hughes also has an agreement with Boeing which governs Hughes' rights and obligations with respect to U.S. federal and state income taxes for all periods prior to the sale of Hughes' Satellite Businesses. Hughes is responsible for any income taxes pertaining to those periods prior to the sale, including any additional income taxes resulting from U.S. federal and state tax audits, and is entitled to any U.S. federal and state income tax refunds relating to those years. The U.S. federal income tax returns of Hughes have been examined through 1994. All years prior to 1986 are closed. Issues relating to the years 1986 through 1994 are being contested through various stages of administrative appeal. The IRS is currently examining Hughes' U.S. federal tax returns for years 1995 through 1997. Management believes that adequate provision has been made for any adjustment which might be assessed for open years. Taxes receivable from GM at December 31, 2001 and 2000, respectively, were approximately $300.0 million and $175.0 million of which $180.0 million and $75.0 million, respectively, are included in "Prepaid expenses and other" in the consolidated balance sheets. Taxes receivable from GM IV-60 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) included as part of investments and other assets were $120.0 million and $100.0 at December 31, 2001 and 2000, respectively. Note 10: Retirement Programs and Other Postretirement Benefits Substantially all of Hughes' employees participate in Hughes' contributory and non-contributory defined benefit retirement plans. Benefits are based on years of service and compensation earned during a specified period of time before retirement. Additionally, an unfunded, nonqualified pension plan covers certain employees. Hughes also maintains a program for eligible retirees to participate in health care and life insurance benefits generally until they reach age 65. Qualified employees who elected to participate in the Hughes contributory defined benefit pension plans may become eligible for these health care and life insurance benefits if they retire from Hughes between the ages of 55 and 65. The components of the pension benefit obligation and the other postretirement benefit obligation, as well as the net benefit obligation recognized in the consolidated balance sheets, are shown below:
Other Postretirement Pension Benefits Benefits --------------- -------------- 2001 2000 2001 2000 ------ ------ ------ ------ (Dollars in Millions) Change in Benefit Obligation Net benefit obligation at beginning of year $403.5 $317.7 $ 30.2 $ 22.8 Service cost 16.0 14.7 0.5 0.6 Interest cost 32.7 30.4 1.9 2.7 Plan participants' contributions 2.1 2.3 -- -- Actuarial (gain) loss 41.7 76.9 (2.3) 8.1 Benefits paid (40.1) (38.5) (2.7) (4.0) ------ ------ ------ ------ Net benefit obligation at end of year 455.9 403.5 27.6 30.2 ------ ------ ------ ------ Change in Plan Assets Fair value of plan assets at beginning of year 477.5 390.1 -- -- Actual return on plan assets (29.9) 115.5 -- -- Employer contributions 6.4 8.0 2.7 4.0 Plan participants' contributions 2.1 2.3 -- -- Benefits paid (40.1) (38.5) (2.7) (4.0) Transfers -- 0.1 -- -- ------ ------ ------ ------ Fair value of plan assets at end of year 416.0 477.5 -- -- ------ ------ ------ ------ Funded status at end of year (39.9) 74.0 (27.6) (30.2) Unamortized amount resulting from changes in plan provisions 23.2 0.9 -- -- Unamortized net amount resulting from changes in plan experience and actuarial assumptions 25.6 (62.1) (6.4) (4.5) ------ ------ ------ ------ Net amount recognized at end of year $ 8.9 $ 12.8 $(34.0) $(34.7) ====== ====== ====== ====== Amounts recognized in the consolidated balance sheets consist of: Prepaid benefit cost $ 29.0 $ 29.4 Accrued benefit cost (52.8) (46.7) $(34.0) $(34.7) Intangible asset 3.7 3.0 -- -- Deferred tax assets 11.7 11.0 -- -- Accumulated other comprehensive loss 17.3 16.1 -- -- ------ ------ ------ ------ Net amount recognized at end of year $ 8.9 $ 12.8 $(34.0) $(34.7) ====== ====== ====== ======
There were no GM Class H common stock shares included in the pension plan assets at December 31, 2001 and $0.5 million at December 31, 2000. IV-61 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Other Pension Postretirement Benefits Benefits ---------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Weighted-average assumptions as of December 31 Discount rate 7.25% 7.75% 7.00% 7.50% Expected return on plan assets 9.50% 9.50% N/A N/A Rate of compensation increase 5.00% 5.00% N/A N/A
For measurement purposes, an 8.0% annual rate of increase in per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease gradually 0.5% per year to 6.0% in 2006.
Other Postretirement Pension Benefits Benefits ---------------------- ---------------- 2001 2000 1999 2001 2000 1999 ------ ------ ------ ----- ---- ---- (Dollars in Millions) Components of net periodic benefit cost Benefits earned during the year $ 16.0 $ 14.7 $ 14.5 $ 0.5 $0.6 $0.6 Interest accrued on benefits earned in prior years 32.7 30.4 23.9 1.9 2.7 1.5 Expected return on assets (41.0) (37.9) (28.5) -- -- -- Amortization components Amount resulting from changes in plan provisions 2.1 0.1 0.4 -- -- -- Net amount resulting from changes in plan experience and actuarial assumptions 0.4 3.6 4.7 (0.5) 0.8 -- ------ ------ ------ ----- ---- ---- Net periodic benefit cost $ 10.2 $ 10.9 $ 15.0 $ 1.9 $4.1 $2.1 ====== ====== ====== ===== ==== ====
The projected benefit obligation and accumulated benefit obligation for the pension plans with accumulated benefit obligations in excess of plan assets were $62.3 million and $52.8 million, respectively, as of December 31, 2001 and $57.2 million and $46.7 million, respectively, as of December 31, 2000. The pension plans with accumulated benefit obligations in excess of plan assets do not have any underlying assets. A one-percentage point change in assumed health care cost trend rates would have the following effects:
1-Percentage 1-Percentage Point Increase Point Decrease -------------- -------------- (Dollars in Millions) Effect on total of service and interest cost components $0.2 $(0.2) Effect on postretirement benefit obligation 2.1 (1.9)
Hughes maintains 401(k) plans for qualified employees. A portion of employee contributions are matched by Hughes and amounted to $17.7 million, $15.1 million and $12.5 million in 2001, 2000 and 1999, respectively. Hughes has disclosed certain amounts associated with estimated future postretirement benefits other than pensions and characterized such amounts as "other postretirement benefit obligation." Notwithstanding the recording of such amounts and the use of these terms, Hughes does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of Hughes (other than pensions) represent legally enforceable liabilities of Hughes. IV-62 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Note 11: Stockholder's Equity GM holds all of the outstanding common stock of Hughes, which consists of 200 shares of $0.01 par value common stock. The following represents changes in the components of OCI, net of taxes, as of December 31:
2001 2000 1999 ------------------------- ------------------------- ----------------------- Tax Tax Pre-tax (Credit) Net Pre-tax Tax Net Pre-tax (Credit) Net Amount Expense Amount Amount Credit Amount Amount Expense Amount ------- -------- ------- ------- ------- ------- ------- -------- ------ (Dollars in Millions) Minimum pension liability adjustments $ (2.0) $ (0.8) $ (1.2) $ (14.8) $ (6.0) $ (8.8) $ (0.8) $(0.3) $ (0.5) Foreign currency translation adjustments.......... $ (60.7) -- $ (60.7) $ (25.9) -- $ (25.9) $ 11.0 -- $ 11.0 Unrealized gains (losses) on securities........ $(203.2) $(82.2) $(121.0) $(351.0) $(142.0) $(209.0) $767.3 $317.4 $449.9 Reclassification adjustment for net losses recognized during the period.... $ 95.2 $ 38.6 $ 56.6 -- -- -- -- -- --
Note 12: Incentive Plans Under the Hughes Electronics Corporation Incentive Plan (the "Plan"), as approved by the GM Board of Directors in 1999, shares, rights or options to acquire up to 233 million shares of GM Class H common stock on a cumulative basis were authorized for grant, of which 75 million shares were available at December 31, 2001 subject to GM Executive Compensation Committee approval. The GM Executive Compensation Committee may grant options and other rights to acquire shares of GM Class H common stock under the provisions of the Plan. The option price is equal to 100% of the fair market value of GM Class H common stock on the date the options are granted. These nonqualified options generally vest over two to five years, vest immediately in the event of certain transactions, expire ten years from date of grant and are subject to earlier termination under certain conditions. Changes in the status of outstanding options were as follows:
Shares Under Weighted-Average Option Exercise Price ------------ ---------------- GM Class H Common Stock Outstanding at December 31, 1998 47,096,160 $11.77 Granted 15,012,825 16.08 Exercised (10,308,171) 9.95 Terminated (4,294,746) 13.49 ----------- Outstanding at December 31, 1999 47,506,068 $13.28 Granted 35,538,026 37.06 Exercised (5,718,726) 11.88 Terminated (10,976,113) 31.47 ----------- Outstanding at December 31, 2000 66,349,255 $23.04 Granted 37,971,644 23.34 Exercised (1,946,460) 11.44 Terminated (6,565,541) 27.66 ----------- Outstanding at December 31, 2001 95,808,898 $23.08 ===========
IV-63 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) The following table summarizes information about the Plan stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable ---------------------------------- --------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (years) Price Exercisable Price --------------- ----------- ------------ --------- ----------- --------- $ 3.00 to $8.99 1,622,843 2.4 $ 6.95 1,622,843 $ 6.95 9.00 to 16.99 28,702,229 5.5 12.58 25,049,427 12.22 17.00 to 24.99 23,671,526 8.5 19.60 6,150,151 18.32 25.00 to 32.99 18,055,604 8.9 27.81 266,599 30.23 33.00 to 41.99 23,756,696 7.9 37.12 3,760,531 40.73 ---------- ---------- 95,808,898 7.4 $23.08 36,849,551 $15.94 ========== ==========
On May 5, 1997, PanAmSat adopted a stock option incentive plan with terms similar to the Plan. As of December 31, 2001, PanAmSat had 5,719,494 options outstanding to purchase its common stock with exercise prices ranging from $21.88 per share to $63.25 per share. The options vest ratably over three to four years and have a remaining life ranging from six years to ten years. At December 31, 2001, 1,876,162 options were exercisable at a weighted average exercise price ranging from $29.00 per share to $63.25. The PanAmSat options have been considered in the following pro forma analysis. The following table presents pro forma information as if Hughes recorded compensation cost using the fair value of issued options on their grant date, as required by SFAS No. 123, Accounting for Stock Based Compensation:
2001 2000 1999 ------- ------ ------- (Dollars in Millions) Earnings (loss) used for computation of available separate consolidated net income (loss) as reported $(714.7) $732.9 $(321.2) pro forma (946.5) 585.3 (384.9)
The pro forma amounts for compensation cost are not indicative of the effects on operating results for future periods. The following table presents the estimated weighted-average fair value of options granted under the Plan using the Black-Scholes valuation model and the assumptions used in the calculations:
2001 2000 1999 ------ ------ ------ Estimated fair value per option granted $13.66 $20.39 $ 8.01 Average exercise price per option granted 23.34 37.06 16.08 Expected stock volatility 51.3% 42.1% 38.0% Risk-free interest rate 5.1% 6.5% 5.2% Expected option life (in years) 7.0 6.9 7.0
IV-64 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Note 13: Other Income and Expenses
2001 2000 1999 ------- ------- ------- (Dollars in Millions) Equity losses from unconsolidated affiliates $ (61.3) $(164.2) $(189.2) Net loss on discontinuation of DIRECTV Japan business and write down of Sky Perfect investment (180.0) (128.4) -- Gain on the sale of Thomson investment 108.0 -- -- Net gain from sale of other investments 22.6 -- 39.4 Other 18.0 -- -- ------- ------- ------- Total other, net $ (92.7) $(292.6) $(149.8) ======= ======= =======
Equity losses from unconsolidated affiliates in 2001 are primarily comprised of losses at the DLA local operating companies and Hughes Tele.com (India) Limited ("HTIL"), and in addition, in 2000 and 1999, DIRECTV Japan. Note 14: Related-Party Transactions In the ordinary course of its operations, Hughes provides telecommunications services and sells electronic components to, and purchases sub-components from, related parties. The following table summarizes significant related-party transactions:
2001 2000 1999 ----- ----- ----- (Dollars in Millions) Revenues $24.8 $33.4 $46.5 Costs and expenses 11.2 27.0 35.2
Note 15: 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 (876.3 million, 681.2 million and 374.1 million during 2001, 2000 and 1999, 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 1,300.0 million during 2001, 1,297.0 million during 2000 and 1,255.5 million during 1999. 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 IV-65 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) 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. 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. 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. 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 16: 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, which would have resulted in the issuance of about 80 million shares if converted at December 31, 2001. The preferred stock accrues quarterly dividends at a rate of 6.25% per year and 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 17: Acquisitions, Investments and Divestitures Acquisitions and Investments On November 19, 2001, Hughes repaid $74.9 million of debt pursuant to the terms of a debt guarantee provided by Hughes for the benefit of Motient Corporation ("Motient"). In connections with the payment, Hughes received from Motient 7.1 million common shares of XM Satellite Radio Holdings Inc. stock, with a market value as of November 2001 of $67.9 million and $3.6 million in cash. The repayment of Motient's debt released Hughes of any further obligations related to Motient's indebtedness and therefore Hughes reversed a related reserve of $39.5 million. The net effect of these actions resulted in a credit of $36.1 million to "Other, net" in the statement of operations. On May 1, 2001, 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 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 under certain circumstances 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, Inc., and is included as part of the Direct-To-Home Broadcast segment. The purchase price was $197.8 million and was paid in cash. IV-66 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) The following selected unaudited pro forma information is being provided to present a summary of the combined results of Hughes and Telocity for 2001 and 2000 as if the acquisition had occurred as of the beginning of the respective periods, giving effect to purchase accounting adjustments. The pro forma data is presented for informational purposes only and may not necessarily reflect the results of operations of Hughes had Telocity operated as part of Hughes for each of the periods presented, nor are they necessarily indicative of the results of future operations. The pro forma information excludes the effect of non-recurring charges.
2001 2000 -------- -------- (Dollars in Millions) Total revenues $8,270.1 $7,297.0 Income (loss) before cumulative effect of accounting change (657.8) 670.0 Net income (loss) (665.2) 670.0 Pro forma income (loss) used for computation of available separate consolidated net income (loss) (758.3) 589.9
On July 28, 1999, DLA, acquired Galaxy Brasil, Ltda. ("GLB"), the exclusive distributor of DIRECTV services in Brazil, from Tevecap S.A. for approximately $114.0 million plus the assumption of debt. In connection with the transaction, Tevecap also sold its 10% equity interest in DLA to Hughes and Darlene Investments, LLC, which increased Hughes' ownership interest in DLA to 77.8%. As part of the transaction, Hughes also increased its ownership interest in SurFin, a company providing financing of subscriber receiver equipment for certain local operating companies located in Latin America, from 59.1% to 75%. The total consideration paid in the transactions amounted to approximately $101.1 million. On May 20, 1999, Hughes acquired by merger all of the outstanding capital stock of USSB, a provider of premium subscription television programming via the digital broadcasting system that it shared with DIRECTV. The total consideration of approximately $1.6 billion paid in July 1999, consisted of approximately $0.4 billion in cash and 22.6 million shares of GM Class H common stock (prior to giving effect to the stock split during 2000). On April 28, 1999, Hughes completed the acquisition of PRIMESTAR's 2.3 million subscriber medium-power direct-to-home satellite business. The purchase price consisted of $1.1 billion in cash and 4.9 million shares of GM Class H common stock (prior to giving effect to the stock split during 2000), for a total purchase price of $1.3 billion. As part of the acquisition of PRIMESTAR, Hughes also purchased the high-power satellite assets, which consisted of an in-orbit satellite and a satellite that had not yet been launched, and related orbital frequencies of Tempo Satellite Inc., a wholly owned subsidiary of TCI Satellite Entertainment Inc, for $500 million in cash. As part of the PRIMESTAR acquisition, Hughes formulated a detailed exit plan during the second quarter of 1999 and immediately began to migrate the medium-power customers to DIRECTV's high-power platform. Accordingly, Hughes accrued exit costs of $150 million in determining the purchase price allocated to the net assets acquired. The principal components of such exit costs include penalties to terminate assumed contracts and costs to remove medium-power equipment from customer premises. Since DIRECTV's acquisition of PRIMESTAR, DIRECTV converted a total of approximately 1.5 million customers to its high power service. The PRIMESTAR By DIRECTV service ceased operations, as planned, on September 30, 2000. The amount of accrued exit costs remaining at December 31, 2001 and 2000 was $4.0 million and $25.9 million, respectively, which primarily represents the remaining obligations on certain contracts. In February 1999, Hughes acquired an additional ownership interest in Grupo Galaxy Mexicana, S.R.L. de C.V. ("GGM"), a Latin America local operating company which is the exclusive distributor of DIRECTV in Mexico, from Grupo MVS, S.R.L. de C.V. ("Grupo MVS"). As a result, Hughes' equity ownership represents 49% of the voting equity and all of the non-voting equity of GGM. In October 1998, Hughes acquired from Grupo MVS an additional 10% interest in DLA, increasing Hughes' ownership interest to 70%. Hughes also acquired an additional 19.8% interest in SurFin, increasing Hughes' ownership percentage from 39.3% to 59.1%. The aggregate purchase price for these transactions was $197.0 million in cash. IV-67 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) The financial information included herein reflect acquisitions discussed above from their respective dates of acquisition. The acquisitions were accounted for by the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair values of the net assets acquired has been recorded as goodwill, resulting in a goodwill addition of $278.2 million for the year ended December 31, 2001, none in 2000 and $3,612.4 million for the year ended December 31, 1999. Divestitures On July 31, 2001, Hughes sold a 1.6% interest in Thomson Multimedia S. A. for approximately $132.0 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. 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 $42.0 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 value of the final closing net assets as discussed in Note 20. Summarized financial information for the discontinued operations follows:
2000 1999 -------- -------- (Dollars in Millions) Revenues (excluding intercompany transactions) $1,260.1 $1,780.4 Income tax provision 23.2 42.9 Net income 36.1 99.8
In a separate, but related transaction, Hughes also sold to Boeing its 50% interest in HRL Laboratories LLC ("HRL") for $38.5 million, which represented the net book value of Hughes' interest in HRL at October 6, 2000. During September 2000, HTIL sold new common shares in a public offering in India. As a result of this transaction, Hughes' equity interest was reduced from 44.7% to 29.1%. Due to the nature of the transaction, Hughes recorded a $23.3 million increase to "Capital stock and additional paid-in capital." On March 1, 2000, Hughes announced that the operations of 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. DIRECTV Japan was paid a commission for each subscriber who actually migrated. Hughes also 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" in the statement of operations 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 $29.7 million was paid for accrued exit costs and $6.8 million was paid for involuntary termination benefits during 2001. The amount remaining for accrued exit costs was IV-68 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) $47.6 million at December 31, 2001. No amounts were remaining for involuntary termination benefits at December 31, 2001. 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," resulting in a write-down of the carrying value of the investment by $212 million and $86 million, respectively. At December 31, 2001, the investment's market value approximated its carrying value. On January 13, 2000, Hughes announced the discontinuation of its mobile cellular and narrowband local loop product lines at HNS. As a result of this decision, Hughes recorded a fourth quarter 1999 pre-tax charge to continuing operations of $272.1 million. The charge represents the write-off of receivables and inventories, licenses, software and equipment with no alternative use. Note 18: Derivative Financial Instruments and Risk Management Hughes' cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates, interest rates and changes in the market value of its equity investments. Hughes manages its exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Hughes enters into derivative instruments only to the extent considered necessary to meet its risk management objectives, and does not enter into derivative contracts for speculative purposes. 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 is exposed to credit risk in the event of non-performance by the counterparties to its foreign exchange contracts. While Hughes believes this risk is remote, credit risk is managed through the periodic monitoring and approval of financially sound counterparties. Note 19: 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 receiving equipment (set-top boxes and dishes). Other includes the corporate office and other entities. IV-69 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) Selected information for Hughes' operating segments are reported as follows:
Direct-To- Home Satellite Network Broadcast Services Systems Other Eliminations Total ---------- --------- -------- -------- ------------ --------- (Dollars in Millions) 2001 External Revenues $6,283.4 $ 709.0 $1,229.6 $ 40.0 -- $8,262.0 Intersegment Revenues 21.0 161.1 96.2 0.3 $(278.6) -- -------- -------- -------- -------- ------- --------- Total Revenues $6,304.4 $ 870.1 $1,325.8 $ 40.3 $(278.6) $8,262.0 -------- -------- -------- -------- ------- --------- Operating Profit (Loss) $ (749.9) $ 165.3 $ (171.8) $ (34.5) $ 33.1 $ (757.8) Depreciation and Amortization 675.1 414.7 60.0 23.0 (25.1) 1,147.7 Intangibles, net 4,249.8 2,238.7 18.9 649.4 -- 7,156.8 Segment Assets 9,484.1 6,296.8 2,339.1 1,199.0 (108.9) 19,210.1 Capital Expenditures 734.3 338.2 664.6 0.4 6.0 1,743.5 -------- -------- -------- -------- ------- --------- 2000 External Revenues $5,208.6 $ 880.2 $1,176.7 $ 22.1 -- $7,287.6 Intersegment Revenues 29.4 143.4 233.1 5.2 $(411.1) -- -------- -------- -------- -------- ------- --------- Total Revenues $5,238.0 $1,023.6 $1,409.8 $ 27.3 $(411.1) $7,287.6 -------- -------- -------- -------- ------- --------- Operating Profit (Loss) $ (557.9) $ 356.6 $ (63.5) $ (67.9) $ (21.4) $ (354.1) Depreciation and Amortization 533.4 337.4 63.6 21.2 (7.5) 948.1 Intangibles, net 4,139.9 2,303.6 41.6 666.2 -- 7,151.3 Segment Assets 9,278.3 6,178.4 1,789.9 2,154.0 (121.3) 19,279.3 Capital Expenditures 913.5 449.5 369.5 0.6 (17.0) 1,716.1 -------- -------- -------- -------- ------- --------- 1999 External Revenues $3,781.7 $ 673.6 $1,091.7 $ 13.3 -- $5,560.3 Intersegment Revenues 3.3 137.0 293.0 2.5 $(435.8) -- -------- -------- -------- -------- ------- --------- Total Revenues $3,785.0 $ 810.6 $1,384.7 $ 15.8 $(435.8) $5,560.3 -------- -------- -------- -------- ------- --------- Operating Profit (Loss) $ (289.6) $ 338.3 $ (234.1) $ (126.0) $(103.1) $ (414.5) Depreciation and Amortization 312.0 280.5 77.4 20.8 (11.8) 678.9 Intangibles, net 4,308.5 2,368.6 46.9 682.0 -- 7,406.0 Segment Assets 8,452.2 5,984.7 1,167.3 3,370.3 (377.5) 18,597.0 Capital Expenditures 516.9 956.4 175.0 30.0 (13.0) 1,665.3 -------- -------- -------- -------- ------- ---------
IV-70 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) The following table presents revenues earned from customers located in different geographic areas. Property is grouped by its physical location. All satellites are reported as United States assets.
2001 2000 1999 --------------------- --------------------- --------------------- Total Net Property Total Net Property Total Net Property Revenues & Satellites Revenues & Satellites Revenues & Satellites -------- ------------ -------- ------------ -------- ------------ (Dollars in Millions) North America United States $6,686.7 $6,331.2 $6,008.2 $5,577.3 $4,407.9 $4,891.8 Canada and Mexico 206.8 207.4 198.8 89.3 114.6 51.8 -------- -------- -------- -------- -------- -------- Total North America 6,893.5 6,538.6 6,207.0 5,666.6 4,522.5 4,943.6 -------- -------- -------- -------- -------- -------- Europe United Kingdom 143.2 8.3 114.7 5.6 175.2 10.5 Other 64.3 0.4 19.7 0.4 47.6 0.2 -------- -------- -------- -------- -------- -------- Total Europe 207.5 8.7 134.4 6.0 222.8 10.7 -------- -------- -------- -------- -------- -------- South America and the Caribbean Brazil 247.0 220.0 285.4 234.3 157.7 151.1 Argentina 156.2 171.2 97.6 3.8 58.9 1.8 Other 321.3 34.2 184.7 8.3 186.4 8.0 -------- -------- -------- -------- -------- -------- Total South America and the Caribbean 724.5 425.4 567.7 246.4 403.0 160.9 -------- -------- -------- -------- -------- -------- Asia Japan 21.1 0.5 34.5 0.6 103.6 0.7 India 93.5 29.3 81.1 16.4 85.1 12.4 China 32.7 0.5 35.1 0.7 27.7 1.2 Other 141.4 0.9 139.4 0.9 108.5 0.5 -------- -------- -------- -------- -------- -------- Total Asia 288.7 31.2 290.1 18.6 324.9 14.8 -------- -------- -------- -------- -------- -------- Total Middle East 24.0 0.1 14.0 -- 11.9 -- Total Africa 123.8 0.4 74.4 0.2 75.2 0.3 -------- -------- -------- -------- -------- -------- Total $8,262.0 $7,004.4 $7,287.6 $5,937.8 $5,560.3 $5,130.3 ======== ======== ======== ======== ======== ========
Note 20: Commitments and Contingencies Litigation In connection with the 2000 sale by Hughes of its satellite systems manufacturing businesses to Boeing, the stock purchase agreement provides for potential adjustment to the purchase price based upon the final closing date financial statements of the satellite systems manufacturing businesses. The stock purchase agreement also provides for an arbitration process to resolve any disputes that arise in determining the purchase price adjustment. Based upon the final closing date financial statements of the satellite systems manufacturing businesses that were prepared by Hughes, Boeing is owed a purchase price adjustment of $164 million plus interest from the date of sale, the total amount of which has been provided for in Hughes' financial statements. However, Boeing has submitted additional proposed adjustments, of which about $750 million remain unresolved. Hughes believes that these additional proposed adjustments are without merit and intends to vigorously contest the matter in the arbitration process which will result in a binding decision unless the matter is otherwise settled. Although Hughes believes it has adequately provided for the disposition of this matter, the impact of its disposition cannot be determined at this time. It is possible that the final resolution of this matter could IV-71 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) 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 systems manufacturing businesses, Hughes retained liability for certain possible fines and penalties and certain financial consequences of debarment associated with potential violations of U.S. Export control laws related to the business now owned by Boeing should the State Department impose such sanctions against the satellite systems manufacturing businesses. Hughes does not expect sanctions imposed by the State Department, if any, 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. Oral argument on the appeal was heard on October 15, 2001 by the Second Circuit Court of Appeals. While the appeal is pending, post-judgment interest on the total judgment is accruing at a rate of 6.241% per year, compounded annually, from the date judgment was entered in October 2000. Hughes and DIRECTV believe that it is reasonably possible that the jury verdict will be overturned and a new trial granted. DIRECTV filed suit in California State Court, Los Angeles County, on June 22, 2001 against Pegasus Satellite Television Inc. and Golden Sky Systems, Inc. (referred to together as "Defendants") to recover monies (currently approximately $60 million) that Defendants owe DIRECTV under the parties' Seamless Marketing Agreement, which provides for reimbursement to DIRECTV of certain subscriber acquisition costs incurred by DIRECTV on account of new subscriber activations in Defendants' territory. Defendants had ceased making payments altogether, and indicated that it did not intend to make any further payments due under the Agreement. On July 13, 2001, Defendants sent notice of termination of the Agreement and on July 16, 2001, Defendants answered DIRECTV's complaint and filed a cross complaint alleging counts of fraud in the inducement, breach of contract, breach of the covenant of good faith and fair dealing, intentional interference with contractual relations, intentional interference with prospective economic advantage and violation of California Bus. and Prof. Code 17200. The latter three counts duplicate claims already asserted by Defendants in the above-referenced federal court litigation. Defendants seek an unstated amount of damages and punitive damages. DIRECTV denies any liability to Defendants, and intends to vigorously pursue its damages claim against Defendants and defend against Defendants' cross claims. Defendants removed the action to federal district court, Central District of Los Angeles, where it has been transferred to the judge hearing the other, above-referenced litigation, and consolidated therewith for purposes of discovery. 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 November 13, 2001, the U.S. Court of Appeals for the Federal Circuit affirmed the lower court decision. On December 26, 2001, Hughes filed a Combined Petition for Panel Rehearing and Rehearing en Banc, seeking to increase the award, which was denied in January 2002. Both parties have until April 25, 2002 to seek Supreme Court review. 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. IV-72 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) On October 12, 2001, Hughes reached a settlement with Raytheon on a purchase price adjustment related to the 1997 spin-off of Hughes' defense electronics business and the subsequent merger of that business with Raytheon. Under the terms of the settlement, Hughes agreed to reimburse Raytheon $635.5 million of the original $9.5 billion purchase price. Hughes paid $500 million of the settlement amount in October 2001 and the remainder was paid subsequent to December 31, 2001. In the third quarter of 2001, Hughes recorded a decrease to "Capital stock and additional paid-in capital" of $574.2 million because of the settlement. 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 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 could not be estimated at December 31, 2001. 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. Other Hughes uses in-orbit and launch insurance to mitigate the potential financial impact of satellite fleet in-orbit and launch failures unless the premium costs are considered uneconomic relative to the risk of satellite failure. The insurance generally covers the unamortized book value of covered satellites. The insurance generally does not compensate for business interruption or loss of future revenues or customers, however Hughes relies on in-orbit spare satellites and excess transponder capacity at key orbital slots to mitigate the impact of satellite failure on Hughes' ability to provide service. Where insurance costs related to known satellite anomalies are prohibitive, Hughes' insurance policies contain coverage exclusions and Hughes is self-insured for certain other satellites. The book value of satellites that were insured with coverage exclusions amounted to $699.3 million and the book value of the satellites that were self-insured was $668.5 million at December 31, 2001. Hughes is contingently liable under standby letters of credit and bonds in the amount of $51.3 million at December 31, 2001 and has guaranteed up to $74.3 million of bank debt. Hughes has guaranteed a $55.4 million debt obligation of an investor in HTIL that matures in 2007. Hughes' performance obligation related to this guarantee can be triggered by a default by the investor beginning in 2002 and thereafter. The remaining obligation is related to DLA and SurFin guarantees of non-consolidated local operating company debt and is due in variable amounts over the next five years. Additionally, in the event that certain transactions do not occur, DLA may be required to repurchase an interest in DLA at the option of a minority partner for $195 million in cash in 2003. The Hughes Board of Directors has approved several benefit plans, triggered by a change-in-control, designed to provide benefits for the retention of about 240 key employees and also provide benefits in the event of employee lay-offs. Generally, these benefits are only available if a qualified change-in-control of Hughes occurs. Upon a change-in-control, the retention benefits will be accrued and expensed when earned and the severance benefits will be accrued and expensed if an employee is identified for termination. A total of up to about $110 million for retention benefits will be paid, with approximately 50% paid at the time of a change-in-control and 50% paid up to 12 months following the date of a change-in-control. The amount of severance benefits to be paid will be based upon the decision to layoff employees, if any, following the date of a change-in-control. In addition, approximately 33.5 million employee stock options will vest upon a qualifying change-in-control and up to an additional 8.5 million employee stock options could vest if employees are laid off within one year of a change-in-control. For purposes of the above benefits and stock options, a successful completion of the Merger would qualify as a change-in-control. At December 31, 2001, minimum future commitments under noncancelable operating leases having lease terms in excess of one year were primarily for real property and aggregated $375.0 million, payable as follows: $92.8 million in 2002, $76.0 million in 2003, $49.3 million in 2004, $38.1 million in 2005, $32.8 million in 2006 and $86.0 million thereafter. Certain of these leases contain escalation clauses and renewal or purchase options. Rental expenses under operating leases, net of sublease rental income, were $59.7 million in 2001, $55.9 million in 2000 and $58.5 million in 1999. IV-73 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(continued) At December 31, 2001, the minimum commitments under noncancelable satellite construction and launch contracts totaled $1,061.5 million. In connection with the direct-to-home broadcast businesses, Hughes has commitments related to certain programming agreements which are variable based upon the number of underlying subscribers and market penetration rates. Minimum payments over the terms of applicable contracts are anticipated to be approximately $1.5 billion, payable as follows: $460.8 million in 2002, $258.2 million in 2003, $148.1 million in 2004, $149.3 million in 2005, $154.0 million in 2006 and $287.0 million thereafter. As part of a series of agreements entered into with AOL on June 21, 1999, Hughes committed to spend up to approximately $1.5 billion in sales, marketing, development and promotion efforts in support of DirecPC(R)/AOL-Plus, DIRECTV(R), DIRECTV(TM)/AOL TV and DirecDuo(TM) products and services. At December 31, 2001, Hughes had spent approximately $500 million in support of these efforts. Consistent with the requirements of the agreements with AOL, additional funds will continue to be spent until the contractual spending limits have been satisfied or until applicable timeframes expire, which in some cases can be for periods of ten years or more. Note 21: Subsequent Events In February 2002, Hughes completed a series of financing activities. PanAmSat borrowed $1,800 million, of which a portion was used to repay $1,725 million owed to Hughes; Hughes deposited $1,500 million of the proceeds received from PanAmSat with GMAC as collateral, with Hughes then borrowing $1,875 million under the GMAC revolving credit facility. Hughes used $1,682.5 million of the proceeds to repay all amounts outstanding under Hughes' $750 million unsecured revolving credit facility, DLA's $450 million revolving credit facility, and SurFin's $400 million and $212.5 million revolving credit facilities. The DLA and SurFin facilities were retired, while the Hughes facility was amended and expanded, as explained below. As a result of these transactions, Hughes expects to have about $2,300 million of available borrowing capacity under those facilities. Also in February 2002, Hughes amended and increased its existing $750.0 million multi-year revolving credit facility (the "New Credit Agreement"). The New Credit Agreement provides availability of $1,235.25 million. Borrowings under the facility bear interest at LIBOR plus 3%. The New Credit Agreement commitment terminates upon the earlier of December 5, 2002 or the effective date of the EchoStar merger. The facility is secured by substantially all of Hughes' assets other than the assets of DIRECTV Latin America and PanAmSat. In March 2002, Hughes was in the process of adding a term loan to the New Credit Agreement that would increase the total funding available to at least $1,800 million. The term loan is expected to close in March 2002. PanAmSat's borrowings consist of a private placement debt offering pursuant to Rule 144A of the Securities Act of 1933, as amended, in the amount of $800 million and $1.0 billion borrowed under a new $1,250 million bank facility, which replaced PanAmSat's $500 million multi-year revolving credit facility. The notes issued in the private placement bear interest at an annual rate of 8.5%, payable semi-annually, mature in 2012 and are unsecured. The bank facility is comprised of a $250 million revolving credit facility, a $300 million Tranche A Term Loan and a $700 million Tranche B Term Loan. The revolving credit facility and the Tranche A Term Loan bear interest at LIBOR plus a 3.00% spread. The Tranche B Term Loan bears interest at LIBOR plus a 3.5% spread. The interest rate spreads on the revolving credit facility and Tranche A Term Loan may be increased or decreased based upon changes in PanAmSat's total leverage ratio, as defined by the credit agreement. The revolving credit facility will terminate in 2007, the Tranche A Term Loan matures in 2007, and the Tranche B Term Loan matures in 2008. Principal payments under theTranche A Term Loan are due in varying amounts from 2004 to 2007. Principal payments under the Tranche B Term Loan are due primarily at maturity. The facilities are secured ratably by substantially all of PanAmSat's operating assets, including its satellites. Of the total $1,800 million borrowed, PanAmSat used $1,725.0 million to repay an intercompany loan from Hughes. In connection with the $1,250 million bank facility, the PanAmSat $750 million fixed rate notes were ratably secured by certain of PanAmSat's operating assets. Concurrent with the transactions described above, the $2,000 million GMAC revolving credit facility was amended. The amended facility provides for a commitment through December 5, 2002, and may be extended to March 31, 2003 at Hughes' option. The facility is split into two loan tranches: a $1,500 million tranche secured by a $1,500 million Hughes cash deposit and a $500 million tranche IV-74 HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(concluded) that shares security with the Hughes $1,235.25 million multi-year secured revolving credit facility described above. Borrowings under the $1,500 million tranche bear interest at GMAC's cost of funds plus 0.125%. The $1,500 million cash deposit earns interest at a rate equivalent to GMAC's cost of funds. Borrowings under the $500 million tranche bear interest at GMAC's cost of funds plus 1.75%. In February 2002, Hughes deposited $1,500 million with GMAC and immediately borrowed $1,875.0 million. Hughes plans to offset the $1,500 million GMAC cash deposit against amounts borrowed from GMAC for balance sheet purposes regardless of whether the merger with EchoStar is completed. The facility must be repaid upon the effective date of the merger with EchoStar. Hughes' and PanAmSat's ability to borrow under the credit facilities is contingent upon meeting financial and other covenants. The agreements also include certain operational restrictions. The covenants limit Hughes' and PanAmSat's ability to, among other things: incur or guarantee additional indebtedness; make restricted payments, including dividends; create or permit to exist certain liens; enter into business combinations and asset sale transactions; make investments; enter into transactions with affiliates; and enter into new businesses. In March 2002, PanAmSat reached an agreement with an insurance carrier to settle a claim related to circuit failures suffered on the PAS-7 satellite in October 2001. PanAmSat anticipates receiving approximately $215.0 million in cash by the end of the second quarter of 2002 as a result of this settlement. * * * IV-75 HUGHES ELECTRONICS CORPORATION SUPPLEMENTAL INFORMATION
Selected Quarterly Data (Unaudited) 1st 2nd 3rd 4th - ----------------------------------- -------- -------- -------- -------- (Dollars in Millions Except Per Share Amounts) 2001 Quarters Revenues $1,893.0 $1,985.1 $2,103.3 $2,280.6 -------- -------- -------- -------- Loss from continuing operations before income taxes, minority interests and cumulative effect of accounting change $ (172.1) $ (257.7) $ (321.2) $ (238.7) Income tax benefit 49.9 74.8 93.1 107.8 Minority interests in net losses of subsidiaries 24.3 26.4 0.9 (1.7) Cumulative effect of accounting change, net of taxes (7.4) -- -- -- -------- -------- -------- -------- Net loss (105.3) (156.5) (227.2) (132.6) Loss used for computation of available separate consolidated net income (loss) $ (128.6) $ (179.8) $ (250.4) $ (155.9) ======== ======== ======== ======== Average number of shares of General Motors Class H common stock outstanding (in millions) (Numerator) 875.4 875.9 876.8 877.3 Average Class H dividend base (in millions) (Denominator) 1,299.1 1,299.6 1,300.5 1,300.9 Available separate consolidated net income (loss) $ (86.7) $ (121.2) $ (168.8) $ (105.1) Stock price range of General Motors Class H common stock High $ 28.00 $ 25.09 $ 21.65 $ 15.80 Low $ 17.90 $ 17.50 $ 11.50 $ 12.12 2000 Quarters Revenues $1,703.1 $1,837.0 $1,688.5 $2,059.0 -------- -------- -------- -------- Loss from continuing operations before income taxes and minority interests $ (337.7) $ (141.8) $ (201.7) $ (134.4) Income tax benefit 221.8 54.8 77.8 51.7 Minority interests in net losses of subsidiaries 7.6 4.5 19.6 22.4 Income (loss) from discontinued operations 26.4 13.4 10.5 (14.2) Gain on sale of discontinued operations, net of taxes -- -- -- 1,132.3 -------- -------- -------- -------- Net income (loss) (81.9) (69.1) (93.8) 1,057.8 Earnings (loss) used for computation of available separate consolidated net income (loss) $ (101.3) $ (87.9) $ (112.6) $1,034.7 ======== ======== ======== ======== Average number of shares of General Motors Class H common stock outstanding (in millions) (Numerator) 413.4 562.7 873.9 874.9 Average Class H dividend base (in millions) (Denominator) 1,294.5 1,297.0 1,297.8 1,298.7 Available separate consolidated net income (loss) $ (32.4) $ (38.1) $ (75.8) $ 697.1 Stock price range of General Motors Class H common stock High $ 47.00 $ 41.58 $ 37.61 $ 38.00 Low $ 30.50 $ 27.33 $ 24.63 $ 21.33
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