-----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, H56sb/ng1E4GYMSWGOJRCa1ac3s7TYFtlTHJhRAjIiGK2C8L0hVd1e+3oBIGcZqR N8/ba8gmWuWrQRmVTkjtOQ== 0000040730-02-000062.txt : 20020814 0000040730-02-000062.hdr.sgml : 20020814 20020814161707 ACCESSION NUMBER: 0000040730-02-000062 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL MOTORS CORP CENTRAL INDEX KEY: 0000040730 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 380572515 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00143 FILM NUMBER: 02736812 BUSINESS ADDRESS: STREET 1: 300 RENAISSANCE CTR STREET 2: MAIL CODE: 482-C34-D71 CITY: DETROIT STATE: MI ZIP: 48265-3000 BUSINESS PHONE: 3135565000 MAIL ADDRESS: STREET 1: 300 RENAISSANCE CTR STREET 2: MAIL CODE: 482-C34-D71 CITY: DETROIT STATE: MI ZIP: 48265-3000 10-Q 1 secondquarter10-q2002.txt GENERAL MOTORS CORPORATIONS 2ND QUARTER 2002 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF - -- 1934 For the quarterly period ended June 30, 2002 OR TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF - --- 1934 For the transition period from to --------------- ------------- Commission file number 1-143 GENERAL MOTORS CORPORATION (Exact name of registrant as specified in its charter) STATE OF DELAWARE 38-0572515 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 Renaissance Center, Detroit, Michigan 48265-3000 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (313) 556-5000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- As of July 31, 2002, there were outstanding 560,335,286 shares of the issuer's $1-2/3 par value common stock and 958,064,677 shares of GM Class H $0.10 par value common stock. - 1 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES INDEX Page No. ------- Part I - Financial Information (Unaudited) Item 1. Financial Statements Consolidated Statements of Income for the Three and Six Months Ended June 30, 2002 and 2001 3 Consolidated Balance Sheets as of June 30, 2002, December 31, 2001, and June 30, 2001 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Part II - Other Information (Unaudited) Item 1. Legal Proceedings 27 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 6. Exhibits and Reports on Form 8-K 30 Signatures 30 Exhibit 99 Hughes Electronics Corporation Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) 31 - 2 - PART I GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, -------- -------- 2002 2001 2002 2001 ---- ---- ---- ---- (dollars in millions except per share amounts) GENERAL MOTORS CORPORATION AND SUBSIDIARIES Total net sales and revenues $48,265 $46,220 $94,529 $88,835 ------ ------ ------ ------ Cost of sales and other expenses (Notes 10 and 11) 38,567 37,181 76,893 71,691 Selling, general, and administrative expenses (Note 11) 6,150 5,855 11,771 11,245 Interest expense 1,767 2,259 3,730 4,470 ------ ------ ------ ------ Total costs and expenses 46,484 45,295 92,394 87,406 ------ ------ ------ ------ Income before income taxes and minority interests 1,781 925 2,135 1,429 Income tax expense (Note 11) 563 304 688 512 Equity income/(loss) and minority interests 74 (144) 73 (203) ----- --- ----- --- Net income 1,292 477 1,520 714 Dividends on preference stocks (23) (23) (47) (51) ----- --- ----- --- Earnings attributable to common stocks $1,269 $454 $1,473 $663 ===== === ===== === Basic earnings (losses) per share attributable to common stocks (Note 9) Earnings per share attributable to $1-2/3 par value $2.48 $1.05 $3.06 $1.59 ==== ==== ==== ==== Earnings per share attributable to Class H $(0.14) $(0.14) $(0.27) $(0.24) ==== ==== ==== ==== Earnings (losses) per share attributable to common stocks assuming dilution (Note 9) Earnings per share attributable to $1-2/3 par value $2.43 $1.03 $3.02 $1.56 ==== ==== ==== ==== Earnings per share attributable to Class H $(0.14) $(0.14) $(0.27) $(0.24) ==== ==== ==== ==== Reference should be made to the notes to consolidated financial statements. - 3 - CONSOLIDATED STATEMENTS OF INCOME - concluded (Unaudited) Three Months Ended Six Months Ended June 30, June 30, -------- -------- 2002 2001 2002 2001 ---- ---- ---- ---- (dollars in millions) AUTOMOTIVE, COMMUNICATIONS SERVICES, AND OTHER OPERATIONS Total net sales and revenues $41,718 $39,731 $81,491 $75,895 ------ ------ ------ ------ Cost of sales and other expenses (Notes 10 and 11) 36,461 35,182 72,672 67,676 Selling, general, and administrative expenses (Note 11) 3,818 4,091 7,508 7,730 Total costs and expenses 40,279 39,273 80,180 75,406 ------ ------ ------ ------ Interest expense 302 151 464 313 Net expense from transactions with Financing and Insurance Operations 46 87 136 218 ----- --- --- --- Income/(loss) before income taxes and minority interests 1,091 220 711 (42) Income tax expense/(benefit) (Note 11) 311 68 151 (13) Equity income/(loss) and minority interests 80 (113) 91 (149) --- --- --- --- Net income/(loss) - Automotive, Communications Services, and Other Operations $860 $39 $651 $(178) === == === === FINANCING AND INSURANCE OPERATIONS Total revenues $6,547 $6,489 $13,038 $12,940 ----- ----- ------ ------ Interest expense 1,465 2,108 3,266 4,157 Depreciation and amortization expense 1,353 1,443 2,714 2,952 Operating and other expenses 2,244 1,729 4,114 3,446 Provision for financing and insurance losses 841 591 1,656 1,132 ----- ----- ------ ------ Total costs and expenses 5,903 5,871 11,750 11,687 ----- ----- ------ ------ Net income from transactions with Automotive, Communications Services, and Other Operations (46) (87) (136) (218) --- --- --- ----- Income before income taxes and minority interests 690 705 1,424 1,471 Income tax expense 252 236 537 525 Equity income/(loss) and minority interests (6) (31) (18) (54) --- --- --- --- Net income - Financing and Insurance Operations $432 $438 $869 $892 === === === === The above supplemental consolidating information is explained in Note 1, "Financial Statement Presentation." Reference should be made to the notes to consolidated financial statements. - 4 - CONSOLIDATED BALANCE SHEETS June 30, June 30, 2002 Dec. 31, 2001 GENERAL MOTORS CORPORATION AND SUBSIDIARIES (Unaudited) 2001 (Unaudited) --------- ---- --------- ASSETS (dollars in millions) Automotive, Communications Services, and Other Operations Cash and cash equivalents $14,421 $8,432 $8,370 Marketable securities 1,014 790 795 ------- ------ ------ Total cash and marketable securities 15,435 9,222 9,165 Accounts and notes receivable (less allowances) 5,686 5,406 6,533 Inventories (less allowances) (Note 2) 9,757 10,034 11,072 Equipment on operating leases - net 4,390 4,524 5,084 Deferred income taxes and other current assets 8,730 7,877 8,499 ------- ------- ------- Total current assets 43,998 37,063 40,353 Equity in net assets of nonconsolidated associates 5,115 4,950 4,934 Property - net 35,248 34,908 33,922 Intangible assets - net 13,763 13,721 7,743 Deferred income taxes 22,138 22,294 15,560 Other assets 16,797 17,274 31,226 ------- ------- ------- Total Automotive, Communications Services, and Other Operations assets 137,059 130,210 133,738 Financing and Insurance Operations Cash and cash equivalents 3,942 10,123 1,139 Investments in securities 12,575 10,669 10,614 Finance receivables - net 106,838 99,813 89,608 Investment in leases and other receivables 35,477 34,618 35,701 Other assets 40,438 36,979 31,281 Net receivable from Automotive, Communications Services, and Other Operations 638 1,557 1,582 ------- ------- ------- Total Financing and Insurance Operations assets 199,908 193,759 169,925 ------- ------- ------- Total assets $336,967 $323,969 $303,663 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Automotive, Communications Services, and Other Operations Accounts payable (principally trade) $19,459 $18,297 $19,177 Loans payable 1,545 2,402 2,430 Accrued expenses 36,513 34,090 34,512 Net payable to Financing and Insurance Operations 638 1,557 1,582 ------ ------ ------ Total current liabilities 58,155 56,346 57,701 Long-term debt 16,831 10,726 8,662 Postretirement benefits other than pensions 33,990 34,515 34,109 Pensions 9,410 10,790 3,111 Other liabilities and deferred income taxes 14,506 13,794 14,791 -------- -------- -------- Total Automotive, Communications Services, and Other Operations liabilities 132,892 126,171 118,374 Financing and Insurance Operations Accounts payable 8,236 7,900 6,348 Debt 158,659 153,186 133,088 Other liabilities and deferred income taxes 15,701 16,259 15,494 ------- ------- ------- Total Financing and Insurance Operations liabilities 182,596 177,345 154,930 ------- ------- ------- Total liabilities 315,488 303,516 273,304 Minority interests 788 746 699 Stockholders' equity $1-2/3 par value common stock (issued, 561,337,257; 559,044,427; and 549,606,968 shares) (Note 9) 936 932 916 Class H common stock (issued, 958,024,533; 877,505,382 and 876,465,865 shares) (Notes 6 and 9) 96 88 88 Capital surplus (principally additional paid-in capital) 21,557 21,519 21,114 Retained earnings 10,376 9,463 10,233 ------ ------- ------ Subtotal 32,965 32,002 32,351 Accumulated foreign currency translation adjustments (2,770) (2,919) (2,814) Net unrealized loss on derivatives (Note 8) (188) (307) (187) Net unrealized gains on securities 268 512 355 Minimum pension liability adjustment (9,584) (9,581) (45) -------- -------- -------- Accumulated other comprehensive loss (12,274) (12,295) (2,691) -------- -------- -------- Total stockholders' equity 20,691 19,707 29,660 -------- -------- -------- Total liabilities and stockholders' equity $336,967 $323,969 $303,663 ======== ======== ======== Reference should be made to the notes to consolidated financial statements. - 5 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ------------------------------------------------------- 2002 2001 Automotive, Financing Automotive, Financing Comm.Serv. and Comm.Serv. and and Other Insurance and Other Insurance --------- --------- --------- --------- (dollars in millions) Net cash provided by operating activities $5,196 $3,030 $3,455 $1,278 Cash flows from investing activities Expenditures for property (3,494) (46) (4,220) (42) Investments in marketable securities - acquisitions (802) (20,311) (773) (15,691) Investments in marketable securities - liquidations 578 18,455 1,139 14,734 Mortgage servicing rights - acquisitions - (634) - (813) Mortgage servicing rights - liquidations - 1 - 18 Finance receivables - acquisitions - (122,714) - (107,883) Finance receivables - liquidations - 58,793 - 68,560 Proceeds from sales of finance receivables - 57,034 - 41,156 Operating leases - acquisitions (2,748) (9,205) (3,182) (6,448) Operating leases - liquidations 2,898 7,168 3,576 5,138 Investments in companies, net of cash acquired (124) (150) (612) (119) Other 744 (567) (351) 129 ----- ------ ----- ----- Net cash used in investing activities (2,948) (12,176) (4,423) (1,261) ----- ------ ----- ----- Cash flows from financing activities Net increase/(decrease) in loans payable (857) 970 222 (21,634) Long-term debt - borrowings 9,821 12,306 3,451 28,904 Long-term debt - repayments (3,818) (11,243) (2,225) (7,703) Repurchases of common and preference stocks (97) - (264) - Proceeds from issuing common stocks 69 - 71 - Proceeds from sales of treasury stocks 19 - - - Cash dividends paid to stockholders (607) - (600) - ----- ----- --- --- Net cash provided by (used in) financing activities 4,530 2,033 655 (433) ----- ----- --- --- Effect of exchange rate changes on cash and cash equivalents 130 13 (47) 1 Net transactions with Automotive/ Financing Operations (919) 919 (389) 389 --- ----- --- --- Net increase/(decrease) in cash and cash equivalents 5,989 (6,181) (749) (26) Cash and cash equivalents at beginning of the period 8,432 10,123 9,119 1,165 ------ ------ ----- ----- Cash and cash equivalents at end of the period $14,421 $3,942 $8,370 $1,139 ====== ===== ===== =====
Reference should be made to the notes to consolidated financial statements. - 6 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Financial Statement Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information. In the opinion of management, all adjustments (consisting of only normal recurring items), which are necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year. For further information, refer to the December 31, 2001 consolidated financial statements and notes thereto included in General Motors Corporation's (the "Corporation", "General Motors", or "GM") 2001 Annual Report on Form 10-K, and all other GM, Hughes Electronics Corporation (Hughes), and General Motors Acceptance Corporation (GMAC) filings with the Securities and Exchange Commission. On August 14, 2002, the Chief Executive Officer and Chief Financial Officer of GM delivered to the U.S. Securities and Exchange Commission (the "Commission") their unqualified attestations, signed under oath concerning all covered reports filed by the Corporation under the Securities Exchange Act of 1934, as amended, as called for by the order of the Commission dated June 27, 2002. In addition, on August 14, 2002, the Chief Executive Officer and Chief Financial Officer of GM complied with the certification requirement of 18 U.S.C. section (ss.) 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, by submitting such certifications by correspondence to the Commission. These certifications and attestations are available to the public in separate Forms 8-K filed with the Commission on August 14, 2002. GM presents separate supplemental consolidating statements of income and other financial information for the following businesses: (1) Automotive, Communications Services, and Other Operations which consists of the design, manufacturing, and marketing of cars, trucks, locomotives, and heavy-duty transmissions and related parts and accessories, as well as the operations of Hughes; and (2) Financing and Insurance Operations which consists primarily of GMAC, which provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, vehicle and homeowners' insurance, and asset-based lending. Transactions between businesses have been eliminated in the Corporation's consolidated statements of income. Certain amounts for 2001 were reclassified to conform with the 2002 classifications. New Accounting Standards Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," changes the accounting for goodwill and indefinite lived intangible assets from an amortization method to an impairment-only approach. Goodwill, including goodwill recorded in past business combinations, is no longer amortized, but is tested for impairment at least annually at the reporting unit level. The Corporation implemented SFAS No. 142 on January 1, 2002. GM then completed step one of the transitional impairment test in the second quarter of 2002. In step one of the two-part transitional impairment test, GM compared the fair value of each reporting unit (which are different from the reporting units of GM's wholly owned subsidiaries GMAC and Hughes) with its respective carrying amount, including goodwill as of January 1, 2002. Since the fair value of each reporting unit exceeded the respective carrying amount, goodwill was not considered impaired. Accordingly, completion of step two of the transitional impairment test is not necessary. GM's reported net income exclusive of amortization expense recognized related to goodwill and amortization of intangibles with indefinite lives required under previous accounting standards on an after-tax basis is as follows (dollars in millions except per share amounts): Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------ 2002 2001 2002 2001 ---- ---- ---- ---- Reported net income $1,292 $477 $1,520 $714 Add: Goodwill amortization - 85 - 158 Amortization of intangibles with indefinite lives - 2 - 4 ----- --- ----- --- Adjusted net income $1,292 $564 $1,520 $876 ===== === ===== === - 7 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 1. Financial Statement Presentation - (concluded) Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 2002 2001 2002 2001 ---- ---- ---- ---- Basic earnings (losses) per share attributable to common stocks EPS attributable to $1-2/3 par value: Reported $2.48 $1.05 $3.06 $1.59 ==== ==== ==== ==== Adjusted $2.48 $1.12 $3.06 $1.74 ==== ==== ==== ==== EPS attributable to Class H: Reported $(0.14) $(0.14) $(0.27) $(0.24) ==== ==== ==== ==== Adjusted $(0.14) $(0.09) $(0.27) $(0.15) ==== ==== ==== ==== Earnings (losses) per share attributable to common stocks assuming dilution EPS attributable to $1-2/3 par value: Reported $2.43 $1.03 $3.02 $1.56 ==== ==== ==== ==== Adjusted $2.43 $1.10 $3.02 $1.71 ==== ==== ==== ==== EPS attributable to Class H: Reported $(0.14) $(0.14) $(0.27) $(0.24) ==== ==== ==== ==== Adjusted $(0.14) $(0.09) $(0.27) $(0.15) ==== ==== ==== ==== 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. This statement did not have a material impact on GM's consolidated financial position or results of operations. In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement eliminates the required classification of gain or loss on extinguishment of debt as an extraordinary item of income and states that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board No. 30 "Reporting Results of Operations." This statement also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions, and makes various other technical corrections to existing pronouncements. The Corporation is required to implement SFAS No. 145 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 June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." This statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than the date of an entity's commitment to an exit plan. The Corporation is required to implement SFAS No. 146 on January 1, 2003. Management has not determined the impact, if any, that this statement will have on its consolidated financial position or results of operations. - 8 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 2. Inventories Inventories included the following for Automotive, Communications Services, and Other Operations (dollars in millions): June 30, Dec. 31, June 30, 2002 2001 2001 -------- -------- ------- Productive material, work in process, and supplies $5,211 $5,069 $5,542 Finished product, service parts, etc. 6,383 6,779 7,377 ------- ------- ------- Total inventories at FIFO 11,594 11,848 12,919 Less LIFO allowance 1,837 1,814 1,847 ------- ------- ------- Total inventories (less allowances) $9,757 $10,034 $11,072 ===== ====== ====== Note 3. Goodwill and Acquired Intangible Assets The components of the Corporation's acquired intangible assets as of June 30, 2002 were as follows (dollars in millions): Gross Carrying Accumulated Net Carrying Amount Amortization Amount -------------- ------------ ------------ Amortized intangible assets: Customer lists and contracts $75 $22 $53 Trademarks and other 46 10 36 Covenants not to compete 18 11 7 ---- -- --- Total $139 $43 $96 === == == Unamortized intangible assets: License fees - orbital slots $432 === Aggregate amortization expense on acquired intangible assets was $3 million and $9 million for the second quarter and six months ended June 30, 2002, respectively. Estimated amortization expense in each of the next five years is as follows: 2002 - $15 million; 2003 - $16 million; 2004 - $11 million; 2005 - $10 million; and 2006 - $10 million. The changes in the carrying amounts of goodwill for the six months ended June 30, 2002 were as follows (dollars in millions):
Total GMNA GME Other (b) Hughes (b) ACO GMAC Total GM ---- --- --------- ---------- --- ---- -------- For Six Months Ended June 30, 2002 Balance as of December 31, 2001 $29 $283 $57 $6,440 $6,809 $3,144 $9,953 Goodwill acquired during the period - - - - - 54 54 Goodwill written off related to sale of business unit (4) - - - (4) - (4) Effect of foreign currency translation - 38 - - 38 17 55 Reclassifications and other (a) - - - 219 219 - 219 -- --- -- ----- ----- ----- ------ Balance as of June 30, 2002 $25 $321 $57 $6,659 $7,062 $3,215 $10,277 == === == ===== ===== ===== ======
(a) In accordance with SFAS No. 142, Hughes completed a review of its intangible assets and determined that previously recorded intangible assets related to customer lists and dealer networks did not meet the contractual legal criteria or separability criteria as described in SFAS No. 141. As a result, in the first quarter of 2002, Hughes reclassified $210 million, net of $146 million accumulated amortization, of previously reported intangible assets to goodwill. (b) The amount recorded for Hughes excludes GM's purchase accounting adjustments related to GM's acquisition of Hughes Aircraft Company. The carrying value of $57 million in goodwill associated with the purchase is reported in the Other segment. Note 4. 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 - 9 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 4. Contingent Matters (concluded) the purchase price and other matters that may result in payments by Hughes to The Boeing Company that would be material to Hughes. GM has established reserves for matters in which losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or other treble damage claims, or demands for recall campaigns, environmental remediation programs, or sanctions, that if granted, could require the Corporation to pay damages or make other expenditures in amounts that could not be estimated at June 30, 2002. 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. In July 2000, GM acquired 20% of the common stock of Fiat Auto Holdings, B.V. (FAH), the entity which is the sole shareholder of Fiat Auto, S.p.A. (Fiat Auto) for $2.4 billion. Subsequent to that acquisition, the European market for new vehicles has experienced a continued decrease in volumes, and manufacturers have experienced increased pricing and general competitive pressures. Those market conditions and other factors have led to deterioration in the performance of Fiat Auto. Accordingly, GM has commenced a review of the appropriate carrying value of GM's investment in FAH. Management of GM believes it is probable that a significant write-down of GM's investment in FAH will be required in the third quarter of 2002 upon completion of GM's review. 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 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 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. Note 5. Preferred Securities of Subsidiary Trusts On April 2, 2001, GM redeemed the Series G Trust's sole assets causing the Series G Trust to redeem the approximately 5 million outstanding Series G 9.87% Trust Originated Preferred Securitiessm (TOPrSsm). The Series G TOPrS were redeemed at a price of $25 per share plus accrued and unpaid dividends of $0.42 per share. Also on April 2, 2001, GM redeemed the approximately 5 million outstanding Series G depositary shares, each of which represents a one-fourth interest in a GM Series G 9.12% Preference Share, at a price of $25 per share plus accrued and unpaid dividends of $0.59 per share. The securities together had a total face value of approximately $252 million. Note 6. America Online's Investment in GM Preference Stock On June 24, 2002, approximately 2.7 million shares of GM Series H 6.25% Automatically Convertible Preference Stock held by AOL Time Warner (AOL) mandatorily converted into approximately 80 million shares of GM Class H common stock as provided for pursuant to the terms of the preference stock. GM originally issued the shares of preference stock to AOL in 1999 in connection with AOL's $1.5 billion investment in, and its strategic alliance with, Hughes. The preference stock accrued quarterly dividends at a rate of 6.25% per year. 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 preference stock. Dividends on the Hughes Series A Preferred Stock were payable to GM quarterly at an annual rate of 6.25%. The underwriting discount on the Hughes Series A Preferred Stock was amortized over three years. The original terms of Hughes Series A Preferred Stock required Hughes to redeem the Series A preferred stock through a cash payment to GM immediately upon the conversion of the preference stock held by AOL into shares of GM Class H common stock. Simultaneous with GM's receipt of the cash redemption proceeds, GM was committed to make a capital contribution to Hughes of the same amount. In connection with this capital contribution, the denominator of the fraction used in the computation of the Available Separate Consolidated Net Income (ASCNI) of Hughes was to be increased by the corresponding number of shares of GM Class H common stock issued. Accordingly, upon conversion of the GM Series H 6.25% Automatically Convertible Preference Stock into GM Class H common stock, both the numerator and denominator used in the computation of ASCNI increased by the amount of the GM Class H common stock issued. - 10 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 6. America Online's Investment in GM Preference Stock (concluded) On June 24, 2002, prior to the conversion of the preference stock on such date, and prior to the time that the Hughes Series A Preferred Stock would have been redeemed on such date, GM, as approved by the GM and Hughes boards of directors, contributed the Hughes Series A Preferred Stock to Hughes. In connection with the contribution of the Hughes Series A Preferred Stock to Hughes, Hughes issued to GM shares of Hughes Series B Preferred Stock. The Hughes Series B Preferred Stock does not accrue dividends and is not redeemable. The Hughes Series B Preferred Stock does not affect the net income of Hughes or the allocation of the earnings per share and amounts available for the payment of dividends on the GM Class H common stock. This contribution by GM had the same effect with respect to the numerator and the denominator of the fraction used in the computation of ASCNI that a cash redemption by Hughes of its Series A preferred stock and a cash contribution by GM of the redemption amount would have had. Note 7. Comprehensive Income GM's total comprehensive income (loss) was as follows (dollars in millions): Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2002 2001 2002 2001 ---- ---- ---- ---- Net income $1,292 $477 $1,520 $714 Other comprehensive income (loss) 148 167 21 (725) ----- --- ----- --- Total $1,440 $644 $1,541 $(11) ===== === ===== == Note 8. Derivative Financial Instruments 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. As a result of the adoption of this standard as of January 1, 2001, GM recorded a transition adjustment representing a one-time after-tax charge to income totaling $23 million, as well as an after-tax unrealized gain of $4 million to other comprehensive income. GM is exposed to market risk from changes in foreign currency exchange rates, interest rates, and certain commodity and equity security prices. In the normal course of business, GM enters into a variety of foreign exchange, interest rate, and commodity forward contracts, swaps, and options, with the objective of minimizing exposure arising from these risks. A risk management control system is utilized to monitor foreign exchange, interest rate, commodity and equity price risks, and related hedge positions. Note 9. 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 effect of potential common shares, unless the inclusion of the potential common shares would have an antidilutive effect. The attribution of earnings to each class of GM common stock was as follows (dollars in millions): Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 2002 2001 2002 2001 ---- ---- ---- ---- Earnings (losses) attributable to common stocks Earnings attributable to $1-2/3 par value $1,389 $574 $1,715 $870 (Losses) attributable to Class H $(120) $(120) $(242) $(207) 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 ASCNI of Hughes for the respective period. - 11 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 9. Earnings Per Share Attributable to Common Stocks (continued) In 2001 and prior years, 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). Beginning in 2002, losses attributable to GM Class H common stock were not adjusted for the effects of GM purchase accounting, mentioned above, because the related goodwill is no longer being amortized in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." The calculated losses used for computation of the ASCNI of Hughes are then multiplied by a fraction, the numerator of which is equal to the weighted-average number of shares of GM Class H common stock outstanding (884 million and 876 million during the three months ended June 30, 2002 and 2001, respectively, and 881 million and 876 million during the six months ended June 30, 2002 and 2001, respectively), and the denominator of which is a number equal to the weighted-average number of shares of GM Class H common stock which if issued and outstanding would represent a 100% interest in the earnings of Hughes (the "Average Class H dividend base"). The Average Class H dividend base was 1.3 billion for the second quarters of 2002 and 2001, and for the six month periods ended June 30, 2002 and 2001. The reconciliation of the amounts used in the basic and diluted earnings per share computations was as follows (dollars in millions except per share amounts):
$1-2/3 Par Value Common Stock Class H Common Stock ----------------------------- -------------------- Per Share Per Share Income Shares Amount ASCNI Shares Amount ------ ------ ------ ----- ------ ------ Three Months Ended June 30, 2002 Net income (loss) $1,397 $(105) Less:Dividends on preference stocks 8 15 ----- ---- Basic EPS Income (loss) attributable to common stocks 1,389 560 $2.48 $(120) 884 $(0.14) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 12 - - ----- --- --- --- Diluted EPS Adjusted income (loss) attributable to common stocks $1,389 572 $2.43 $(120) 884 $(0.14) ===== === ==== === === ==== Three Months Ended June 30, 2001 Net income (loss) $582 $(105) Less:Dividends on preference stocks 8 15 --- --- Basic EPS Income (loss) attributable to common stocks 574 549 $1.05 (120) 876 (0.14) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 10 - - --- --- --- --- Diluted EPS Adjusted income (loss) attributable to common stocks $574 559 $1.03 $(120) 876 $(0.14) === === ==== === === ==== Six Months Ended June 30, 2002 Net income (loss) $1,730 $(210) Less:Dividends on preference stocks 15 32 ----- --- Basic EPS Income (loss) attributable to common stocks 1,715 560 $3.06 (242) 881 $(0.27) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 8 - - ----- --- --- --- Diluted EPS Adjusted income (loss) attributable to common stocks $1,715 568 $3.02 $(242) 881 $(0.27) ===== === ==== === === ==== Six Months Ended June 30, 2001 Net income (loss) $889 $(175) Less:Dividends on preference stocks 19 32 --- --- Basic EPS Income (loss) attributable to common stocks 870 549 $1.59 (207) 876 $(0.24) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 10 - - --- --- --- --- Diluted EPS Adjusted income (loss) attributable to common stocks $870 559 $1.56 $(207) 876 $(0.24) === === ==== === === ====
- 12 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 9. Earnings Per Share Attributable to Common Stocks (concluded) Certain stock options were not included in the computation of diluted earnings per share for the periods presented since the options' underlying exercise prices were greater than the average market prices of the GM $1-2/3 par value common stock and GM Class H common stock, and therefore the effect would have been antidilutive. In addition, options to purchase shares of GM Class H common stock with underlying exercise prices less than the average market prices were outstanding, but were excluded from the calculations of diluted loss per share, as inclusion of these securities would have been antidilutive to the net loss per share. Note 10. Depreciation and Amortization Depreciation and amortization included primarily in cost of sales and other expenses for Automotive, Communications Services, and Other Operations was as follows (dollars in millions): Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2002 2001 2002 2001 ---- ---- ---- ---- Depreciation $1,143 $1,146 $2,275 $2,183 Amortization of special tools 622 573 1,251 1,138 Amortization of intangible assets - 76 3 143 ----- ----- ----- ----- Total $1,765 $1,795 $3,529 $3,464 ===== ===== ===== ===== Note 11. European Matters 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 in 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. GM recorded, in cost of sales and other expenses, an after-tax charge of $55 million ($0.10 per share of GM $1-2/3 par value common stock) in the second quarter of 2002 for those member states that have passed national laws during the second quarter ended June 30, 2002. Management is currently assessing the impact of this potential legislation on GM's financial position and results of operations, and may include charges to earnings throughout the remaining quarters of 2002 and in future periods as additional national laws are passed. During 2001, GM Europe (GME) 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 include, among other things, reducing GME's manufacturing capacity, restructuring the dealer network in Germany, and redefining the way vehicles are marketed. These initiatives resulted in a decrease to GM's pre-tax earnings in the first quarter of 2002 as follows: (1) $298 million related to employee separation costs for approximately 4,000 employees; (2) $235 million related to asset writedowns; and (3) $108 million related to the dealer network restructuring in Germany. The net income impact of these charges in the first quarter of 2002 was $407 million, or $0.72 diluted earnings per share of GM $1-2/3 par value common stock ($553 million included in cost of sales and other expenses; $88 million included in selling, general, and administrative expenses; and $(234) million included in income tax expense). - 13 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued (Unaudited) Note 12. Segment Reporting GM's reportable operating segments within its Automotive, Communications Services, and Other Operations (ACO) business consist of General Motors Automotive (GMA) (which is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM), and GM Asia Pacific (GMAP)), Hughes, and Other. GM's reportable operating segments within its Financing and Insurance Operations (FIO) business consist of GMAC and Other. Selected information regarding GM's reportable operating segments were as follows (dollars in millions):
Other GMNA GME GMLAAM GMAP GMA Hughes Other Total ACO GMAC Financing Total FIO ---- --- ------ ---- --- ------ ----- --------- ---- --------- --------- For the Three Months Ended June 30, 2002 Net sales and revenues: External customers $30,661 $5,741 $1,233 $1,009 $38,644 $2,237 $837 $41,718 $6,525 $22 $6,547 Intersegment (453) 260 73 120 - 4 (4) - - - - ------ ----- ----- ----- ------ ----- --- ------ ------ -- ----- Total net sales and revenues $30,208 $6,001 $1,306 $1,129 $38,644 $2,241 $833 $41,718 $6,525 $22 $6,547 ====== ===== ===== ===== ====== ===== === ====== ===== == ===== Interest income (a) $166 $67 $5 $3 $241 $8 $(101) $148 $735 $(40) $695 Interest expense $267 $42 $30 $2 $341 $123 $(162) $302 $1,405 $60 $1,465 Net income (loss) $1,248 $(170) $(73) $39 $1,044 $(156) $(28) $860 $431 $1 $432 Segment assets $96,971 $19,299 $3,655 $1,340 $121,265 $19,193 $(3,399) $137,059 $199,842 $66 $199,908 For the Three Months Ended June 30, 2001 Net sales and revenues: External customers $28,609 $5,987 $1,692 $927 $37,215 $1,997 $519 $39,731 $6,422 $67 $6,489 Intersegment (492) 244 47 201 - 6 (6) - - - - ------ ----- ------ ----- ------ ----- --- ------ ----- -- ----- Total net sales and revenues $28,117 $6,231 $1,739 $1,128 $37,215 $2,003 $513 $39,731 $6,422 $67 $6,489 ====== ===== ===== ===== ====== ===== === ====== ===== == ===== Interest income (a) $293 $101 $(1) $4 $397 $19 $(250) $166 $666 $(113) $553 Interest expense $350 $79 $15 $2 $446 $42 $(337) $151 $2,050 $58 $2,108 Net income (loss) $521 $(154) $31 $(121) $277 $(156)(b) $(82) $39 $449 $(11) $438 Segment assets $90,185 $19,186 $4,472 $903 $114,746 $19,081 $(89) $133,738 $168,850 $1,075 $169,925
(a) Interest income is included in net sales and revenues from external customers. (b) The amount reported for Hughes excludes amortization of GM purchase accounting adjustments related to GM's acquisition of Hughes Aircraft Company of $1 million for 2001. There is no comparable adjustment in 2002 because the related goodwill is no longer being amortized effective January 1, 2002 in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." - 14 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - concluded (Unaudited) Note 12. Segment Reporting (concluded)
Other GMNA GME GMLAAM GMAP GMA Hughes Other Total ACO GMAC Financing Total FIO ---- --- ------ ---- --- ------ ----- --------- ---- --------- --------- For the Six Months Ended June 30, 2002 Net sales and revenues: External customers $60,082 $11,125 $2,483 $1,913 $75,603 $4,244 $1,644 $81,491 $12,928 $110 $13,038 Intersegment (857) 460 124 273 - 9 (9) - - - - ------ ------ ----- ----- ------ ---- ----- ------ ------ --- ------ Total net sales and revenues $59,225 $11,585 $2,607 $2,186 $75,603 $4,253 $1,635 $81,491 $12,928 $110 $13,038 ====== ====== ===== ===== ====== ===== ===== ====== ====== === ====== Interest income (a) $250 $131 $12 $5 $398 $12 $(189) $221 $1,439 $(129) $1,310 Interest expense $381 $121 $58 $4 $564 $199 $(299) $464 $3,161 $105 $3,266 Net income (loss) $1,873 $(702) $(113) $46 $1,104 $(312) $(141) $651 $870 $(1) $869 For the Six Months Ended June 30, 2001 Net sales and revenues: External customers $54,189 $11,987 $3,053 $1,765 $70,994 $3,908 $993 $75,895 $12,791 $149 $12,940 Intersegment (966) 512 81 373 - 12 (12) - - - - ------ ------ ----- ----- ------ ----- --- ------ ------ --- ------ Total net sales and revenues $53,223 $12,499 $3,134 $2,138 $70,994 $3,920 $981 $75,895 $12,791 $149 $12,940 ====== ====== ===== ===== ====== ===== === ====== ====== === ====== Interest income (a) $562 $184 - $8 $754 $43 $(475) $322 $1,304 $(231) $1,073 Interest expense $705 $139 $39 $3 $886 $93 $(666) $313 $4,039 $118 $4,157 Net income (loss) $627 $(238) $36 $(142) $283 $(260)(b) $(201) $(178) $914 $(22) $892
(a) Interest income is included in net sales and revenues from external customers. (b) The amount reported for Hughes excludes amortization of GM purchase accounting adjustments related to GM's acquisition of Hughes Aircraft Company of $2 million for 2001. There is no comparable adjustment in 2002 because of the related goodwill is no longer being amortized effective January 1, 2002 in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." * * * * * * - 15 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the December 31, 2001 consolidated financial statements and notes thereto along with the MD&A included in General Motors Corporation's (the "Corporation", "General Motors", or "GM") 2001 Annual Report on Form 10-K, and all other GM, Hughes Electronics Corporation (Hughes), and General Motors Acceptance Corporation (GMAC) filings with the Securities and Exchange Commission. All earnings per share amounts included in the MD&A are reported as diluted. GM presents separate financial information for the following businesses: Automotive, Communications Services, and Other Operations (ACO) and Financing and Insurance Operations. GM's reportable operating segments within its 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 business. 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. - 16 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS For the second quarter of 2002, consolidated net income for the Corporation was $1.3 billion, or $2.43 per share of GM $1-2/3 par value common stock, compared with $477 million, or $1.03 per share of GM $1-2/3 par value common stock for the second quarter of 2001. GM's consolidated net income for the six months ended June 30, 2002 was $1.5 billion, or $3.02 per share of GM $1-2/3 par value common stock, compared with $714 million, or $1.56 per share of GM $1-2/3 par value common stock for the six months ended June 30, 2001. The consolidated net income included special items on an after-tax basis as follows: List of Special Items - After Tax (dollars in millions)
Total Other GMNA GME GMLAAM GMAP GMA Hughes Other Total ACO GMAC Financing Total GM ---- --- ------ ---- --- ------ ----- --------- ---- --------- -------- For the Three Months Ended June 30, 2002 Reported Net Income (Loss) $1,248 $(170) $(73) $39 $1,044 $(156) $(28) $860 $431 $1 $1,292 GME End of Life Vehicle Charge (A) - 55 - - 55 - - 55 - - 55 ----- --- -- -- ----- --- --- --- --- -- ----- Adjusted Income (Loss) $1,248 $(115) $(73) $39 $1,099 $(156) $(28) $915 $431 $1 $1,347 ===== === == == ===== === === === === == ===== For the Three Months Ended June 30, 2001 Reported Net Income (Loss) $521 $(154) $31 $(121) $277 $(156) $(82) $39 $449 $(11) $477 Isuzu Restructuring (G) - - - 133 133 - - 133 - - 133 --- --- --- --- --- --- --- --- --- --- --- Adjusted Income (Loss) $521 $(154) $31 $12 $410 $(156) $(82) $172 $449 $(11) $610 === === === === === === === === === === === For the Six Months Ended June 30, 2002 Reported Net Income (Loss) $1,873 $(702) $(113) $46 $1,104 $(312) $ (141) $651 $870 $(1) $1,520 GME End of Life Vehicle Charge (A) - 55 - - 55 - - 55 - - 55 GME Restructuring Charge (B) - 407 - - 407 - - 407 - - 407 Hughes Space Shuttle Settlement (C) - - - - - (59) - (59) - - (59) Hughes GECC Contractual Dispute (D) - - - - - 51 - 51 - - 51 Hughes Loan Guarantee Charge (E) - - - - - 18 - 18 - - 18 ----- --- --- -- ----- --- --- ----- --- -- ----- Adjusted Income (Loss) $1,873 $(240) $(113) $46 $1,566 $(302) $(141) $1,123 $870 $(1) $1,992 ===== === === == ===== === === ===== === == ===== For the Six Months Ended June 30, 2001 Reported Net Income (Loss) $627 $(238) $36 $(142) $283 $(260) $(201) $(178) $914 $(22) $714 SFAS 133 Adjustment (F) 14 (2) 1 1 14 8 - 22 (34) - (12) Isuzu Restructuring (G) - - - 133 133 - - 133 - - 133 --- --- -- --- --- --- --- --- --- --- --- Adjusted Income (Loss) $641 $(240) $37 $(8) $430 $(252) $(201) $(23) $880 $(22) $835 === === == === === === === === === == ===
See next page for Footnotes. - 17 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS List of Special Items - After Tax Footnotes: (A) During September 2000, the European Union 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. The laws to be developed in the individual country legislatures throughout Europe will have a significant impact on the amount ultimately paid by the manufacturers. The after-tax charge of $55 million, recorded in cost of sales and other expenses, relates to those member states that have passed national laws during the second quarter ended June 30, 2002. See Note 11 in the Notes to Consolidated Financial Statements. (B) The GME Restructuring Charge relates to the initiative implemented in the first quarter of 2002 to improve the competitiveness of GM's automotive operations in Europe. See Note 11 in the Notes to Consolidated Financial Statements. (C) The Space Shuttle Settlement relates to the favorable resolution of a lawsuit that was filed against the U.S. government on March 22, 1991, based upon the National Aeronautics and Space Administration's (NASA) breach of contract to launch ten satellites on the Space Shuttle. (D) The GECC Contractual Dispute relates to the expected loss associated with a contractual dispute with General Electric Capital Corporation. (E) The Loan Guarantee Charge relates to a loan guarantee for a Hughes Network Systems' affiliate in India. (F The SFAS No. 133 adjustment represents the net income impact from initially adopting SFAS No. 133, "Accounting for Derivatives and Hedging Activities." (G) The Isuzu restructuring charge includes General Motors' portion of severance payments and asset impairments that were part of the second quarter restructuring of its affiliate Isuzu Motors Ltd. - 18 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Vehicle Unit Deliveries of Cars and Trucks Three Months Ended June 30, --------------------------- 2002 2001 ------------------------ ------------------------ GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- --- -------- -------- --- -------- (units in thousands) GMNA United States Cars 2,245 590 26.3% 2,324 610 26.2% Trucks 2,332 694 29.7% 2,341 666 28.5% ----- ------ ----- ----- Total United States 4,577 1,284 28.1% 4,665 1,276 27.3% Canada, Mexico, and Other 822 209 25.4% 740 186 25.1% ----- ------ ----- ----- Total GMNA 5,399 1,493 27.7% 5,405 1,462 27.0% GME 5,076 443 8.7% 5,352 504 9.4% GMLAAM 899 156 17.3% 1,003 175 17.4% GMAP 3,445 138 4.0% 3,234 130 4.0% ----- ----- ------ ----- Total Worldwide 14,819 2,230 15.1% 14,994 2,271 15.1% ====== ===== ====== ===== Six Months Ended June 30, ------------------------- 2002 2001 ------------------------ ------------------------ GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- --- -------- -------- --- -------- (units in thousands) GMNA United States Cars 4,144 1,061 25.6% 4,413 1,213 27.5% Trucks 4,433 1,354 30.5% 4,458 1,258 28.2% ----- ----- ----- ----- Total United States 8,577 2,415 28.2% 8,871 2,471 27.9% Canada, Mexico, and Other 1,498 389 26.0% 1,363 348 25.5% ----- ----- ----- ------ Total GMNA 10,075 2,804 27.8% 10,234 2,819 27.5% GME 10,107 878 8.7% 10,631 1,002 9.4% GMLAAM 1,809 309 17.1% 1,983 339 17.1% GMAP 7,004 279 4.0% 6,701 250 3.7% ------ ----- ------ ----- Total Worldwide 28,995 4,270 14.7% 29,549 4,410 14.9% ====== ===== ====== ===== Wholesale Sales Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (units in thousands) GMNA Cars 704 654 1,316 1,249 Trucks 853 729 1,603 1,364 ----- ----- ----- ----- Total GMNA 1,557 1,383 2,919 2,613 ----- ----- ----- ----- GME Cars 418 473 813 914 Trucks 19 22 48 49 --- --- --- --- Total GME 437 495 861 963 --- --- --- --- GMLAAM Cars 112 127 223 238 Trucks 47 60 91 108 --- --- --- --- Total GMLAAM 159 187 314 346 --- --- --- --- GMAP Cars 47 57 94 104 Trucks 39 43 100 135 -- --- --- --- Total GMAP 86 100 194 239 ----- ----- ----- ----- Total Worldwide 2,239 2,165 4,288 4,161 ===== ===== ===== ===== - 19 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review GMA's income and net margin, adjusted to exclude special items (adjusted income and margin), was $1.1 billion and 2.8% on net sales and revenues of $38.6 billion for the second quarter of 2002. This compares with income of $410 million and a net margin of 1.1% on net sales and revenues of $37.2 billion for the prior year quarter. For the six months ended June 30, 2002 adjusted income and margin, increased to $1.6 billion and 2.1% on net sales and revenues of $75.6 billion compared with income of $430 million and a net margin of 0.6% on net sales and revenues of $71.0 billion for the prior year six-month period. The increase in adjusted second quarter and year-to-date 2002 income and net sales and revenues was primarily due to an increase in wholesale sales volumes, favorable mix, material cost savings, and structural cost reductions. These favorable conditions were partially offset by pricing pressures in North America and increased OPEB and salaried separation/retirement costs in North America. GMNA's income was $1.2 billion for the second quarter of 2002, compared with $521 million for the prior year quarter. Income for the six months ended June 30, 2002, was $1.9 billion compared with adjusted income of $641 million for the prior six month period. The increase in GMNA's second quarter and year-to-date 2002 income was primarily the result of higher wholesale sales volumes, favorable mix, material costs savings, and structural cost reductions. These favorable conditions were partially offset by pricing pressures and increased OPEB and salaried separation/retirement costs. Net price, which 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, was unfavorable for the quarter at (1.9)% year-over-year. GME's adjusted loss was $115 million for the second quarter of 2002, compared with a loss of $154 million for the prior year quarter. Adjusted losses for the six months ended June 30, 2002, totaled $240 million, which was unchanged compared to an adjusted loss of $240 million for the prior year six-month period. The decrease in second quarter 2002 adjusted loss was primarily due to material and structural cost improvements. This was partially offset by a decrease in wholesale sales volumes driven by a weak European industry and continuing competitive pricing pressures, as well as reduced sales of the Vectra due to the changeover to the new model. GMLAAM's loss was $73 million for the second quarter of 2002, compared with income of $31 million for the prior year quarter. Losses for the six months ended June 30, 2002 totaled $113 million, compared to adjusted income of $37 million for the prior year six-month period. The decrease in second quarter and year-to-date 2002 earnings was primarily due to political unrest and economic uncertainty in Argentina, Brazil, and Venezuela, which have caused a significant deterioration to the 2002 industry outlook for the region. GMAP's income for the second quarter of 2002 was $39 million compared to adjusted income of $12 million for the prior year quarter. Income for the six months ended June 30, 2002, was $46 million compared to an adjusted loss of $8 million for the prior year six-month period. The increase in second quarter and year-to-date 2002 earnings was primarily due to equity income improvements from several joint ventures in the region as well as slightly favorable pricing, partially offset by decreased wholesale sales volumes and increases in material and structural costs. Hughes Financial Review Total net sales and revenues increased to $2.2 billion and $4.3 billion for the second quarter and first six months of 2002, respectively, compared with $2.0 billion and $3.9 billion in the comparable periods in 2001. The increase in second quarter and year-to-date net sales and revenues resulted primarily from increased revenues at the Direct-To-Home Broadcast segment due to continued subscriber growth at DIRECTV U.S. and $55 million of revenues in the second quarter associated with the 2002 World Cup at DIRECTV Latin America. Hughes' adjusted loss was $156 million for the second quarter of 2002 and 2001. Losses for the six months ended June 30, 2002 totaled $302 million compared to losses of $252 million for the first six months of 2001. The increase in year-to-date losses was primarily due to an increase in interest expense which includes a $47 million charge in the second quarter 2002 for losses associated with the final settlement of a contractual dispute with GECC. The increase in year-to-date losses was also due to a decrease in interest income due to lower average cash and cash equivalent balances in the current year and a decrease in realized gains on investments. These unfavorable factors were partially offset by the increase in revenues discussed above, a $37 million gain resulting from the resolution of remaining claims associated with the exit from the DIRECTV Japan business, and an increased income tax benefit resulting from higher pre-tax losses and favorable resolution of certain tax contingencies recorded in the first six months of 2002. - 20 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMAC Financial Review GMAC's income was $431 million on net sales and revenues of $6.5 billion for the second quarter of 2002, compared with $449 million on net sales and revenues of $6.4 billion for the prior year quarter. Income for the first six months of 2002, was $870 million on net sales and revenues of $12.9 billion, compared with adjusted income of $880 million on net sales and revenues of $12.8 billion for the prior year period. Income from automotive and other financing operations totaled $347 million for the second quarter of 2002, compared with $360 million for the prior year quarter. For the six months ended June 30, 2002, income from automotive and other financing operations totaled $602 million compared to $651 million for the prior year period. The decrease in income reflects higher credit losses and unfavorable borrowing spreads, which more than offset the positive effect of higher retail asset levels in North America. Income from insurance operations totaled $26 million for the second quarter of 2002, compared with $41 million for the prior year quarter. For the six months ended June 30, 2002, income from insurance operations totaled $62 million compared to $83 million for the prior year period. The decrease is largely accounted for by the absence of capital gains reflecting weak equity markets, which more than offset a continued improvement in underwriting results. Income from mortgage operations totaled $58 million for the second quarter of 2002, compared with $48 million for the prior year quarter. For the six months ended June 30, 2002, income from mortgage operations totaled $206 million compared to $146 million for the prior year period. The increase reflects increased production volumes in both the residential and commercial mortgage sectors, which were partially offset by a reduction in the value of mortgage servicing rights, due to actual and expected levels of mortgage prepayments. Investment in Fiat Auto Holdings In July 2000, GM acquired 20% of the common stock of Fiat Auto Holdings, B.V. (FAH), the entity which is the sole shareholder of Fiat Auto, S.p.A. (Fiat Auto) for $2.4 billion. Subsequent to that acquisition, the European market for new vehicles has experienced a continued decrease in volumes, and manufacturers have experienced increased pricing and general competitive pressures. Those market conditions and other factors have led to deterioration in the performance of Fiat Auto. Accordingly, GM has commenced a review of the appropriate carrying value of GM's investment in FAH. Management of GM believes it is probable that a significant write-down of GM's investment in FAH will be required in the third quarter of 2002 upon completion of GM's review. LIQUIDITY AND CAPITAL RESOURCES Financing Structure In the first six months of 2002, 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 in 2001 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. 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 2003, and an additional $7.4 billion committed through June 2006. On February 15, 2002, GM issued $875 million of 7.250% Senior Notes due February 15, 2052. The bonds mature in 50 years and are redeemable by GM, in whole or part, prior to 2052 if certain circumstances are satisfied. On March 6, 2002, GM also 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 par value common stock once specific conditions are satisfied. The proceeds of the offerings, 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 June 30, 2002, cash, marketable securities, and $3.0 billion of assets of the Voluntary Employees' Beneficiary Association (VEBA) trust invested in fixed-income securities totaled $18.4 billion, compared with $12.2 billion at December 31, 2001 and $12.2 billion at June 30, 2001. The increase from December 31, 2001 was primarily due to proceeds from the bond and convertible debt offerings, and strong cash flow from automotive operations. Total assets - 21 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive, Communications Services, and Other Operations (concluded) in the VEBA trust used to pre-fund part of GM's other postretirement benefits liability approximated $6.0 billion at June 30, 2002, compared with $4.9 billion at December 31, 2001 and $5.2 billion at June 30, 2001. GM previously indicated that it had a goal of maintaining $13.0 billion of cash and marketable securities in order to continue funding product development programs throughout the next downturn in the business cycle. This $13.0 billion target includes cash to pay certain costs that were pre-funded in part by VEBA contributions. Long-term debt was $16.8 billion at June 30, 2002, compared with $10.7 billion at December 31, 2001 and $8.7 billion at June 30, 2001. The ratio of long-term debt to long-term debt and GM's net assets of Automotive, Communications Services, and Other Operations was 80.2% at June 30, 2002, compared with 72.6% at December 31, 2001 and 36.1% at June 30, 2001. 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 81.5% at June 30, 2002, compared with 76.5% at December 31, 2001 and 41.9% at June 30, 2001. Net liquidity excluding Hughes, calculated as cash, marketable securities, and $3.0 billion of assets of the VEBA trust invested in fixed-income securities less the total of loans payable and long-term debt, was $2.6 billion at June 30, 2002, compared with $1.0 billion at December 31, 2001 and $1.9 billion at June 30, 2001. In order to provide financial flexibility to GM and its suppliers, GM maintains a two-part financing program through 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 June 30, 2002, the outstanding balance under the first part of the program amounted to approximately $755 million, and there was no outstanding balance under the second part of the program. Beginning January 2004, Fiat has the right to exercise a put option to require GM to purchase 80% of 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." 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. 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. See Note 4 in the Notes to Consolidated Financial Statements and "Investment in Fiat Auto Holdings in this MD&A." - 22 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Financing and Insurance Operations At June 30, 2002, GMAC owned assets and serviced automotive receivables totaling $228.0 billion, compared with $220.1 billion at December 31, 2001 and $193.0 billion at June 30, 2001. The increase from December 31, 2001 was primarily the result of an increase in serviced retail receivables, serviced wholesale receivables, mortgage loans held for investment, other assets, and investments in securities. These increases were partially offset by a decrease in cash and cash equivalents, real estate mortgages held for sale, commercial and other loan receivables, mortgage lending receivables, notes receivable from GM, and mortgage servicing rights. Total automotive and commercial finance receivables serviced by GMAC, including sold receivables, totaled $139.0 billion at June 30, 2002, compared with $130.6 billion at December 31, 2001 and $116.8 billion at June 30, 2001. The increase from December 31, 2001 was primarily the result of a $4.7 billion increase in serviced retail receivables, a $4.7 billion increase in serviced wholesale receivables, partially offset by a $1.0 billion decline in commercial and other loan receivables. Continued GM-sponsored retail financing incentives contributed to the rise in serviced retail receivables. The increase in serviced wholesale loan receivables was due to increased dealer inventories at June 30, 2002 compared to December 31, 2001. At June 30, 2002, GMAC's total borrowings were $158.0 billion, compared with $152.0 billion at December 31, 2001 and $131.4 billion at June 30, 2001. GMAC's ratio of total debt to total stockholder's equity at June 30, 2002 was 9.3:1, compared with 9.4:1 at December 31, 2001 and 8.9:1 at June 30, 2001. 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. 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 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): June 30, Dec. 31, 2002 2001 -------- -------- Automotive, Communications Services, and Other Operations - ------------------------------------ Assets leased under operating leases $2,530 $2,412 Trade receivables sold 889 868 ----- ----- Total $3,419 $3,280 ===== ===== Financing and Insurance Operations Receivables sold or securitized: - Mortgage loans $110,228 $104,678 - Retail finance receivables 13,291 11,978 - Wholesale finance receivables 16,179 16,227 ------- ------- Total $139,698 $132,883 ======= ======= - 23 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Book Value Per Share Book value per share is determined based on the liquidation rights of the various classes of common stock. Book value per share of GM $1-2/3 par value common stock was $27.48 at June 30, 2002, compared with $24.79 at December 31, 2001 and $38.85 at June 30, 2001. Book value per share of GM Class H common stock, adjusted to reflect the GM Class H common stock split, was $5.50 at June 30, 2002, compared with $4.96 at December 31, 2001 and $7.77 at June 30, 2001. Dividends Dividends may be paid on common stocks only when, as, and if declared by the GM Board in its sole discretion. The amount available for the payment of dividends on each class of common stock will be reduced on occasion by dividends paid on that class and will be adjusted on occasion for changes to the amount of surplus attributed to the class resulting from the repurchase or issuance of shares of that class. GM's policy is to distribute dividends on its $1-2/3 par value common stock based on the outlook and indicated capital needs of the business. On May 7, 2002, the GM Board declared a quarterly cash dividend of $0.50 per share on GM $1-2/3 par value common stock, paid June 10, 2002, to holders of record on May 17, 2002. With respect to GM Class H common stock, the GM Board determined that it will not pay any cash dividends at this time in order to allow the earnings of Hughes to be retained for investment in its business. A quarterly dividend of $8.7793 per share for the GM Series H 6.25% Automatically Convertible Preference Stock was paid on June 24, 2002, to AOL Time Warner, the sole holder of record. European Matters 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 in 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. GM recorded an after-tax charge of $55 million ($0.10 per share of GM $1-2/3 par value common stock) in the second quarter of 2002 for those member states that have passed national laws during the second quarter ended June 30, 2002. Management is currently assessing the impact of this potential legislation on GM's financial position and results of operations, and may include charges to earnings throughout the remaining quarters of 2002 as additional national laws are passed. The European Commission has approved a new 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 regulation would have on its present new vehicle and aftermarket distribution 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 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. - 24 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes/EchoStar Transactions (concluded) 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 liabilities prior to the transactions or exchanging such shares for either cash or GM outstanding liabilities after the transactions. Following these transactions, 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 of a failure to obtain certain specified regulatory clearances or financing to complete the merger, 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. 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. In addition, in the event that the transactions do not occur because certain of the specified regulatory clearances or approvals relating to United States federal, state or local antitrust and or federal communication commission matters have not been satisfied, EchoStar will be required to pay a $600 million termination fee to Hughes. On July 2, 2002, GM received a favorable private letter ruling from the U.S. Internal Revenue Service to the effect that, among other things, the split-off of the Hughes holding company from GM would be tax-free to GM and its stockholders for U.S. federal income-tax purposes. General Motors, Hughes, and EchoStar continue to seek required regulatory clearances and approvals from the U.S. Department of Justice and the Federal Communications Commission with a goal toward completing the transactions in the second half of 2002. The companies also are in the process of preparing materials to be distributed to GM $1-2/3 par value common stockholders and GM Class H common stockholders seeking their affirmative vote on certain aspects of the transactions, and to EchoStar stockholders for their information. Employment and Payrolls Worldwide employment at June 30, (in thousands) 2002 2001 ---- ---- GMNA 198 207 GME 69 76 GMLAAM 24 25 GMAP 11 11 GMAC 31 29 Hughes 12 11 Other 12 13 ---- ---- Total employees 357 372 === === Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2002 2001 2002 2001 ---- ---- ---- ---- Worldwide payrolls - (in billions) $5.4 $5.2 $10.4 $10.2 === === ==== ==== Significant Accounting Policies GM has identified significant accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved, could result in material changes to its financial condition or results of operations under different conditions or using different assumptions. The Corporation's most significant accounting policies are related to the following areas: sales allowances, policy and warranty, impairment of long-lived assets, employee costs, postemployment benefits, allowance for credit losses, investments in operating leases, and accounting for derivatives and other contracts at fair value. Details regarding the Corporation's use of these policies and the related estimates are described fully in the Corporation's 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission. There have been no material changes to the Corporation's significant accounting policies that affected the Corporation's financial condition or results of operations in the second quarter of 2002. - 25 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Significant Accounting Policies (concluded) On August 6, 2002, GM announced that the Corporation will expense the fair market value of stock options granted to employees beginning in January 2003, pursuant to SFAS No. 123. In 2003, GM expects the expense associated with stock options will be about $85 million, or $0.15 per share of GM $1-2/3 par value common stock for the year assuming continuing option grants and values similar to recent years. SFAS No. 123 requires amortizing the expense of options over their vesting period. The full cost of GM's annual option grants could grow to about $130 million, or $0.24 per share, in 2005. Additional Matters Asbsetos Matters Like most domestic and foreign automobile manufacturers, over the years GM has used some brake products incorporating small amounts of encapsulated asbestos. These products, generally brake linings, are known as asbestos containing friction products. There is a significant body of scientific data demonstrating that these asbestos containing friction products are safe and do not create an increased risk of asbestos related disease. GM believes that the use of asbestos in these products was appropriate. As with other companies that have used products containing asbestos, there has been an increase in the number of claims against GM related to allegations concerning the use of friction products in recent years. A growing number of auto mechanics are filing suit seeking recovery as a result of exposure to the small amount of asbestos used in brake components. These claims almost always identify numerous other potential sources for the claimant's exposure to asbestos which do not involve GM or even asbestos containing friction products and many of which place users at much greater risk. Many of these claimants do not have an asbestos related illness and may never develop one. This is consistent with the experience reported by other automotive manufacturers and other end users of asbestos. GM and the other domestic automobile manufacturers sought to have the asbestos brake claims against them transferred and consolidated with asbestos brake litigation in the Delaware bankruptcy court where the Federal Mogul bankruptcy is pending. The bankruptcy court in Delaware declined to consolidate the automobile manufacturers' cases, and the Court of Appeals affirmed that decision. The manufacturers are attempting to have that decision reviewed by the U.S. Supreme Court. That attempt to consolidate and the bankruptcy court's decision to decline to do so are procedural and do not affect any defenses available in these cases. Two other types of claims related to alleged asbestos exposure are being asserted against GM, representing a significantly lower alleged exposure than the automotive friction claims. Like other locomotive manufacturers, GM used a limited amount of asbestos in locomotive brakes and in the insulation used in some locomotives resulting in lawsuits being filed against it by railroad workers seeking relief based on their exposure to asbestos. These claims usually identify numerous other potential sources for the claimant's exposure to asbestos which do not involve GM or even locomotives. Many of these claimants do not have an asbestos related illness and may never develop one. In addition, like many other manufacturers, a relatively small number of claims are brought by contractors who are seeking recovery based on exposure to asbestos containing products while working on premises owned by GM. These claims almost always identify numerous other potential sources for the claimant's exposure to asbestos which do not involve GM. Many of these claimants do not have an asbestos related illness and may never develop one. While General Motors has resolved many of these cases over the years and continues to do so for conventional strategic litigation reasons (avoiding defense costs and possible exposure to runaway verdicts), GM, as stated above, believes that the vast majority of such claims against GM are without merit. In this regard GM believes that it has very strong defenses based upon a number of published epidemiological studies prepared by highly respected scientists. GM believes there is compelling evidence warranting the dismissal of virtually all of these claims against GM. GM will vigorously press this evidence before judges and juries whenever possible. Additionally, GM believes there is strong statutory and judicial precedent supporting federal preemption of the asbestos tort claims asserted on behalf of railroad workers. Such preemption would mean that federal law entirely eliminates the possibility that such individuals could bring tort claims against GM. GM's aggregate expense associated with resolution of these claims in 2001 was approximately $10 million. This figure may grow in future years because of the number of claims, the many years it can take to resolve any given claim, and the increasing rate at which claims are being filed. Nevertheless, it is management's belief, based upon consultation with legal counsel, that these claims will not result in a material adverse effect upon the financial condition of GM. - 26 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Additional Matters (concluded) Isuzu Restructuring Matters On August 14, 2002, GM confirmed it is in discussions with Isuzu Motors Ltd. and Isuzu's banks, including Mizuho Corporate Bank, Ltd., regarding a comprehensive operational and financial restructuring of Isuzu. Under the restructuring proposal, GM would spend a total of Y60 billion (U.S. $500 million). The investment would be used to acquire a majority interest in certain of Isuzu's diesel engine businesses and complete ownership of certain diesel engine technologies. GM also would acquire a majority interest in a new diesel engine engineering joint venture with Isuzu as well as rights to use various related technologies. In addition, GM would have its existing equity in the company retired as part of Isuzu's financial restructuring plan, and GM would then purchase new equity in the company, leaving GM with a 12-percent ownership stake in Isuzu Motors. * * * * * * * PART II ITEM 1. LEGAL PROCEEDINGS Previously reported legal proceedings which have been terminated, either during the quarter ended June 30, 2002, or subsequent thereto, but before the filing of this report are summarized below: As previously reported, 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, 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. In July 2002, the parties reached a settlement and stipulated to dismissal of the lawsuit with prejudice. Pursuant to that settlement, DIRECTV paid approximately $20 million to Global. * * * With respect to the previously reported dispute between General Electric Capital Corporation ("GECC") and DIRECTV arising out of a contract entered into between the parties on July 31, 1995, the parties executed an agreement on June 4, 2002 to settle the matter for $180 million. The settlement resulted in Hughes recording a second quarter 2002 pre-tax charge of $47 million, primarily related to interest expense. * * * * - 27 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The annual meeting of stockholders of the Registrant was held on June 4, 2002. At that meeting, the following matters were submitted to a vote of the stockholders of General Motors Corporation: 2002 General Motors Annual Meeting Final Voting Results (All classes of common stock) Proposal Voting Results Votes* Percent** ------- --------- Item No. 1 Nomination and Election of Directors The Judges subscribed and delivered a certificate reporting that the following nominees for directors had received the number of votes* set opposite their respective names. Percy N. Barnevik For 596,375,959 98.7% Withheld 8,114,082 1.3 John H. Bryan For 594,420,874 98.3 Withheld 10,069,167 1.7 Armando M. Codina For 596,247,270 98.6 Withheld 8,242,771 1.4 George M. C. Fisher For 596,410,019 98.7 Withheld 8,080,022 1.3 Nobuyuki Idei For 594,573,264 98.4 Withheld 9,916,777 1.6 Karen Katen For 594,566,366 98.4 Withheld 9,923,675 1.6 Alan G. Lafley For 596,418,509 98.7 Withheld 8,071,532 1.3 E. Stanley O'Neal For 594,421,185 98.3 Withheld 10,068,856 1.7 Eckhard Pfeiffer For 594,021,526 98.3 Withheld 10,468,515 1.7 John F. Smith, Jr. For 596,415,514 98.7 Withheld 8,074,527 1.3 G. Richard Wagoner, Jr. For 596,503,519 98.7 Withheld 7,986,522 1.3 Lloyd D. Ward For 593,163,452 98.1 Withheld 11,326,589 1.9 In addition, 62 votes were cast 0.0 for each of the following: John Chevedden, James Dollinger, W. Dean Fitzpatrick, John Lauve, Louis Lauve III, Steve J. Mahac, Larry Parks, Robert G. Rinaldi, Danny R. Taylor, William L. Walde, William E. Woodward, M.D. Item No. 2 A proposal of the Board of Directors For 576,776,036 95.4% that the stockholders ratify the Against 22,293,255 3.7 selection of Deloitte & Touche LLP Abstain 5,420,750 0.9 as independent public accountants for the year 2002. Item No. 3 A proposal of the Board of Directors For 520,480,349 86.1% that the stockholders approve the Against 76,377,285 12.6 Corporation's executive incentive Abstain 7,632,407 1.3 program, effective June 4, 2002. - 28 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Proposal Voting Results Votes* Percent** ------- --------- Item No. 4 A stockholder proposal that For 14,846,791 2.9% GM provide each year a detailed Against 478,015,004 93.2 report of accidents caused by Abstain 20,147,082 3.9 driver distraction due to driver use of the internet or cell phones in General Motors cars. Item No. 5 A stockholder proposal that a For 122,529,377 23.9% bylaw be adopted that the Board Against 374,637,147 73.0 (and/or management) nominate Abstain 15,842,360 3.1 independent directors to key Board committees to the fullest extent possible. Item No. 6 A stockholder proposal that the For 20,325,029 4.0% Directors increase the stock dividend. Against 481,953,798 93.9 Abstain 10,730,048 2.1 Item No. 7 A stockholder proposal that For 214,318,962 41.8% shareholder approval be required Against 285,990,093 55.7 to adopt, terminate or maintain Abstain 12,699,827 2.5 a poison pill. Item No. 8 A stockholder proposal that GM For 24,302,082 4.7% adopt a bylaw for directors to be Against 471,402,250 91.9 paid their retainer in GM current Abstain 17,304,547 3.4 voting stock. * Numbers represent the aggregate voting power of all votes cast as of June 4, 2002 with holders of GM $1-2/3 par value common stock casting one vote per share and holders of GM Class H common stock casting 0.2 vote per share, which represents the applicable voting power after the three-for-one stock split of the GM Class H common stock in the form of a 200% stock dividend, paid on June 30, 2000 to GM Class H common stockholders of record on June 13, 2000. ** Percentages represent the aggregate voting power of both classes of GM common stock cast for each item. * * * * * * - 29 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit Number Exhibit Name Page No. - ------ ----------------------------------------------- -------- 99 Hughes Electronics Corporation Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations 31 (b) Reports on Form 8-K Seven reports on Form 8-K, were filed April 2, 2002, April 16, 2002, May 1, 2002 (2), June 3, 2002, June 4, 2002 and June 24, 2002 during the quarter ended June 30, 2002 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. * * * * * * SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. GENERAL MOTORS CORPORATION -------------------------- (Registrant) Date: August 14, 2002 /s/Peter R. Bible - --------------------- ---------------------------------------- (Peter R. Bible, Chief Accounting Officer) - 30 - EX-99 3 secondquarterex992002.txt HUGHES ELECTRONICS CORPORATION 2Q 2002 INFORMATION EXHIBIT 99 HUGHES ELECTRONICS CORPORATION FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS CONSOLIDATED STATEMENTS OF OPERATIONS AND AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2002 2001 2002 2001 -------- -------- -------- -------- (Dollars in Millions) Revenues Direct broadcast, leasing and other services.................. $2,004.0 $1,738.6 $3,862.0 $3,436.8 Product sales................................................. 205.7 246.5 385.9 441.3 -------- -------- -------- -------- Total Revenues............................................. 2,209.7 1,985.1 4,247.9 3,878.1 -------- -------- -------- -------- Operating Costs and Expenses, Exclusive of Depreciation and Amortization Expense Shown Below Broadcast programming and other costs......................... 1,078.9 786.6 1,982.1 1,525.3 Cost of products sold......................................... 184.7 189.2 357.7 343.7 Selling, general and administrative expenses.................. 823.0 927.3 1,650.8 1,813.9 Depreciation and amortization................................. 261.6 305.0 523.6 570.7 -------- -------- -------- -------- Total Operating Costs and Expenses......................... 2,348.2 2,208.1 4,514.2 4,253.6 -------- -------- -------- -------- Operating Loss.................................................... (138.5) (223.0) (266.3) (375.5) Interest income................................................... 7.4 19.0 11.7 42.8 Interest expense.................................................. (122.3) (42.8) (198.7) (93.4) Other, net........................................................ 8.9 (10.9) (32.7) (3.7) -------- -------- -------- -------- Loss Before Income Taxes, Minority Interests and Cumulative Effect of Accounting Change............................................. (244.5) (257.7) (486.0) (429.8) Income tax benefit................................................ 92.9 74.8 184.7 124.7 Minority interests in net (earnings) losses of subsidiaries....... (3.5) 26.4 (10.2) 50.7 -------- -------- -------- -------- Loss before cumulative effect of accounting change................ (155.1) (156.5) (311.5) (254.4) Cumulative effect of accounting change, net of taxes.............. -- -- -- (7.4) -------- -------- -------- -------- Net Loss.......................................................... (155.1) (156.5) (311.5) (261.8) Adjustment to exclude the effect of GM purchase accounting........ -- 0.8 -- 1.6 -------- -------- -------- -------- Loss excluding the effect of GM purchase accounting............... (155.1) (155.7) (311.5) (260.2) Preferred stock dividends......................................... (22.8) (24.1) (46.9) (48.2) -------- -------- -------- -------- Loss Used for Computation of Available Separate Consolidated Net Income (Loss).................................................... $ (177.9) $ (179.8) $ (358.4) $ (308.4) ======== ======== ======== ======== Available Separate Consolidated Net Income (Loss) Average number of shares of General Motors Class H Common Stock outstanding (in millions) (Numerator)...................... 884.0 875.9 880.8 875.7 Average Class H dividend base (in millions) (Denominator)......... 1,307.6 1,299.6 1,304.4 1,299.4 Available Separate Consolidated Net Income (Loss)................. $ (120.3) $ (121.2) $ (242.0) $ (207.8) ======== ======== ======== ========
- -------- Reference should be made to the Notes to the Consolidated Financial Statements. 31 HUGHES ELECTRONICS CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2002 2001 --------- ------------ (Dollars in Millions) ASSETS Current Assets Cash and cash equivalents...................................... $ 836.1 $ 700.1 Accounts and notes receivable (less allowances)................ 1,137.7 1,090.5 Contracts in process........................................... 122.6 153.1 Inventories.................................................... 333.9 360.1 Deferred income taxes.......................................... 134.4 118.9 Prepaid expenses and other..................................... 1,042.4 918.4 --------- --------- Total Current Assets.................................... 3,607.1 3,341.1 Satellites, net................................................... 4,852.7 4,806.6 Property, net..................................................... 2,183.6 2,197.8 Goodwill, net..................................................... 6,715.3 6,496.6 Intangible Assets, net............................................ 447.9 660.2 Net Investment in Sales-type Leases............................... 175.9 227.0 Investments and Other Assets...................................... 1,266.8 1,480.8 --------- --------- Total Assets............................................ $19,249.3 $19,210.1 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts payable............................................... $ 1,104.1 $ 1,227.5 Deferred revenues.............................................. 157.7 178.5 Short-term borrowings and current portion of long-term debt.... 1,081.6 1,658.5 Accrued liabilities and other.................................. 1,303.3 1,342.0 --------- --------- Total Current Liabilities............................... 3,646.7 4,406.5 Long-Term Debt.................................................... 2,398.4 988.8 Other Liabilities and Deferred Credits............................ 1,301.8 1,465.1 Deferred Income Taxes............................................. 757.7 746.5 Commitments and Contingencies Minority Interests................................................ 542.9 531.3 Stockholder's Equity.............................................. Capital stock and additional paid-in capital................... 10,151.5 9,561.2 Preferred stock, Series A...................................... -- 1,498.4 Preferred stock, Series B...................................... 914.1 -- Retained earnings (deficit).................................... (444.8) (86.4) --------- --------- Subtotal Stockholder's Equity................................. 10,620.8 10,973.2 --------- --------- Accumulated Other Comprehensive Income (Loss) Minimum pension liability adjustment......................... (17.3) (17.3) Accumulated unrealized gains on securities and derivatives... 69.6 192.6 Accumulated foreign currency translation adjustments......... (71.3) (76.6) --------- --------- Accumulated other comprehensive income (loss).................. (19.0) 98.7 --------- --------- Total Stockholder's Equity.............................. 10,601.8 11,071.9 --------- --------- Total Liabilities and Stockholder's Equity.............. $19,249.3 $19,210.1 ========= =========
- -------- Reference should be made to the Notes to the Consolidated Financial Statements. 32 HUGHES ELECTRONICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ------------------- 2002 2001 -------- --------- (Dollars in Millions) Cash Flows from Operating Activities Net Cash Provided by (Used in) Operating Activities..... $ 72.7 $ (97.5) -------- --------- Cash Flows from Investing Activities Investment in companies, net of cash acquired............... (1.3) (209.4) Expenditures for property................................... (310.1) (393.3) Expenditures for satellites................................. (418.3) (468.1) Proceeds from disposal of property.......................... -- 0.2 Proceeds from sale of investments........................... -- 67.8 Proceeds from insurance claims.............................. 215.0 132.4 -------- --------- Net Cash Used in Investing Activities................... (514.7) (870.4) -------- --------- Cash Flows from Financing Activities Net increase (decrease) in short-term borrowings............ (785.5) 437.4 Long-term debt borrowings................................... 1,801.0 1,144.4 Repayment of long-term debt................................. (182.8) (1,036.8) Debt issuance costs......................................... (58.3) -- Stock options exercised..................................... 6.5 13.9 Preferred stock dividends paid to General Motors............ (68.7) (46.8) Final payment on Raytheon settlement........................ (134.2) -- -------- --------- Net Cash Provided by Financing Activities............... 578.0 512.1 -------- --------- Net increase (decrease) in cash and cash equivalents........... 136.0 (455.8) Cash and cash equivalents at beginning of the period........... 700.1 1,508.1 -------- --------- Cash and cash equivalents at end of the period................. $ 836.1 $ 1,052.3 ======== ========= - --------
Reference should be made to the Notes to the Consolidated Financial Statements. 33 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation 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. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting. In the opinion of management, all adjustments (consisting only of normal recurring items) which are necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Hughes Annual Report on Form 10-K for the year ended December 31, 2001 and the Hughes Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 filed with the Securities and Exchange Commission ("SEC") on March 11, 2002 and May 6, 2002, respectively, and all other Hughes filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report. On August 14, 2002, the Chief Executive Officer and Chief Financial Officer of Hughes complied with the certification requirement of 18 U.S.C. (S)1350, as adopted pursuant to (S)906 of the Sarbanes-Oxley Act of 2002, by submitting such certifications by correspondence to the Commission. These certificates are available to the public in a Form 8-K filed with the Commission on August 14, 2002. 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. 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 a company holding all of the capital stock of Hughes ("HEC Holdings") from GM and the combination of the Hughes business with EchoStar by means of a merger (the "Merger" or "EchoStar 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 Quarterly Report do not give any effect to or make any adjustment for the anticipated completion of the Merger. The split-off of HEC Holdings 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 HEC Holdings (which 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 EchoStar Merger to form New EchoStar. Each share of HEC Holdings 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 New EchoStar in exchange for each share of EchoStar Class A or Class B common stock held immediately prior to the EchoStar Merger. 34 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 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 GM 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, 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 cash or certain debt of GM, GM 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. 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. In addition, if the merger agreement is terminated for failure to obtain specified regulatory clearances or financing to complete the Merger, EchoStar is obligated to purchase Hughes' interest in PanAmSat Corporation ("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. 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 Federal Communications Commission ("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 EchoStar Merger was not completed for the specific reasons identified above. 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 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. On July 2, 2002, GM received a favorable private letter ruling from the U.S. Internal Revenue Service to the effect that, among other things, the split-off of HEC Holdings from GM would be tax-free to GM and its stockholders for U.S. federal income-tax purposes. GM, Hughes and EchoStar continue to seek required regulatory clearances and approvals from the U.S. Department of Justice and the FCC with a goal toward completing the transactions in the second half of 2002. The 35 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) companies also are in the process of preparing materials to be distributed to GM stockholders seeking their affirmative vote on certain aspects of the transactions, and to EchoStar stockholders for their information. In connection with the pending EchoStar Merger, some 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 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. 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 accounting principles generally accepted in the United States of America 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 digital subscriber line services ("DSL"), the sale of transponder capacity and related services through outright sales, sales-type leases and operating lease contracts, and sales of DIRECTV receiving equipment, communications equipment and communications services. Sales are generally recognized as products are shipped or services are rendered. Direct-To-Home subscription and pay-per-view revenues are recognized when programming is broadcast to subscribers. Equipment rental revenue is recognized monthly as earned. Advertising revenue is recognized when the related services are performed. Programming payments received from subscribers in advance of the broadcast are recorded as deferred revenues until earned. 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. 36 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 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, no obligations under sale-leaseback agreements remain at June 30, 2002. 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 ("SAC") are incurred to acquire new DIRECTV subscribers and consist of print and television advertising, subsidies paid to manufacturers of DIRECTV receiving equipment, the cost of free programming provided to the subscriber, the cost of commissions paid to authorized retailers and dealers for subscribers added through their respective distribution channels and the cost of installation and hardware subsidies for subscribers added through DIRECTV's direct sales program. The cost of print and television advertising, subsidies paid to manufacturers and free programming is expensed as incurred. Manufacturer subsidies earned prior to August 2000 are payable over five years, the present value of which was accrued in the period earned with interest expense recorded over the term of the obligation. The current portion of these manufacturer subsidies are recorded in the consolidated balance sheets in "Accrued liabilities and other", with the long-term portion recorded in "Other liabilities and deferred credits". Substantially all commissions paid to retailers and dealers, although paid in advance, are earned by the retailers and dealers over 12 months from the date of subscriber activation and are refundable to Hughes on a pro-rata basis should the subscriber cancel the DIRECTV service during the service period. As a result, prepaid commissions are deferred and amortized to expense over the 12-month service period. The amount deferred is limited to the estimated average gross margin to be derived 37 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) from the subscriber over the 12-month period. The excess commission over the estimated margin and non-refundable commissions are expensed immediately. The cost of installation and hardware subsidies under the direct sales program are deferred when a customer commits to 12 months of the DIRECTV service. The amount deferred is amortized to expense over the commitment period and limited to the margin expected to be earned over the contract term, less an allowance for estimated unrecoverable amounts. Subsidy amounts in excess of the estimated gross margin, and subsidies where no commitment is obtained, are expensed immediately. SAC is included in "Selling, general and administrative expenses" in the consolidated statements of operations and available separate consolidated net income (loss). The deferred portion of the costs are included in "Prepaid expenses and other" in the consolidated balance sheets. Hughes actively monitors the recoverability of prepaid commissions and deferred subsidies. To the extent refunds are due for prepaid commissions, Hughes credits the amount due against amounts payable to the retailers/dealers, and therefore, recoverability is reasonably assured. Under the direct sales program, the subscriber is required to secure their account with a credit card and agrees that a pro-rated early termination fee of $150 will be assessed if the subscriber cancels service prior to the end of the commitment period. As a result, with the subscriber credit card as security together with existing allowances, the recoverability of deferred subsidies is reasonably assured. 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 $218.1 million and $133.2 million for the six months ended June 30, 2002 and June 30, 2001, respectively. 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 $23.9 million and $37.6 million at June 30, 2002 and December 31, 2001, respectively. Inventories Inventories are stated at the lower of cost or market principally using the average cost method. 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 38 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 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. Broadcast Programming Rights The cost of television programming broadcast rights are recognized as programming is broadcast. The cost of television programming rights to distribute live sporting events is 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 consolidated statements of operations and available separate consolidated net income (loss). Advance payments in the form of cash and equity instruments received from programming content providers for carriage of their signal on DIRECTV are deferred and recognized as a reduction of programming costs on a straight-line basis over the related contract term. Equity instruments are recorded at fair value based on quoted market prices or appraised values, based on an independent third-party valuation. The current and long-term portions of these deferred credits are recorded in the consolidated balance sheets in "Accrued liabilities and other" and "Other liabilities and deferred credits" and are being amortized on a straight-line basis over the related contract terms ranging from 4 to 10 years. Software Development Costs Other assets include certain software development costs capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed". Capitalized software development costs at June 30, 2002 and December 31, 2001, net of accumulated amortization of $157.5 million and $147.8 million, respectively, totaled $86.7 million and $85.1 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 expensed. Valuation of Long-Lived Assets Hughes evaluates the carrying value of long-lived assets to be held and used, other than goodwill and intangible assets with indefinite lives, 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 judgements 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. 39 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 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 consolidated statements of operations and available separate consolidated net income (loss). 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, 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 is recognized in the consolidated statements of operations and available separate consolidated net income (loss) 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 June 30, 2002 and December 31, 2001. Hughes carries 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 40 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 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 consolidated statements of operations and available separate consolidated net income (loss) 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 $0.8 million at June 30, 2002 is expected to be recognized in earnings during the next twelve months. 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". 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. 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. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" on January 1, 2002. SFAS No. 144 refines existing impairment accounting guidance and extends the use of accounting for discontinued operations to 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 SFAS No. 144 did not have any impact on Hughes' consolidated results of operations or financial position. Hughes also adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. 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, or sooner if an event occurs or circumstances change that would more likely than not result in an impairment loss. All other intangible assets are amortized over their estimated useful lives. SFAS No. 142 requires that Hughes perform step one of a two-part transitional impairment test to 41 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) compare the fair value of each reportable unit with its respective carrying amount, including goodwill. If the carrying value exceeds its fair value, step two of the transitional impairment test must be performed to measure the amount of the impairment loss, if any. SFAS No. 142 also requires that intangible assets be reviewed as of the date of adoption to determine if they continue to qualify as intangible assets under the criteria established under SFAS No. 141, "Business Combinations," and to the extent previously recorded intangible assets do not meet the criteria that they be reclassified to goodwill. In accordance with SFAS No. 142, Hughes completed a review of its intangible assets and determined that previously recorded intangible assets related to dealer networks and subscriber base did not meet the contractual legal criteria or separability criteria as described in SFAS No. 141. As a result, in the first quarter of 2002, Hughes reclassified $209.8 million, net of $146.0 million of accumulated amortization, of previously reported intangible assets to goodwill. Hughes also completed in the first quarter of 2002 the required transitional impairment test for intangible assets with indefinite lives, which consist of FCC Licenses for direct-to-home broadcasting frequencies ("Orbital Slots"), and determined that no impairment existed because the fair value of these assets exceeded the carrying value as of January 1, 2002. In the second quarter of 2002, with the assistance of an independent valuation firm, Hughes completed step one of the transitional test to determine whether a potential impairment existed on goodwill recorded at January 1, 2002. Primarily based on the present value of expected future cash flows, it was determined that the fair value of DIRECTV U.S. and the Satellite Services segment exceeded their carrying values, therefore no further impairment test was required. It was also determined that the carrying value of DIRECTV Latin America, LLC ("DLA") and DIRECTV Broadband, Inc. ("DIRECTV Broadband") exceeded their fair values, therefore requiring step two of the impairment test be performed. The amount of goodwill recorded at January 1, 2002 for DLA and DIRECTV Broadband was $622.4 million and $107.9 million, respectively. No goodwill or intangible assets existed at the Network Systems segment, other than for equity method investments, and therefore no impairment test was required. Because the carrying value of DLA and DIRECTV Broadband exceeded their fair values, Hughes must complete step two of the impairment test by December 31, 2002. Step two requires the comparison of the implied value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss will be recognized in an amount equal to that excess. In the initial year of the adoption, the impairment loss, if any, is recorded as a cumulative effect of accounting change, net of taxes, and recorded in subsequent years as a pre-tax charge to operating income. Although the amount of any impairment loss related to the goodwill recorded at DLA and DIRECTV Broadband cannot be determined at this time, the amount of any such loss could be material to Hughes' consolidated results of operations. The following represents Hughes' reported net loss on a comparable basis excluding the after-tax effect of amortization expense associated with goodwill and intangible assets with indefinite lives:
Three Months Six Months Ended Ended June 30 June 30 ---------------- ---------------- 2002 2001 2002 2001 ------- ------- ------- ------- (Dollars in Millions) Reported net loss.................................... $(155.1) $(156.5) $(311.5) $(261.8) Add: Goodwill amortization............................... -- 58.9 -- 106.5 Intangible assets with indefinite lives amortization -- 1.8 -- 3.6 ------- ------- ------- ------- Adjusted net loss................................. $(155.1) $ (95.8) $(311.5) $(151.7) ======= ======= ======= =======
42 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) Hughes had $6,715.3 million and $6,496.6 million of goodwill at June 30, 2002 and December 31, 2001, respectively, net of accumulated amortization of $838.1 million and $700.0 million at June 30, 2002 and December 31, 2001, respectively. The changes in the carrying amounts of goodwill for the six months ended June 30, 2002 were as follows: Direct-To-Home Satellite Network Broadcast Services Systems Total -------------- --------- ------- ------- (Dollars in Millions) Balance as of December 31, 2001........ $3,734.0 $2,743.7 $ 18.9 $6,496.6 Reclassification from intangible assets 209.8 -- -- 209.8 Other.................................. 25.4 -- (16.5) 8.9 -------- -------- ------ -------- Balance as of June 30, 2002............ $3,969.2 $2,743.7 $ 2.4 $6,715.3 ======== ======== ====== ======== Hughes had $447.9 million and $660.2 million of intangible assets, net at June 30, 2002 and December 31, 2001, respectively. Accumulated amortization for intangible assets was $38.7 million and $182.2 million at June 30, 2002 and December 31, 2001, respectively. Intangible assets at June 30, 2002 consist of $432.3 million, net of $30.6 million of accumulated amortization, of Orbital Slots which have indefinite useful lives and other intangible assets of $15.6 million, net of $8.1 million of accumulated amortization. Intangible assets, excluding intangible assets with indefinite useful lives, are amortized over 3 years. Amortization expense for intangible assets was $2.5 million and $70.8 million for June 30, 2002 and December 31, 2001, respectively. Estimated amortization expense in each of the next five years is as follows: $4.5 million in the remainder of 2002; $6.1 million in 2003; $1.2 million in 2004; and none thereafter. Hughes adopted SFAS No. 141 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 "Accumulated other comprehensive income (loss)". New Accounting Standards In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 requires the recognition of costs associated with exit or disposal activities when incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces previous accounting guidance provided by Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". Hughes is required to implement SFAS No. 146 on January 1, 2003. Management has not determined the impact, if any, that this statement will have on Hughes' consolidated results of operations or financial position. 43 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections". SFAS No. 145 eliminates the requirement to present gains and losses on the early extinguishment of debt as an extraordinary item, and resolves accounting inconsistencies for certain lease modifications. Hughes' adoption of this standard on January 1, 2003 is not expected to have an impact on Hughes consolidated results of operations or financial position. Note 3. Inventories Major Classes of Inventories June 30, December 31, 2002 2001 -------- ------------ (Dollars in Millions) Productive material and supplies.......... $ 47.7 $ 58.3 Work in process........................... 153.6 145.7 Finished goods............................ 162.5 183.2 Provision for excess or obsolete inventory (29.9) (27.1) ------ ------ Total.................................. $333.9 $360.1 ====== ====== Note 4. Comprehensive Income (Loss) Hughes' total comprehensive income (loss) was as follows:
Three Months Ended Six Months Ended June 30, June 30, ---------------- ---------------- 2002 2001 2002 2001 ------- ------- ------- ------- (Dollars in Millions) Net loss.......................................................... $(155.1) $(156.5) $(311.5) $(261.8) Other comprehensive income (loss): Foreign currency translation adjustments....................... 6.7 (4.0) 5.3 (2.8) Cumulative effect of accounting change......................... -- -- -- 0.4 Unrealized gains (losses) on securities and derivatives:....... Unrealized holding gains (losses).......................... (106.8) 19.4 (123.0) (130.5) Less: reclassification adjustment for gains recognized during the period........................................ -- (1.3) -- (23.6) ------- ------- ------- ------- Other comprehensive income (loss).......................... (100.1) 14.1 (117.7) (156.5) ------- ------- ------- ------- Total comprehensive loss................................ $(255.2) $(142.4) $(429.2) $(418.3) ======= ======= ======= =======
Note 5. Available Separate Consolidated Net Income (Loss) GM Class H common stock is a "tracking stock" of GM designed to provide holders with financial returns based on the financial performance of Hughes. Holders of GM Class H common stock have no direct rights in the equity or assets of Hughes, but rather have rights in the equity and assets of GM (which includes 100% of the stock of Hughes). Amounts available for the payment of dividends on GM Class H common stock are based on the Available Separate Consolidated Net Income (Loss) ("ASCNI") of Hughes. The ASCNI of Hughes is determined quarterly and is equal to the net income (loss) of Hughes, excluding the effects of the GM 44 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 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 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). 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 under the GM restated certificate of incorporation to reflect the following: (i) subdivisions and combinations of the GM Class H common stock and stock dividends payable in shares of GM Class H common stock to holders of GM Class H common stock; (ii) the fair market value of contributions of cash or property by GM to Hughes, or of cash or property of GM to or for the benefit of employees of Hughes for employee benefit plans or arrangements of GM, Hughes or other GM subsidiaries; (iii) the contribution of shares of capital stock of GM to or for the benefit of employees of Hughes or its subsidiaries for benefit plans or arrangements of GM, Hughes or other GM subsidiaries; (iv) payments made by Hughes to GM of amounts applied to the repurchase by GM of shares of GM Class H common stock, so long as the GM board has approved the repurchase and GM applied he payment to the repurchase; and (v) the repurchase by Hughes of shares of GM Class H common stock that are no longer outstanding, so long as the GM board approved the repurchase. 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. The following table sets forth comparative information regarding GM Class H Common Stock and the GM Class H Dividend Base for the six months ended June 30, 2002 and 2001:
2002 2001 ------- ------- (Shares in Millions) GM Class H Common Stock Outstanding Shares at January 1..................................................... 877.5 875.3 Shares issued for mandatory redemption of GM Series H preference stock.. 80.1 -- Shares issued for stock options exercised............................... 0.4 1.2 ------- ------- Shares at June 30....................................................... 958.0 876.5 ======= ======= Weighted average number of shares of GM Class H common stock outstanding (Numerator)........................................................... 880.8 875.7 ======= ======= GM Class H Dividend Base GM Class H dividend base at January 1................................... 1,301.1 1,298.8 Increase for mandatory redemption of GM Series H preference stock....... 80.1 -- Increase for stock options exercised.................................... 0.4 1.2 ------- ------- GM Class H dividend base at June 30..................................... 1,381.6 1,300.0 ======= ======= Weighted average GM Class H dividend base (Denominator)................. 1,304.4 1,299.4 ======= =======
45 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) Note 6. Hughes Series A and B 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. 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. On June 24, 2002, the GM Series H preference stock, pursuant to its terms, was mandatorily converted to about 80.1 million shares of GM Class H common stock. As a result, the number of shares in the Class H dividend base and the number of shares of GM Class H common stock outstanding were each increased by the number of shares issued. Also on June 24, 2002, in connection with the automatic conversion of the GM Series H preference stock held by AOL, GM contributed the $1.5 billion of Hughes Series A Preferred Stock back to Hughes, which Hughes cancelled and recorded as a contribution to "Capital stock and additional paid in capital". In exchange for the Series A Preferred Stock, Hughes issued $914.1 million of Series B Preferred Stock to GM, which was recorded as a reduction to "Capital stock and additional paid in capital". The Hughes Series B Preferred Stock, which does not accrue dividends, will be converted to Hughes Class B common stock just prior to the Merger, or, if the Merger does not occur, at the option of GM anytime after June 24, 2003. All capital stock of Hughes owned directly or indirectly by GM, including the Series B Preferred Stock, will be contributed by GM to HEC Holdings prior to the split-off and in connection therewith shares of HEC Holdings Class C common stock will be issued. Note 7. Short-Term Borrowings and Long-Term Debt Short-Term Borrowings and Current Portion of Long-Term Debt
Interest Rates at June 30, December 31, June 30, 2002 2002 2001 ----------------- -------- ------------ (Dollars in Millions) Credit facilities.................................. 3.75%--5.38% $ 864.8 $ 450.0 Other short-term borrowings........................ 4.48%--14.50% 16.8 16.4 Current portion of long-term debt.................. 6.00% 200.0 1,192.1 -------- -------- Total short-term borrowings and current portion of long-term debt.................................. $1,081.6 $1,658.5 ======== ========
Long-Term Debt Interest Rates at June 30, December 31, June 30, 2002 2002 2001 ----------------- -------- ------------ (Dollars in Millions) Notes payable........ 6.00%--8.50% $1,550.0 $ 796.5 Credit facilities.... 4.84%--5.34% 1,000.0 1,322.6 Other debt........... 4.34%--12.37% 48.4 61.8 -------- -------- Total debt.......... 2,598.4 2,180.9 Less current portion. 200.0 1,192.1 -------- -------- Total long-term debt $2,398.4 $ 988.8 ======== ======== 46 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) Debt and Credit Facilities. Notes Payable. In February 2002, PanAmSat completed an $800 million private placement note offering. These unsecured notes bear interest at an annual rate of 8.5%, payable semi-annually and mature in 2012. In January 2002, PanAmSat repaid in full the $46.5 million outstanding balance of variable rate notes assumed in 1999 in connection with the early buy-out of a satellite sale-leaseback. PanAmSat issued five, seven, ten and thirty-year fixed rate notes totaling $750.0 million in January 1998. The outstanding principal balances and interest rates for these notes as of June 30, 2002 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 credit facility (the "Amended Credit Agreement"). The Amended Credit Agreement provides availability of $1,235.2 million in revolving borrowings, which bear interest at the London Interbank Offer Rate ("LIBOR") plus 3.0%. The Amended 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. In March 2002, Hughes borrowed an additional $764.8 million under a term loan tranche that was added to the Amended Credit Agreement. The term loan has the same terms as the revolving facility and increased the total funding available under the Amended Credit Agreement to $2,000 million. As of June 30, 2002, the revolving component of the Amended Credit Agreement was undrawn and $764.8 million was outstanding under the term loan. 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 June 30, 2002, a $300 million Tranche A term loan and a $700 million Tranche B term loan, both of which were fully drawn as of June 30, 2002. This bank facility replaced a previously existing $500 million unsecured multi-year revolving credit facility. The new revolving credit facility and the Tranche A term loan bear interest at LIBOR plus 3.0%. The Tranche B term loan bears interest at LIBOR plus 3.5%. The revolving credit facility and Tranche A term loan interest rates may be increased or decreased based upon changes in PanAmSat's total leverage ratio, as defined by the credit agreement. The revolving credit facility and the Tranche A term loan terminate 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. PanAmSat repaid a $1,725 million intercompany loan from Hughes in February 2002, using proceeds from the bank facility and notes payable described above, as well as existing cash balances. On October 1, 2001, Hughes entered into a $2.0 billion revolving credit facility with General Motors Acceptance Corporation ("GMAC"). The facility was subsequently amended in February 2002. The amended facility provides for a commitment through the earlier of December 5, 2002 or the effective date of the EchoStar Merger. The facility is split into two loan tranches: a $1,500 million tranche secured by a February 2002 $1,500 million Hughes cash deposit and a $500 million tranche that shares security with the Amended Credit Agreement described above. Borrowings under the $1,500 million tranche bear interest at GMAC's cost of funds (approximately 2.0% at June 30, 2002) 47 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 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. Hughes has the legal right of setoff with respect to the $1,500 million GMAC cash deposit, and accordingly offsets it against amounts borrowed from GMAC under the $1,500 million tranche for balance sheet purposes. The excess over Hughes' $1,500 million cash deposit must be repaid upon the effective date of the EchoStar Merger. The cash collateralized tranche was fully drawn and $100.0 million was outstanding under the $500 million tranche as of June 30, 2002. On January 5, 2001, DLA entered into a $450.0 million revolving credit facility. The DLA facility was repaid and retired in February 2002. In addition, SurFin Ltd.'s unsecured revolving credit facilities of $400.0 million and $212.5 million were repaid and retired in February 2002. Other. $65.2 million in other short-term and long-term debt, related primarily to DLA and Hughes Network Systems, Inc.'s ("HNS") international subsidiaries, was outstanding at June 30, 2002, bearing fixed and floating rates of interest of 4.34% to 14.50%. Principal on these borrowings is due in varying amounts through 2007. Note 8. Acquisitions, Investments and Divestitures Acquisitions and Investments On May 1, 2001, DLA, which operates the Latin America DIRECTV business, acquired from Grupo Clarin S.A. ("Clarin") a 51% ownership interest in Galaxy Entertainment Argentina S.A. ("GEA"), a local operating company in Argentina that provides direct-to-home broadcast services, and other assets, consisting primarily of programming and advertising rights. The purchase price, valued at $169 million, consisted of a 3.98% ownership interest in DLA and a put option that under certain circumstances will allow Clarin to sell in November 2003 its 3.98% interest back to DLA for $195 million. 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 "Capital stock and additional paid-in capital". On April 3, 2001, Hughes acquired Telocity Delaware, Inc. ("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. The following selected unaudited pro forma information is being provided to present a summary of the combined results of Hughes and Telocity for 2001 as if the acquisition had occurred as of the beginning of the period, 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 the period presented, nor are they necessarily indicative of the results of future operations. The pro forma information excludes the effect of non-recurring charges.
Six Months Ended June 30, 2001 --------------------- (Dollars in Millions) Total revenues................................................................... $3,886.2 Loss before cumulative effect of accounting change............................... (302.1) Net loss......................................................................... (309.5) Pro forma loss used for computation of available separate consolidated net income (loss)......................................................................... (356.1)
48 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) The financial information included herein reflect 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. Divestitures On June 27, 2002, HNS reached an agreement to exchange its approximate 29% equity interest in, and $75 million of long term receivables from, Hughes Tele.com (India) Limited ("HTIL") for an equity interest in, and long term receivables from, Tata Teleservices Limited ("TTSL"). HNS expects to carry the investment in TTSL under the cost method since HNS' interest in TTSL will represent less than 20% of TTSL equity. The transaction is anticipated to close in the fourth quarter of 2002. The consummation of this transaction may result in a loss, which is currently not determinable and is dependent on the fair value of the securities exchanged on the date of close. On March 1, 2000, Hughes announced that the operations of DIRECTV Japan would be discontinued. As a result, Hughes accrued exit costs and involuntary termination benefits related to 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. In the second quarter of 2002, $36.7 million of accrued liabilities related to the exit costs were reversed upon the resolution of the remaining claims, resulting in a credit adjustment to "Other, net". Note 9. Segment Reporting Hughes' segments, which are differentiated by their products and services, include Direct-To-Home Broadcast, Satellite Services, and Network Systems. Direct-To-Home Broadcast is engaged in acquiring, promoting, selling and/or distributing digital entertainment programming via satellite to residential and commercial customers and providing land-based DSL services. Satellite Services is engaged in the selling, leasing and operating of satellite transponders and providing services for cable television systems, news companies, direct-to-home television operators, 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(R) receiving equipment (set-top boxes and dishes). Other includes the corporate office and other entities. 49 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) Selected information for Hughes' operating segments are reported as follows:
Direct-To- Home Satellite Network Broadcast Services Systems Other Eliminations Total ---------- --------- ------- ------ ------------ -------- (Dollars in Millions) For the Three Months Ended: June 30, 2002 External Revenues.......... $1,789.6 $166.0 $ 242.1 $ 12.0 -- $2,209.7 Intersegment Revenues...... 4.1 43.3 12.3 -- $ (59.7) -- -------- ------ ------- ------ ------- -------- Total Revenues............. $1,793.7 $209.3 $ 254.4 $ 12.0 $ (59.7) $2,209.7 ======== ====== ======= ====== ======= ======== Operating Profit (Loss).... $ (136.4) $ 61.0 $ (46.1) $(16.9) $ (0.1) $ (138.5) EBITDA (1)................. 20.6 150.7 (29.5) (16.2) (2.5) 123.1 June 30, 2001 External Revenues.......... $1,524.1 $168.4 $ 284.3 $ 8.3 -- $1,985.1 Intersegment Revenues...... 3.6 39.9 17.9 -- $ (61.4) -- -------- ------ ------- ------ ------- -------- Total Revenues............. $1,527.7 $208.3 $ 302.2 $ 8.3 $ (61.4) $1,985.1 ======== ====== ======= ====== ======= ======== Operating Profit (Loss).... $ (182.9) $ 32.8 $ (56.5) $(22.9) $ 6.5 $ (223.0) EBITDA (1)................. (1.3) 134.5 (36.8) (17.6) 3.2 82.0 For the Six Months Ended: June 30, 2002 External Revenues.......... $3,429.7 $330.3 $ 467.5 $ 20.4 -- $4,247.9 Intersegment Revenues...... 7.8 86.1 29.7 -- $(123.6) -- -------- ------ ------- ------ ------- -------- Total Revenues............. $3,437.5 $416.4 $ 497.2 $ 20.4 $(123.6) $4,247.9 ======== ====== ======= ====== ======= ======== Operating Profit (Loss).... $ (351.9) $118.1 $ (97.2) $ 62.5 $ 2.2 $ (266.3) EBITDA (1)................. (42.0) 301.8 (62.6) 64.4 (4.3) 257.3 June 30, 2001 External Revenues.......... $3,010.1 $334.9 $ 517.6 $ 15.5 -- $3,878.1 Intersegment Revenues...... 7.5 78.6 32.8 0.1 $(119.0) -- -------- ------ ------- ------ ------- -------- Total Revenues............. $3,017.6 $413.5 $ 550.4 $ 15.6 $(119.0) $3,878.1 ======== ====== ======= ====== ======= ======== Operating Profit (Loss).... $ (328.4) $ 73.9 $(109.1) $(21.4) $ 9.5 $ (375.5) EBITDA (1)................. 4.7 274.5 (75.1) (10.7) 1.8 195.2
- -------- (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 uses EBITDA to evaluate the operating performance of Hughes and its business segments, to allocate resources and capital to its business segments and as a measure of performance for incentive compensation purposes. Hughes management believes that EBITDA is a meaningful measurement that is commonly used by investors, equity analysts and others to measure and compare Hughes' operating performance to other communications, entertainment and media service providers. EBITDA does not give effect to cash used for debt service requirements consisting of interest payments of $123.5 million and $54.3 million for the three months ended June 30, 2002 and 2001, respectively and $218.1 million and $133.2 million for the six months ended June 30, 2002 and 2001, respectively. As a result, EBITDA does not reflect funds available for investment in the business of Hughes, dividends or other discretionary uses. EBITDA as presented herein may not be comparable to similarly titled measures reported by other companies. 50 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) The following represents a reconciliation of EBITDA to reported net loss on the consolidated statements of operations and available separate consolidated net income (loss):
Three Months Six Months Ended Ended June 30, June 30, ---------------- ---------------- 2002 2001 2002 2001 ------- ------- ------- ------- (Dollars in Millions) (Unaudited) EBITDA.................................................... $ 123.1 $ 82.0 $ 257.3 $ 195.2 Depreciation and amortization............................. (261.6) (305.0) (523.6) (570.7) ------- ------- ------- ------- Operating loss............................................ (138.5) (223.0) (266.3) (375.5) Interest income........................................... 7.4 19.0 11.7 42.8 Interest expense.......................................... (122.3) (42.8) (198.7) (93.4) Other, net................................................ 8.9 (10.9) (32.7) (3.7) ------- ------- ------- ------- Loss before income taxes, minority interest and cumulative effect of accounting change............................. (244.5) (257.7) (486.0) (429.8) Income tax benefit........................................ 92.9 74.8 184.7 124.7 Minority interest in net (earnings) losses of subsidiaries (3.5) 26.4 (10.2) 50.7 Cumulative effect of accounting change.................... -- -- -- (7.4) ------- ------- ------- ------- Net Loss.................................................. $(155.1) $(156.5) $(311.5) $(261.8) ======= ======= ======= =======
Note 10. Commitments and Contingencies Litigation In connection with the 2000 sale by Hughes of its satellite systems manufacturing businesses to The Boeing Company ("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 certain financial consequences of debarment associated with potential non-criminal 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. 51 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 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 was pending, post-judgment interest on the total judgment was accruing at a rate of 6.241% per year, compounded annually, from the date judgment was entered in October 2000. In the first quarter of 2002, DIRECTV increased its provision for loss related to this matter by $83 million, of which $56 million was recorded as a charge to "Selling, general and administrative expenses" and $27 million was recorded as a charge to "Interest expense," based on the status of settlement negotiations between the parties. On June 4, 2002, Hughes and GECC executed an agreement to settle the matter for $180 million. As a result, in the second quarter of 2002 DIRECTV increased its provision for loss by $47 million, which was recorded as a charge to "Interest expense." The $180 million settlement was paid to GECC in June 2002. 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 (about $63 million recorded) 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 they 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. 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. 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. 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. In March 2002, Hughes was advised that no further judicial review would be sought by the U.S. Government and the payment was in process. In April 2002, Hughes received payment for 52 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) the full amount of the judgment. As a result, Hughes recorded a $95 million gain, net of legal costs, as an offset to "Selling, general and administrative expenses" in the first quarter of 2002. In October 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 for a portion of the original $9.5 billion purchase price. Hughes paid $500 million of the settlement amount in October 2001 and the remainder, $134.2 million, was paid during February 2002. 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 arising in the ordinary course of business. Hughes has established loss provisions for matters in which losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or 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 June 30, 2002. 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 and does not compensate for business interruption or loss of future revenues or customers. Hughes relies on in-orbit spare satellites and excess transponder capacity at key orbital slots to mitigate the effects of satellite failure on its' ability to provide service. Where insurance costs related to known satellite anomalies are prohibitive, Hughes' insurance policies contain coverage exclusions and Hughes is not insured for certain other satellites. The book value of satellites that were insured with coverage exclusions amounted to $662.7 million and the book value of the satellites that were not insured was $602.9 million at June 30, 2002. Two satellites owned and operated by PanAmSat, and other satellites of a similar design operated by others, have experienced a progressive degradation of their solar arrays causing a reduction in output power. PanAmSat and the manufacturer are monitoring the problem to determine its cause and its expected effect. The power reduction may require PanAmSat to permanently turn off certain transponders on the affected satellites to allow the continued operation of other transponders. At this time, the power degradation has not required PanAmSat to reduce the number of operating transponders on either affected satellite. Hughes has partially insured the affected satellites with policies that cover these problems. However, should it be necessary to turn off a significant number of transponders, there can be no assurance that we will be reimbursed by the insurers, as they may dispute a payment obligation, or the anomaly may occur outside the coverage period. Also, Hughes could recognize a loss on the portion of book value of the satellites that is not insured of up to $133.7 million. Moreover, these problems may not be insured in the future for any loss occurring outside the existing policy periods. Hughes is contingently liable under standby letters of credit and bonds in the aggregate amount of $61.1 million which were undrawn at June 30, 2002 and DLA has guaranteed $3.0 million of bank debt related to non-consolidated DLA local operating companies, which is due in variable amounts over the 53 HUGHES ELECTRONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued) next five years. Additionally, as described in Note 8, DLA may be required to repurchase Clarin's 3.98% interest in DLA for $195 million in 2003. In the first quarter of 2002, Hughes recorded a $29.0 million charge to "Other, net" related to an expected requirement to perform on a guarantee obligation of up to $55.4 million for bank debt owed by an investor in HTIL. Hughes has accrued a current liability to the lender and an account receivable from the investor for the guarantee amount. The $29.0 million charge represents a provision for the portion of the receivable from the investor estimated to be uncollectible. A payment by Hughes pursuant to the guarantee will likely be required in the second half of 2002. The Hughes Board of Directors has approved several benefit plans 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 decisions that will be made relating to employee layoffs, 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 EchoStar Merger would qualify as a change-in-control. At June 30, 2002, minimum future commitments under noncancelable operating leases having lease terms in excess of one year were primarily for real property and aggregated $343.8 million, payable as follows: $58.4 million in the remainder of 2002, $84.8 million in 2003, $54.8 million in 2004, $35.5 million in 2005, $30.4 million in 2006 and $79.9 million thereafter. Certain of these leases contain escalation clauses and renewal or purchase options. At June 30, 2002, the minimum commitments under noncancelable satellite construction and launch contracts totaled $725.7 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 $1.6 billion, payable as follows: $319.4 million in the remainder of 2002, $323.7 million in 2003, $251.1 million in 2004, $167.5 million in 2005, $175.7 million in 2006 and $373.0 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 June 30, 2002, 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. * * * 54 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY DATA
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2002 2001 2002 2001 -------- -------- -------- -------- (Dollars in Millions) (Unaudited) Consolidated Statements of Operations Data: Total revenues............................................. $2,209.7 $1,985.1 $4,247.9 $3,878.1 Total operating costs and expenses......................... 2,348.2 2,208.1 4,514.2 4,253.6 -------- -------- -------- -------- Operating loss............................................. (138.5) (223.0) (266.3) (375.5) Other expenses, net........................................ (106.0) (34.7) (219.7) (54.3) Income tax benefit......................................... 92.9 74.8 184.7 124.7 Minority interests in net (earnings) losses of subsidiaries (3.5) 26.4 (10.2) 50.7 -------- -------- -------- -------- Loss before cumulative effect of accounting change......... (155.1) (156.5) (311.5) (254.4) Cumulative effect of accounting change, net of taxes....... -- -- -- (7.4) -------- -------- -------- -------- Net loss................................................... (155.1) (156.5) (311.5) (261.8) Adjustment to exclude the effect of GM purchase accounting............................................... -- 0.8 -- 1.6 Preferred stock dividends.................................. (22.8) (24.1) (46.9) (48.2) -------- -------- -------- -------- Loss Used for Computation of Available Separate Consolidated Net Income (Loss)........................... $ (177.9) $ (179.8) $ (358.4) $ (308.4) ======== ======== ======== ========
June 30, 2002 December 31, (Unaudited) 2001 ----------- ------------ (Dollars in Millions) Consolidated Balance Sheet Data: Cash and cash equivalents....... $ 836.1 $ 700.1 Total current assets............ 3,607.1 3,341.1 Total assets.................... 19,249.3 19,210.1 Total current liabilities....... 3,646.7 4,406.5 Long-term debt.................. 2,398.4 988.8 Minority interests.............. 542.9 531.3 Preferred stock................. 914.1 1,498.4 Total stockholder's equity...... 10,601.8 11,071.9 55 HUGHES ELECTRONICS CORPORATION SUMMARY DATA -- (continued) Three Months Ended Six Months Ended June 30, June 30, ---------------- ---------------- 2002 2001 2002 2001 ------- ------- ------- ------- (Dollars in Millions) (Unaudited) Other Data: EBITDA(1)........................... $ 123.1 $ 82.0 $ 257.3 $ 195.2 EBITDA Margin(1).................... 5.6% 4.1% 6.1% 5.0% Depreciation and amortization....... $ 261.6 $ 305.0 $ 523.6 $ 570.7 Capital expenditures................ 367.6 510.2 728.4 861.4 Cash flows from operating activities 0.5 47.1 72.7 (97.5) Cash flows from investing activities (327.6) (675.4) (514.7) (870.4) Cash flows from financing activities 49.4 153.0 578.0 512.1 - -------- (1) EBITDA is defined as operating profit (loss), plus depreciation and amortization. EBITDA is not presented as an alternative measure of operating results or cash flow from operations, as determined in accordance with accounting principles generally accepted in the United States of America. Hughes management uses EBITDA to evaluate the operating performance of Hughes and its business segments, to allocate resources and capital to its business segments and as a measure of performance for incentive compensation purposes. Hughes management believes that EBITDA is a meaningful measurement that is commonly used by investors, equity analysts and others to measure and compare Hughes' operating performance to other communications, entertainment and media service providers. EBITDA does not give effect to cash used for debt service requirements consisting of interest payments of $123.5 million and $54.3 million for the three months ended June 30, 2002 and 2001, respectively and $218.1 million and $133.2 million for the six months ended June 30, 2002 and 2001, respectively. As a result, EBITDA 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. 56 HUGHES ELECTRONICS CORPORATION SUMMARY DATA -- Concluded Selected Segment Data
Direct-To-Home Satellite Network Eliminations Broadcast Services Systems and Other Total -------------- --------- ------- ------------ -------- (Dollars in Millions) (Unaudited) For the Three Months Ended: June 30, 2002 Total Revenues............... $1,793.7 $209.3 $ 254.4 $ (47.7) $2,209.7 -------- ------ ------- ------- -------- % of Total Revenues.......... 81.2% 9.5% 11.5% (2.2%) 100.0% Operating Profit (Loss)...... $ (136.4) $ 61.0 $ (46.1) $ (17.0) $ (138.5) Operating Profit Margin...... N/A 29.1% N/A N/A N/A EBITDA....................... $ 20.6 $150.7 $ (29.5) $ (18.7) $ 123.1 EBITDA Margin................ 1.1% 72.0% N/A N/A 5.6% Depreciation and Amortization $ 157.0 $ 89.7 $ 16.6 $ (1.7) $ 261.6 Capital Expenditures......... 157.2 109.5 87.8 13.1 367.6 -------- ------ ------- ------- -------- June 30, 2001 Total Revenues............... $1,527.7 $208.3 $ 302.2 $ (53.1) $1,985.1 -------- ------ ------- ------- -------- % of Total Revenues.......... 77.0% 10.5% 15.2% (2.7%) 100.0% Operating Profit (Loss)...... $ (182.9) $ 32.8 $ (56.5) $ (16.4) $ (223.0) Operating Profit Margin...... N/A 15.7% N/A N/A N/A EBITDA....................... $ (1.3) $134.5 $ (36.8) $ (14.4) $ 82.0 EBITDA Margin................ N/A 64.6% N/A N/A 4.1% Depreciation and Amortization $ 181.6 $101.7 $ 19.7 $ 2.0 $ 305.0 Capital Expenditures......... 226.3 94.2 167.1 22.6 510.2 -------- ------ ------- ------- -------- For the Six Months Ended: June 30, 2002 Total Revenues............... $3,437.5 $416.4 $ 497.2 $(103.2) $4,247.9 -------- ------ ------- ------- -------- % of Total Revenues.......... 80.9% 9.8% 11.7% (2.4%) 100.0% Operating Profit (Loss)...... $ (351.9) $118.1 $ (97.2) $ 64.7 $ (266.3) Operating Profit Margin...... N/A 28.4% N/A N/A N/A EBITDA....................... $ (42.0) $301.8 $ (62.6) $ 60.1 $ 257.3 EBITDA Margin................ N/A 72.5% N/A N/A 6.1% Depreciation and Amortization $ 309.9 $183.7 $ 34.6 $ (4.6) $ 523.6 Capital Expenditures......... 296.7 183.5 216.1 32.1 728.4 -------- ------ ------- ------- -------- June 30, 2001 Total Revenues............... $3,017.6 $413.5 $ 550.4 $(103.4) $3,878.1 -------- ------ ------- ------- -------- % of Total Revenues.......... 77.8% 10.7% 14.2% (2.7%) 100.0% Operating Profit (Loss)...... $ (328.4) $ 73.9 $(109.1) $ (11.9) $ (375.5) Operating Profit Margin...... N/A 17.9% N/A N/A N/A EBITDA....................... $ 4.7 $274.5 $ (75.1) $ (8.9) $ 195.2 EBITDA Margin................ 0.2% 66.4% N/A N/A 5.0% Depreciation and Amortization $ 333.1 $200.6 $ 34.0 $ 3.0 $ 570.7 Capital Expenditures......... 353.9 161.4 345.3 0.8 861.4 -------- ------ ------- ------- --------
57 HUGHES ELECTRONICS CORPORATION The following management's discussion and analysis should be read in conjunction with the Hughes Electronics Corporation ("Hughes") management's discussion and analysis included in the Hughes Annual Report on Form 10-K for the year ended December 31, 2001 and the Hughes Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 filed with the Securities and Exchange Commission ("SEC") on March 11, 2002 and May 6, 2002, respectively, and all other Hughes filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report. In addition, the following discussion excludes purchase accounting adjustments related to General Motors' acquisition of Hughes. This Quarterly Report may contain certain statements that Hughes believes are, or may be considered to be, "forward-looking statements," within the meaning of various provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as we "believe," "expect," "anticipate," "intend," "plan," "foresee" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause Hughes' actual results to differ materially from historical results or from those expressed or implied by the relevant forward-looking statement. Risk factors which could cause actual performance and future actions to differ materially from forward-looking statements made herein include, but are not limited to, economic conditions, product demand and market acceptance, government action, local political or economic developments in or affecting countries where Hughes has operations, foreign currency exchange rates, ability to obtain export licenses, competition, the outcome of legal proceedings, ability to achieve cost reductions, ability to timely perform material contracts, technological risk, limitations on access to distribution channels, the success and timeliness of satellite launches, in-orbit performance of satellites, loss of uninsured satellites, ability of customers to obtain financing, Hughes' ability to access capital to maintain its financial flexibility and the effects of the strategic transactions that General Motors Corporation ("GM") and Hughes have entered into as noted below. Additionally, the in-orbit satellites of Hughes and its approximately 81% owned subsidiary, PanAmSat Corporation ("PanAmSat"), are subject to the risk of failing prematurely due to, among other things, mechanical failure, collision with objects in space or an inability to maintain proper orbit. Satellites are subject to the risk of launch delay and failure, destruction and damage while on the ground or during launch and failure to become fully operational once launched. Delays in the production or launch of a satellite or the complete or partial loss of a satellite, in-orbit or during launch, could have a material adverse impact on the operations of Hughes' businesses. With respect to both in-orbit and launch problems, insurance carried by Hughes and PanAmSat, 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. For further information regarding PanAmSat's satellites, refer to PanAmSat's Annual Report on Form 10-K for the year ended December 31, 2001 and PanAmSat's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002 and June 30, 2002, filed with the SEC on March 11, 2002, May 6, 2002 and August 13, 2002, respectively. Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report and Hughes undertakes no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances. 58 HUGHES ELECTRONICS CORPORATION Proposed 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 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" or "EchoStar 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 Quarterly 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. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates. The following represent what Hughes believes are the critical accounting policies that require the most significant management estimates and judgements: Valuation of Long-Lived Assets. Hughes evaluates the carrying value of long-lived assets to be held and used, other than goodwill and intangible assets with indefinite lives, 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. Valuation of Goodwill and Intangible Assets with Indefinite Lives. Hughes evaluates the carrying value of goodwill and intangible assets with indefinite lives on an annual basis, and when events and circumstances warrant such a review in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", which is described in Note 2 to the consolidated financial statements. SFAS No. 142 requires the use of fair value in determining the amount of impairment, if any, for recorded goodwill and intangible assets with indefinite lives. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. 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. 59 HUGHES ELECTRONICS CORPORATION 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 is recognized in the consolidated statements of operations and available separate consolidated net income (loss) 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 investment's 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 10 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 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. General Business Overview The continuing operations of Hughes are comprised of the following segments: Direct-To-Home Broadcast, Satellite Services and Network Systems. 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 results of operations for DIRECTV Broadband have been included in Hughes' financial information since the date of acquisition. See Note 8 to the consolidated financial statements and "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures" below, for further discussion of this transaction. On June 4, 2002, Hughes and General Electric Capital Corporation ("GECC") executed an agreement to settle, for $180 million, a claim arising from a contractual arrangement whereby GECC managed a credit program for consumers who purchased DIRECTV(R) programming and related hardware. As a result, in 2002 DIRECTV increased its provision for loss related to this matter by $130 million, of which $56 million was recorded as a charge to "Selling, general and administrative expenses" and $74 million ($27 million in the first quarter of 2002 and $47 million in the second quarter of 2002) was recorded as a charge to "Interest expense." See Note 10 to the consolidated financial statements and Part II--Item 1. "Legal Proceedings" for additional information. 60 HUGHES ELECTRONICS CORPORATION 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. In the second quarter of 2002 DIRECTV 5 was successfully launched and is currently providing services from the 119 degrees west longitude orbital location previously provided by DIRECTV 6, which is serving as a back-up at 119 degrees west longitude. With the addition of these satellites, DIRECTV has the capacity to transmit more than 300 local channels and comply with the federal "must carry" provisions of the Satellite Home Viewer Improvement Act of 1999 in the 47 U.S. markets where DIRECTV currently offers local programming. 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. DIRECTV plans to expand its local channel offerings to an additional 4 markets by the end of 2002, bringing the total number of markets capable of receiving local channels to 51, reaching approximately 62% of all television households in the United States. Beginning with the first quarter of 2002, DIRECTV changed its policy to no longer include pending subscribers in its cumulative subscriber base. Pending subscribers are customers who have purchased equipment and have had all of the required customer information entered into DIRECTV's billing system, but have not yet activated service. This new policy reflects a more simplified approach to counting customers and is consistent with the rest of the multi-channel television industry. As a result, DIRECTV reduced its cumulative subscriber base by approximately 360,000 subscribers that had been previously identified as pending subscribers on December 31, 2001. This change has no impact on past or future revenues, EBITDA or cash flows. The amounts reported herein for DIRECTV's cumulative subscriber base, subscriber additions and average monthly revenue per subscriber ("ARPU"), have been calculated on a comparative basis excluding pending subscribers. 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 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 and are included in "Other, net." 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 investor's 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 method. See Note 8 to the consolidated financial statements and "Liquidity and Capital Resources--Acquisitions, Investments and Divestitures" below, for further discussion of this transaction. DLA's 2002 operating results have been significantly affected by the devaluation of the Argentinean peso against the U.S. dollar since December 31, 2001. For the three and six month periods ended June 30, 2002, DLA's reported loss was increased by $8 million and $40 million, respectively, as a result of the devaluation of the Argentinean peso. Further declines in value of the Argentinean peso and other Latin American currencies against the U.S. dollar are possible, and could result in additional losses in the future. 61 HUGHES ELECTRONICS CORPORATION Also in 2001, DLA secured a contract for the exclusive rights to broadcast and re-sell the FIFA World Cup soccer tournaments, occurring in 2002 and 2006, in Argentina, Chile, Colombia, Mexico, Uruguay and Venezuela. The costs of the live sporting events are recorded in the period the events are broadcast. As a result, the cost of the June 2002 competitions of $130 million was charged to operations in the second quarter of 2002. Because of weak economic conditions in several of its largest markets, DLA was unable to recover the entire cost of the programming, resulting in a second quarter loss on the contract of about $75 million. The Satellite Services segment represents the results of 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. From time to time, and in response to customer demand, PanAmSat sells transponders to customers through sales-type lease transactions. The Network Systems segment represents the results of Hughes Network Systems, Inc. ("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. HNS is a premier broadband products and services company with particular emphasis on providing broadband access. HNS is also a leading supplier of DIRECTV(R) receiving equipment (set-top boxes and antennas). During the first quarter of 2002, HNS recorded a $29.0 million charge in "Other, net" for a loan guarantee obligation related to a Hughes affiliate in India. On June 27, 2002, HNS reached an agreement to exchange its approximate 29% equity interest in, and $75 million of long term receivables from, Hughes Tele.com (India) Limited ("HTIL") for an equity interest in, and long term receivables from, Tata Teleservices Limited ("TTSL"). HNS expects to carry the investment in TTSL under the cost method since HNS' interest in TTSL will represent less than 20% of TTSL equity. The transaction is anticipated to close in the fourth quarter of 2002. The consummation of this transaction may result in a loss, which is currently not determinable and is dependent on the fair value of the securities exchanged on the date of close. See Note 10 to the consolidated financial statements and "Commitments and Contingencies--Other" for additional information. During the first quarter of 2002, Hughes recorded a $95 million gain, net of legal costs, as an offset to "Selling, general and administrative expenses" as a result of the favorable resolution of a lawsuit filed against the U.S. Government on March 22, 1991. The lawsuit was based upon the National Aeronautics and Space Administration's ("NASA") breach of contract to launch ten satellites on the Space Shuttle. See Note 10 to the consolidated financial statements and "Commitments and Contingencies--Litigation". Hughes adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. The adoption of this standard resulted in the discontinuation of amortization on goodwill and intangible assets with indefinite lives and is discussed in more detail below under "Accounting Changes" and in Note 2 to the consolidated financial statements. Hughes recognized amortization expense of $72 million and $134 million for goodwill and intangible assets with indefinite lives for the three and six month periods ended June 30, 2001, respectively, for which there is no comparable amount in 2002. During the second and third quarters of 2001, Hughes announced a nearly 10% reduction of its approximately 7,900 employees, excluding DIRECTV customer service representatives, located in the 62 HUGHES ELECTRONICS CORPORATION United States. As a result 750 employees, across all business disciplines, were given notification of termination that resulted in an expense of $22.2 million in the second quarter of 2001 and $65.3 million in the third quarter of 2001 for a total charge to operations of $87.5 million. Of that charge, $80.0 million was 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 June 30, 2002, substantially all employees had been terminated. The remaining accrual for employee severance benefits and other costs amounted to $16.8 million and $4.2 million, respectively, at June 30, 2002. On March 1, 2000, Hughes announced that the operations of DIRECTV Japan would be discontinued. As a result, Hughes accrued exit costs and involuntary termination benefits related to 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. In the second quarter of 2002, $36.7 million of accrued liabilities related to the exit costs were reversed upon the resolution of the remaining claims, resulting in a credit adjustment to "Other, net". In October 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 for a portion of the original $9.5 billion purchase price. Hughes paid $500 million of the settlement amount in October 2001 and the remainder, $134.2 million, was paid during February 2002. At June 30, 2002, Hughes had a cash balance of $836.1 million and unused debt capacity of $1,885 million. As a result, Hughes believes it has adequate liquidity to fund cash requirements for the remainder of the year estimated to be $550 million to $750 million. A significant portion of Hughes' debt matures no later than December 2002. Absent a merger with EchoStar by such time, Hughes will be required to either extend or refinance the debt or obtain cash from asset sales and/or equity transactions, as necessary, to repay the borrowings. See further discussion under "Liquidity and Capital Resources." Satellite Fleet Hughes has a fleet of 29 satellites, seven owned by DIRECTV and 22 owned and operated by PanAmSat. PanAmSat expects to launch and place into service new satellites as part of its construction and launch strategy. The new satellites are intended to meet the expected demand for additional satellite capacity, replace capacity affected by satellite anomalies or replace satellites reaching their expected end of life, and provide added backup to existing capacity. In connection with this strategy, seven satellites have been successfully launched since December 1999, including the GALAXY IIIC satellite launched in June 2002. PanAmSat is currently constructing and expects to launch up to five satellites by 2006. PanAmSat currently expects to launch one satellite in the second half of 2002, two satellites in the first half of 2003, one satellite in 2005 and one satellite in 2006. 63 HUGHES ELECTRONICS CORPORATION 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 services, including local channel coverage. As previously mentioned, the high-power DIRECTV 5 satellite was successfully launched in May 2002 to replace DIRECTV 6 at 119 degrees west longitude. DIRECTV 6 is serving as a back-up at 119 degrees west longitude. Results of Operations Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Revenues. Revenues for the second quarter of 2002 increased 11.3% to $2,209.7 million, compared with $1,985.1 million for the second quarter of 2001. The increased revenues resulted primarily from the Direct-To-Home Broadcast segment, which reported a $266.0 million increase in revenues over the second quarter of 2001 that resulted primarily from the addition of about 1.3 million net new subscribers in the United States and Latin America since June 30, 2001. Also contributing to the increase were $55.0 million of subscriber and non-subscriber revenues associated with the 2002 World Cup at DIRECTV Latin America, partially offset by $47.8 million of lower product sales, primarily at the Network Systems segment as a result of the substantial completion in late 2001 of two significant customer contracts for the sale of phones and systems for mobile satellite programs. Operating Costs and Expenses. Operating costs and expenses increased $140.1 million to $2,348.2 million for the second quarter of 2002 from $2,208.1 million for the second quarter of 2001. Broadcast programming and other costs increased by $292.3 million for the second quarter of 2002 from the same period in 2001 due to higher costs at the Direct-To-Home Broadcast segment resulting from the increase in subscribers and the $130.0 million of costs associated with the 2002 World Cup. Costs of products sold remained relatively unchanged for the second quarter of 2002 compared with the second quarter of 2001. Selling, general and administrative expenses decreased by $104.3 million during the second quarter of 2002 compared to the same period in 2001 due primarily to lower expenses resulting from cost saving initiatives and lower subscriber acquisition costs at the Direct-to-Home Broadcast segment. Depreciation and amortization decreased by $43.4 million during the second quarter of 2002 compared to the second quarter of 2001 due primarily to the discontinuation of amortization expense related to goodwill and intangible assets with indefinite lives in accordance with SFAS No. 142, which amounted to $72.0 million for the second quarter of 2001. This decrease was partially offset by added depreciation expense related to capital expenditures for property and satellites since the second quarter of 2001. 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 uses EBITDA to evaluate the operating performance of Hughes and its 64 HUGHES ELECTRONICS CORPORATION business segments, to allocate resources and capital to its business segments and as a measure of performance for incentive compensation purposes. Hughes management believes that EBITDA is a meaningful measurement that is commonly used by investors, equity analysts and others to measure and compare Hughes' operating performance to other communications, entertainment and media service providers. EBITDA does not give effect to cash used for debt service requirements, and thus does not reflect funds available for investment in the business of Hughes, dividends or other discretionary uses. EBITDA margin is calculated by dividing EBITDA by total revenues. EBITDA and EBITDA margin as presented herein may not be comparable to similarly titled measures reported by other companies. EBITDA for the second quarter of 2002 was $123.1 million and EBITDA margin was 5.6%, compared to EBITDA of $82.0 million and EBITDA margin of 4.1% for the second quarter of 2001. The increase in EBITDA resulted primarily from increased EBITDA of $21.9 million at the Direct-To-Home Broadcast segment from the higher revenues, reduced expenses resulting from cost saving initiatives and the lower subscriber acquisition costs at DIRECTV U.S., offset by the $75.0 million loss from the 2002 World Cup at DIRECTV Latin America. Also contributing to the increase was $16.2 million of higher EBITDA at the Satellite Services segment resulting from cost saving initiatives. Operating Loss. The operating loss for the second quarter of 2002 was $138.5 million compared to an operating loss of $223.0 million for the second quarter of 2001. The decreased operating loss resulted from the factors causing the increase in EBITDA discussed above and the decreased depreciation and amortization expense. Over the past several years, Hughes has incurred operating losses, principally due to the costs of acquiring new subscribers in its Direct-To-Home Broadcast businesses. Hughes expects operating losses to decline and, barring significant changes in circumstances, to generate operating profit in the future as DIRECTV's large subscriber base begins generating additional operating profit due to continued revenue growth without a corresponding increase in subscriber acquisition costs. In addition, in the event the merger with EchoStar is not consummated, Hughes expects to reevaluate whether it will continue to invest in its DIRECTV Broadband and DIRECWAY consumer Internet businesses. Interest Income and Expense. Interest income decreased to $7.4 million for the second quarter of 2002 compared to $19.0 million for the same period of 2001 due to a decrease in average cash balances. Interest expense increased to $122.3 million for the second quarter of 2002 from $42.8 million for the second quarter of 2001. The higher interest expense resulted primarily from $47 million of interest expense associated with the settlement of the GECC dispute and interest expense from higher outstanding borrowings that resulted from the February 2002 debt refinancing. Changes in cash and cash equivalents and debt are discussed in more detail below under "Liquidity and Capital Resources." Other, Net. Hughes reported other, net income of $8.9 million for the second quarter of 2002 compared to other, net loss of $10.9 million for the same period of 2001. Other, net income for the second quarter of 2002 primarily relates to $36.7 million of accrued liabilities related to costs to exit the DIRECTV Japan business that were reversed upon the resolution of the remaining claims, partially offset by equity method losses. Other, net loss for the second quarter 2001 resulted primarily from equity method losses. Income Taxes. Hughes recognized an income tax benefit of $92.9 million for the second quarter of 2002 compared to $74.8 million for the second quarter of 2001. The higher tax benefit for the second quarter of 2002 was primarily due to the favorable resolution of certain tax contingencies in 2002. 65 HUGHES ELECTRONICS CORPORATION Net Loss. Hughes reported a net loss of $155.1 million for the second quarter of 2002, compared to $156.5 million for the same period of 2001. Direct-To-Home Broadcast Segment Direct-To-Home Broadcast segment revenues for the second quarter of 2002 increased 17.4% to $1,793.7 million from $1,527.7 million for the second quarter of 2001. The Direct-To-Home Broadcast segment had positive EBITDA of $20.6 million for the second quarter of 2002 compared with negative EBITDA of $1.3 million for the second quarter of 2001. The operating loss for the segment decreased to $136.4 million for the second quarter of 2002 from $182.9 million for the second quarter of 2001. United States. DIRECTV U.S. was the biggest contributor to the segment's revenue growth with revenues of $1,549 million for the second quarter of 2002, a 15.2% increase over second quarter 2001 revenues of $1,345 million. The increase in revenues resulted primarily from the larger subscriber base in 2002. As of June 30, 2002, DIRECTV had approximately 10.7 million subscribers compared to about 9.6 million subscribers at June 30, 2001. Excluding subscribers in NRTC territories, DIRECTV owned and operated subscribers totaled 9.0 million and 7.8 million at June 30, 2002 and June 30, 2001, respectively. DIRECTV added 202,000 net new owned and operated subscribers for the second quarter of 2002, compared to 132,000 for the second quarter of 2001. ARPU for DIRECTV U.S. was $58.10 and $58.00 for the quarter ended June 30, 2002 and June 30, 2001, respectively. EBITDA was $148 million for the second quarter of 2002 compared to EBITDA of $75 million for the second quarter of 2001. Operating income for the second quarter of 2002 was $52 million compared to an operating loss of $39 million for the second quarter of 2001. The increase in EBITDA was due to higher gross profits resulting from the increased revenues discussed above, lower expenses resulting from cost saving initiatives and lower subscriber acquisition costs partially offset by an increase in retention marketing costs associated with higher levels of set-top box sales to existing subscribers. The change in operating loss was due to the increase in EBITDA and a decrease in amortization expense of $36 million resulting from the discontinuation of amortization expense related to goodwill and intangible assets with indefinite lives in accordance with SFAS No. 142, which was partially offset by an $18 million increase in depreciation associated with capital expenditures since June 30, 2001. Latin America. Revenues for the Latin America DIRECTV businesses increased 29.7% to $227 million for the second quarter of 2002 from $175 million for the second quarter of 2001. The increased revenues resulting from the $55 million of revenues generated from the 2002 World Cup and the larger subscriber base were partially offset by the negative effect resulting from the devaluation of the Argentinean peso. Subscribers grew to about 1.7 million at June 30, 2002 compared to 1.4 million at June 30, 2001. Latin America DIRECTV added 27,000 net new subscribers during the second quarter of 2002 compared to 25,000 net new subscribers during the second quarter of 2001. Programming ARPU (which excludes non-subscriber revenue and revenue from set-top box rentals) was $29 and $36 for the three months ended June 30, 2002 and June 30, 2001, respectively. The decrease in programming ARPU was largely due to the effects of the devaluation of the Argentinean peso. EBITDA was a negative $99 million for the second quarter of 2002 compared to negative EBITDA of $35 million for the second quarter of 2001. The change in EBITDA was primarily due to the $75.0 million loss from the 2002 World Cup and losses related to currency devaluations, partially offset by lower selling and general and administrative expenses resulting from cost saving initiatives. The Latin America DIRECTV businesses incurred an operating loss of $148 million for the second quarter 66 HUGHES ELECTRONICS CORPORATION of 2002 compared to an operating loss of $87 million for the second quarter of 2001. The increased operating loss resulted from the decline in EBITDA and higher depreciation expense related primarily to the increased number of subscribers leasing DIRECTV receiver equipment and the consolidation of GEA that was partially offset by the decrease in amortization expense resulting from the discontinuation of goodwill amortization. DIRECTV Broadband. Revenues for DIRECTV Broadband increased to $18 million for the second quarter of 2002 from $7 million for the second quarter of 2001. The higher revenues are attributable to an increase in subscribers. DIRECTV Broadband added approximately 20,000 net new subscribers during the second quarter of 2002 compared to 4,000 net new subscribers during the second quarter of 2001. At June 30, 2002, DIRECTV Broadband had more than 133,000 residential broadband subscribers in the United States compared with about 68,000 customers as of June 30, 2001. EBITDA was a negative $29 million for the second quarter of 2002 compared to a negative $41 million for the second quarter of 2001. The operating loss for the second quarter of 2002 was $40 million compared to an operating loss of $58 million for the second quarter of 2001. The improvement in EBITDA and operating loss resulted from the increased revenues and the benefits from cost saving initiatives. Satellite Services Segment Revenues for the Satellite Services segment were $209.3 million for the second quarter of 2002 compared to $208.3 million for the same period in the prior year. The slight increase was primarily due to occasional service revenue related to the global broadcast distribution of the 2002 World Cup, partially offset by reduced program distribution and direct-to-home video revenues. EBITDA was $150.7 million for the second quarter of 2002, a 12.0% increase over the second quarter 2001 EBITDA of $134.5 million. EBITDA margin for the second quarter of 2002 was 72.0% compared to 64.6% for the second quarter of 2001. The increase in EBITDA and EBITDA margin was principally due to increased operating efficiencies that resulted from cost saving initiatives. Operating profit was $61.0 million for the second quarter of 2002 compared to $32.8 million for the second quarter of 2001. The increase in operating profit resulted primarily from the increase in EBITDA and lower amortization expense for the second quarter of 2002 resulting from the discontinuation of goodwill amortization. Network Systems Segment The Network Systems segment's second quarter 2002 revenues were $254.4 million, compared to $302.2 million for the second quarter of 2001. The lower revenues resulted from the substantial completion in late 2001 of two significant customer contracts for the sale of phones and systems for mobile satellite programs. The Network Systems segment reported negative EBITDA of $29.5 million for the second quarter of 2002 compared to negative EBITDA of $36.8 million for the second quarter of 2001. The Network Systems segment had an operating loss of $46.1 million for the second quarter of 2002 compared to an operating loss of $56.5 million for the second quarter of 2001. The increased EBITDA and the decreased operating loss resulted from improved operating margins on increased shipments of DIRECTV receiving equipment. 67 HUGHES ELECTRONICS CORPORATION Eliminations and Other The elimination of revenues decreased to $47.7 million for the second quarter of 2002 from $53.1 million for the second quarter of 2001 due primarily to decreased shipments of DIRECTV receiving equipment from the Network Systems segment to the Direct-To-Home Broadcast segment. Operating profit from "eliminations and other" remained relatively unchanged at $17.0 million for the second quarter of 2002 compared with $16.4 million for the second quarter of 2001. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Revenues. Revenues for the six months ended June 30, 2002 increased 9.5% to $4,247.9 million compared with $3,878.1 million for the six months ended June 30, 2001. The increase in revenues was primarily attributable to $419.9 million of higher revenues at the Direct-To-Home Broadcast segment in the first six months of 2002 that resulted from the addition of about 1.3 million net new DIRECTV subscribers in the United States and Latin America since June 30, 2001 and $55.0 million of revenues associated with the 2002 World Cup at DIRECTV Latin America. The increased revenues from the Direct-To-Home Broadcast segment were partially offset by a decrease in revenues of $53.2 million at the Network Systems segment that resulted from the substantial completion in late 2001 of two significant customer contracts for the sale of phones and systems for mobile satellite programs. Operating Costs and Expenses. Operating costs and expenses increased to $4,514.2 million for the first six months of 2002 from $4,253.6 million for the first six months of 2001. Broadcast programming and other costs increased by $456.8 million for the first six months of 2002 from the same period in 2001 due to higher costs at the Direct-To-Home Broadcast segment resulting from the increase in subscribers and the $130.0 million cost of the 2002 World Cup. Costs of products sold increased by $14.0 million for the first six months of 2002 from the first six months of 2001. Selling, general and administrative expenses decreased by $163.1 million during the first six months of 2002 compared to the same period in 2001 due primarily to a $95.5 million net gain recorded from the NASA claim, a $40.0 million gain related to the PAS 7 insurance claim and lower expenses resulting from cost saving initiatives, partially offset by a $56.0 million loss recorded for the GECC dispute. Depreciation and amortization decreased by $47.1 million during the first six months of 2002 compared to the first six months of 2001 due to the discontinuation of amortization expense related to goodwill and intangible assets with indefinite lives in accordance with SFAS No. 142, which amounted to $134 million in the first half of 2001. This decrease was partially offset by added depreciation expense related to capital expenditures for property and satellites since June 30, 2001, the consolidation of GEA in May 2001 and the acquisition of Telocity in April 2001. EBITDA. EBITDA for the first six months of 2002 was $257.3 million and EBITDA margin was 6.1%, compared to EBITDA of $195.2 million and EBITDA margin of 5.0% for the same period of 2001. The higher EBITDA resulted from $27.3 million of increased EBITDA at the Satellite Services segment and the $95 million gain for the NASA claim recorded in Eliminations and Other. These increases were partially offset by $46.7 million of lower EBITDA at the Direct-to-Home Broadcast segment for the first six months of 2002 compared to the first six months of 2001 that resulted primarily from the settlement of the GECC dispute, the $75.0 million loss from the 2002 World Cup and the acquisition of Telocity in April 2001 and GEA in May 2001. Operating Loss. The operating loss for the first six months of 2002 was $266.3 million compared to an operating loss of $375.5 million for the first six months of 2001. The decreased operating loss 68 HUGHES ELECTRONICS CORPORATION resulted from the factors causing the increase in EBITDA discussed above and the lower amortization expense. Over the past several years, Hughes has incurred operating losses, principally due to the costs of acquiring new subscribers in its Direct-To-Home Broadcast businesses. Hughes expects operating losses to decline and, barring significant changes in circumstances, to generate operating profit in the future as DIRECTV's large subscriber base begins generating additional operating profit due to continued revenue growth without a corresponding increase in subscriber acquisition costs. In addition, in the event the merger with EchoStar is not consummated, Hughes expects to reevaluate whether it will continue to invest in its DIRECTV Broadband and DIRECWAY consumer Internet businesses. Interest Income and Expense. Interest income decreased to $11.7 million for the first six months of 2002 compared to $42.8 million for the same period of 2001 due to a decrease in average cash balances. Interest expense increased to $198.7 million for the first six months of 2002 from $93.4 million for the first six months of 2001. The higher interest expense resulted primarily from the $74.0 million of interest recorded in connection with the settlement of the GECC dispute and interest expense associated with higher outstanding debt balances that resulted from the debt refinancing in February 2002. 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 loss of $32.7 million for the first six months of 2002 from a net loss of $3.7 million for the same period of 2001. Other, net loss for the first six months of 2002 resulted primarily from a $29 million charge recorded for a loan guarantee obligation related to a Hughes affiliate in India and equity method losses partially offset by $36.7 million of accrued liabilities related to the costs to exit the DIRECTV Japan business that were reversed upon the resolution of the remaining claims. Other, net loss for the first six months of 2001 resulted primarily from $23.0 million of equity method losses, partially offset by gains from the sale of investments. Income Taxes. Hughes recognized an income tax benefit of $184.7 million for the first six months of 2002 compared to $124.7 million for the first six months of 2001. The higher tax benefit for the first six months of 2002 is due to higher pre-tax losses and the favorable resolution of certain tax contingencies. Loss from Continuing Operations. Hughes reported a loss from continuing operations before cumulative effect of accounting change of $311.5 million for the six months ended June 30, 2002, compared to $254.4 million for the same period of 2001. Cumulative Effect of Accounting Change. 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 "Accumulated other comprehensive income (loss)". Direct-To-Home Broadcast Segment Direct-To-Home Broadcast segment revenues for the first six months of 2002 increased 13.9% to $3,437.5 million from $3,017.6 million for the first six months of 2001. The Direct-To-Home Broadcast segment had negative EBITDA of $42.0 million for the first six months of 2002 compared with positive 69 HUGHES ELECTRONICS CORPORATION EBITDA of $4.7 million for the first six months of 2001. The operating loss for the segment increased to $351.9 million for the first six months of 2002 from $328.4 million for the first six months of 2001. United States. The DIRECTV U.S. business was the biggest contributor to the segment's revenue growth with revenues of $3,015 million for the first six months of 2002, a 13.0% increase over the $2,669 million in revenues for the first six months of 2001. The increase in revenues resulted primarily from an increased number of DIRECTV subscribers since June 30, 2001, partially offset by lower ARPU. As of June 30, 2002, DIRECTV had more than 10.7 million subscribers compared to about 9.6 million subscribers at June 30, 2001. Excluding subscribers in NRTC territories, DIRECTV owned and operated subscribers totaled 9.0 million and 7.8 million at June 30, 2002 and June 30, 2001, respectively. DIRECTV added 552,000 net new owned and operated subscribers for the first six months of 2002, compared to 383,000 net new owned and operated subscribers for the first six months of 2001. ARPU for DIRECTV U.S. was $57.50 and $58.30 for the six months ended June 30, 2002 and June 30, 2001, respectively. The reduced ARPU in 2002 is primarily due to lower premium package revenue and fewer pay-per-view purchases than in 2001. EBITDA was $177 million for the first six months of 2002 compared to EBITDA of $125 million for the first six months of 2001. The operating loss for the first six months of 2002 for the DIRECTV U.S. businesses was $4 million compared to $92 million for the first six months of 2001. The increased EBITDA was due to higher gross profits resulting from the increase in revenues discussed above and lower expenses resulting from cost saving initiatives, which were partially offset by the expense associated with the settlement with GECC, and an increase in retention marketing costs associated with the sale of set-top boxes to existing subscribers. The decrease in the operating loss was due to the increased EBITDA and a $71 million decrease in amortization expense resulting from the discontinuation of amortization expense related to goodwill and intangible assets with indefinite lives, which was partially offset by a $36 million increase in depreciation expense related to the addition of property and satellites since the first six months of 2001. Latin America. Revenues for the Latin America DIRECTV businesses increased 15.3% to $392 million for the first six months of 2002 from $340 million for the first six months of 2001. The increased revenues resulted from $55.0 million of revenues generated from the 2002 World Cup and a larger subscriber base, offset by the negative effect resulting from the devaluation of the Argentinean peso. Subscribers grew to about 1.7 million at June 30, 2002 compared to about 1.4 million at June 30, 2001. DIRECTV Latin America added about 59,000 net new subscribers for the first six months of 2002 compared to about 126,000 net new subscribers for the first six months of 2001. Programming ARPU was $30 and $36 for the six months ended June 30, 2002 and June 30, 2001, respectively. The decrease in programming ARPU was largely the result of the devaluation of the Argentinean peso. EBITDA was a negative $160 million for the first six months of 2002 compared to a negative EBITDA of $79 million for the first six months of 2001. The change in EBITDA was primarily due to the $75.0 million loss from the 2002 World Cup, a $40 million loss related to the Argentina currency devaluation and the consolidation of GEA beginning in May of 2001, partially offset by lower operating expenses resulting from cost saving initiatives. The Latin America DIRECTV businesses incurred an operating loss of $268 million for the first six months of 2002 compared to an operating loss of $179 million for the first six months of 2001. The increased operating loss resulted from the decline in EBITDA; higher depreciation expense that resulted from an increase in customer-leased DIRECTV receiving equipment and the consolidation of GEA, partially offset by the decrease in amortization expense resulting from the discontinuation of amortization expense related to goodwill. DIRECTV Broadband. Revenues increased $24 million to $31 million for the first six months of 2002 compared to $7 million for the first six months of 2001. The increased revenues are primarily due 70 HUGHES ELECTRONICS CORPORATION to six months of revenues in 2002 compared with 2001, which only includes revenues from the date of DIRECTV Broadband's acquisition in April 2001. Also contributing to the increase was a larger subscriber base in 2002. DIRECTV Broadband added about 42,000 net new subscribers for the first six months of 2002 compared to 4,000 net new subscribers for the first six months of 2001. At June 30, 2002, DIRECTV Broadband had more than 133,000 residential broadband subscribers in the United States compared with 68,000 subscribers at June 30, 2001. EBITDA was a negative $59 million for the first six months of 2002 compared to a negative $41 million for the first six months of 2001. The operating loss was $80 million for the six months ended June 30, 2002 and $58 million for the six months ended June 30, 2001. The increase in negative EBITDA and operating loss was due to 2002 having six months of activity, compared with 2001, which only includes activity from the date of DIRECTV Broadband's acquisition in April 2001. Satellite Services Segment Revenues for the Satellite Services segment for the first six months of 2002 increased $2.9 million to $416.4 million from $413.5 million for the same period in the prior year. The increase was primarily due to a termination fee of approximately $6.4 million from one of the company's video customers and service revenue related to the global broadcast distribution of the 2002 World Cup, partially offset by lower program distribution and direct-to-home video revenues. Revenues from operating leases of transponders, satellite services and other were 97.5% of total revenues for the first six months of 2002 and increased to $406.0 million from $402.5 million for the first six months of 2001. EBITDA was $301.8 million for the first six months of 2002, a 9.9% increase over the first six months of 2001 EBITDA of $274.5 million. EBITDA margin for the first six months of 2002 was 72.5% compared to 66.4% for the first six months of 2001. The higher EBITDA and EBITDA margin was principally due to increased operating efficiencies that resulted from cost saving initiatives and a $40 million gain related to the settlement of the PAS 7 insurance claim. These gains were partially offset by a $19 million charge to operating income for the write-off of receivables due to the conversion of several sales-type leases to operating leases by a PanAmSat customer, an $11 million provision for idle facilities, and $4 million of additional bad debt expense. Operating profit was $118.1 million for the first six months of 2002 compared to $73.9 million for the first six months of 2001. The increase in operating profit resulted from the increased EBITDA and lower amortization expense for the first six months of 2002 due to the decrease in amortization expense resulting from the discontinuation of goodwill amortization. Network Systems Segment Revenues for the Network Systems segment for the first six months of 2002 decreased by 9.7% to $497.2 million from $550.4 million for the first six months of 2001. The lower revenues resulted from the substantial completion in late 2001 of two significant customer contracts for the sale of phones and systems for mobile satellite programs, partially offset by increased sales of DIRECTV receiving equipment. The Network Systems segment reported negative EBITDA of $62.6 million for the first six months of 2002, compared to negative EBITDA of $75.1 million for the first six months of 2001. The Network Systems segment had an operating loss of $97.2 million for the first six months of 2002, compared to an operating loss of $109.1 million for the first six months of 2001. The change in EBITDA and 71 HUGHES ELECTRONICS CORPORATION operating loss resulted from higher operating margins from increased sales of DIRECTV receiving equipment and lower general and administrative costs, partially offset by a $6 million charge related to severance benefits in the first quarter of 2002. Eliminations and Other The elimination of revenues was $103.2 million for the first six months of 2002 compared to $103.4 million for the first six months of 2001. Operating profit from "eliminations and other" increased to $64.7 million for the first six months of 2002 from an operating loss of $11.9 million for the first six months of 2001. The increase in operating profit resulted primarily from the $95 million net gain recorded from the NASA claim, partially offset by higher corporate expenditures related to costs associated with the EchoStar Merger and employee benefit and compensation costs for the first quarter of 2002. Liquidity and Capital Resources In the six months of 2002, Hughes had sources of cash of $1,126.9 million, resulting primarily from additional net borrowings of $832.7 million, insurance proceeds of $215.0 million and cash provided by operations of $72.7 million. Included in cash provided by operations was a $180.0 million payment related to the GECC settlement. These sources of cash were offset by cash used during the first six months of about $990.9 million, primarily for expenditures for satellites and property of $728.4 million, the final settlement payment to Raytheon of $134.2 million and debt issuance costs of $58.3 million. As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) at June 30, 2002 and December 31, 2001 was 0.99 and 0.76, respectively. Working capital increased by $1,025.8 million to a working capital deficit of $39.6 million at June 30, 2002 from a working capital deficit of $1,065.4 million at December 31, 2001. The change was principally due to the repayment of current debt obligations and an increase in cash balances, both of which were funded by the proceeds received from long term borrowings that resulted from the refinancing transactions described in more detail below. Hughes expects to have cash requirements for the remainder of 2002 of approximately $550 million to $750 million primarily due to capital expenditures for satellites and property and increased investments in affiliated companies. 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. See "Security Ratings" below for a discussion of Hughes' credit rating. In February 2002, Hughes completed a series of financing activities. PanAmSat borrowed $1,800 million, a portion of which 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 $450.0 million revolving credit facility, and SurFin's $400.0 million and $212.5 million revolving credit facilities. The DLA and SurFin facilities were retired, while the Hughes facility was amended and expanded (the "Amended Credit Agreement"). In March 2002, Hughes borrowed an additional $764.8 million under a term loan tranche that was added to the Amended Credit Agreement and repaid $375.0 million of the GMAC facility. In the second 72 HUGHES ELECTRONICS CORPORATION quarter of 2002, Hughes borrowed an additional $100.0 million on the GMAC tranche loan. Hughes' and PanAmSat's debt is more fully described below in "Debt and Credit 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 by December 2002, Hughes will be required to either extend or refinance the debt or obtain cash from asset sales, or equity transactions, as necessary, to repay the borrowings. There can be no assurance, however, that Hughes will be able to refinance the debt, obtain new borrowings or complete asset sales or equity transactions. Hughes' failure to extend or refinance its debt could cause a material adverse effect on Hughes' financial condition. 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 termination 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 ("GM Board") in its sole discretion. 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 $836.1 million at June 30, 2002 compared to $700.1 million at December 31, 2001. The increase in cash resulted primarily from additional net borrowings of $832.7 million and insurance proceeds of $215.0 million, partially offset by expenditures for satellites and property of $728.4 million and the final settlement payment to Raytheon of $134.2 million. Cash provided by operating activities was $72.7 million in the first six months of 2002, compared to cash used in operating activities of $97.5 million in the first six months of 2001. The increase in 2002 resulted primarily from decreased working capital requirements. Cash used in investing activities was $514.7 million in the six months ended June 30, 2002, and $870.4 million for the same period in 2001. The reduction in cash flows used in investing activities in 2002 primarily resulted from reduced investments in companies, reduced expenditures for satellites and property and a $82.6 million increase in proceeds from insurance claims, partially offset by proceeds from the sale of investments of $67.8 million in 2001 for which there were no comparable transactions in 2002. Cash provided by financing activities was $578.0 million in the first six months of 2002 and $512.1 million in the first six months of 2001. The increase in cash flows provided by financing activities in 2002 is primarily due to additional net borrowings of $832.7 million, partially offset by cash used for debt issuance costs of $58.3 million and the final payment of the Raytheon settlement of $134.2 million. 73 HUGHES ELECTRONICS CORPORATION Debt and Credit Facilities. Notes Payable. In February 2002, PanAmSat completed an $800 million private placement note offering. These unsecured notes bear interest at an annual rate of 8.5%, payable semi-annually and mature in 2012. In January 2002, PanAmSat repaid in full the $46.5 million outstanding balance of variable rate notes assumed in 1999 in connection with the early buy-out of a satellite sale-leaseback. PanAmSat issued five, seven, ten and thirty-year fixed rate notes totaling $750.0 million in January 1998. The outstanding principal balances and interest rates for these notes as of June 30, 2002 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 credit facility. The Amended Credit Agreement provides availability of $1,235.2 million in revolving borrowings, which bear interest at the London Interbank Offer Rate ("LIBOR") plus 3.0%. The Amended 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. In March 2002, Hughes borrowed an additional $764.8 million under a term loan tranche that was added to the Amended Credit Agreement. The term loan has the same terms as the revolving facility and increased the total funding available under the Amended Credit Agreement to $2,000 million. As of June 30, 2002, the revolving component of the Amended Credit Agreement was undrawn and $764.8 million was outstanding under the term loan. 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 June 30, 2002, a $300 million Tranche A term loan and a $700 million Tranche B term loan, both of which were fully drawn as of June 30, 2002. This bank facility replaced a previously existing $500 million unsecured multi-year revolving credit facility. The new revolving credit facility and the Tranche A term loan bear interest at LIBOR plus 3.0%. The Tranche B term loan bears interest at LIBOR plus 3.5%. The revolving credit facility and Tranche A term loan interest rates may be increased or decreased based upon changes in PanAmSat's total leverage ratio, as defined by the credit agreement. The revolving credit facility and the Tranche A term loan terminate 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. PanAmSat repaid a $1,725 million intercompany loan from Hughes in February 2002, using proceeds from the bank facility and notes payable described above, as well as existing cash balances. 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 the earlier of December 5, 2002 or the effective date of EchoStar Merger. The facility is split into two loan tranches: a $1,500 million tranche secured by a February 2002 $1,500 million Hughes cash deposit and a $500 million tranche that shares security with the Amended Credit Agreement described above. Borrowings under the $1,500 million tranche bear interest at GMAC's cost of funds (approximately 2.0% at June 30, 2002) 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. Hughes has the legal right of setoff with respect to the $1,500 million GMAC cash deposit, and accordingly offsets it 74 HUGHES ELECTRONICS CORPORATION against amounts borrowed from GMAC under the $1,500 million tranche for balance sheet purposes. The excess over Hughes' $1,500 million cash deposit must be repaid upon the effective date of the EchoStar Merger. The cash collateralized tranche was fully drawn and the $100 million was outstanding under the $500 million tranche as of June 30, 2002. On January 5, 2001, DLA entered into a $450.0 million revolving credit facility. The DLA facility was repaid and retired in February 2002. In addition, SurFin's unsecured revolving credit facilities of $400.0 million and $212.5 million were repaid and retired in February 2002. Other. $65.2 million in other short-term and long-term debt, related primarily to DLA and HNS' international subsidiaries, was outstanding at June 30, 2002, bearing fixed and floating rates of interest of 4.34% to 14.50%. 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 a company holding all of the capital stock of Hughes ("HEC Holdings") from GM and the combination of the Hughes business with EchoStar by means of a 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. The split-off of HEC Holdings 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 HEC Holdings (which 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 EchoStar Merger to form New EchoStar. Each share of HEC Holdings 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 New EchoStar in exchange for each share of EchoStar Class A or Class B common stock held immediately prior to the 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 GM 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, 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 cash or certain debt of GM, GM 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. 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. In addition, if the merger agreement is terminated for failure to obtain specified regulatory clearances or financing to complete the Merger, EchoStar is obligated to purchase Hughes' interest in PanAmSat for an aggregate purchase price of 75 HUGHES ELECTRONICS CORPORATION 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. 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 Federal Communications Commission ("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 EchoStar Merger was not completed for the specific reasons identified above. 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 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. On July 2, 2002, GM received a favorable private letter ruling from the U.S. Internal Revenue Service to the effect that, among other things, the split-off of HEC Holdings from GM would be tax-free to GM and its stockholders for U.S. federal income-tax purposes. GM, Hughes and EchoStar continue to seek required regulatory clearances and approvals from the U.S. Department of Justice and the FCC with a goal toward completing the transactions in the second half of 2002. The companies also are in the process of preparing materials to be distributed to GM stockholders seeking their affirmative vote on certain aspects of the transactions, and to EchoStar stockholders for their information. In connection with the pending EchoStar Merger, some 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 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. Acquisitions and Investments. On May 1, 2001, DLA, which operates the Latin America DIRECTV business, acquired from Grupo Clarin S.A. ("Clarin") a 51% ownership interest in GEA, a local operating company located in Argentina that provides direct-to-home broadcast services, and other assets, consisting primarily of programming and advertising rights. The purchase price, valued at $169 million, consisted of a 3.98% ownership interest in DLA and a put option that under certain circumstances will allow Clarin to sell in November 2003 its 3.98% interest back to DLA for $195 million. 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 "Capital stock and additional paid-in capital." 76 HUGHES ELECTRONICS CORPORATION 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. 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. Divestitures. On June 27, 2002, HNS reached an agreement to exchange its approximate 29% equity interest in, and $75 million of long term receivables from, HTIL for an equity interest in, and long term receivables from, TTSL. HNS expects to carry the investment in TTSL under the cost method since HNS' interest in TTSL will represent less than 20% of TTSL equity. The transaction is anticipated to close in the fourth quarter of 2002. The consummation of this transaction may result in a loss, which is currently not determinable and is dependent on the fair value of the securities exchanged on the date of close. On March 1, 2000, Hughes announced that the operations of DIRECTV Japan would be discontinued. As a result, Hughes accrued exit costs and involuntary termination benefits related to 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. In the second quarter of 2002, $36.7 million of accrued liabilities related to the exit costs were reversed upon the resolution of the remaining claims, resulting in a credit adjustment to "Other, net". Commitments and Contingencies Litigation In connection with the 2000 sale by Hughes of its satellite systems manufacturing businesses to The Boeing Company ("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 certain financial consequences of debarment associated with potential non-criminal violations of U.S. Export control laws related to the business now owned by Boeing should the State Department impose such sanctions against the 77 HUGHES ELECTRONICS CORPORATION satellite systems manufacturing businesses. Hughes does not expect sanctions imposed by the State Department, if any, to have a material adverse effect on it's consolidated financial statements. 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 was pending, post-judgment interest on the total judgment was accruing at a rate of 6.241% per year, compounded annually, from the date judgment was entered in October 2000. In the first quarter of 2002, DIRECTV increased its provision for loss related to this matter by $83 million, of which $56 million was recorded as a charge to "Selling, general and administrative expenses" and $27 million was recorded as a charge to "Interest expense," based on the status of settlement negotiations between the parties. On June 4, 2002, Hughes and GECC executed an agreement to settle the matter for $180 million. As a result, in the second quarter of 2002 DIRECTV increased its provision for loss by $47 million, which was recorded as a charge to "Interest expense." The $180 million settlement was paid to GECC in June 2002. 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 (about $63 million recorded) 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 they 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. 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. Hughes Communications Galaxy, Inc. ("HCGI") filed a lawsuit on March 22, 1991 against the U.S. Government based upon NASA's breach of contract to launch ten satellites on the Space Shuttle. 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. In March 2002, Hughes was advised that no further judicial review would be sought by the U.S. Government and the payment was 78 HUGHES ELECTRONICS CORPORATION in process. In April 2002, Hughes received payment for the full amount of the judgment. As a result, Hughes recorded a $95 million gain, net of legal costs, as an offset to "Selling, general and administrative expenses" in the first quarter of 2002. 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 arising in the ordinary course of business. Hughes has established loss provisions for matters in which losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or 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 June 30, 2002. 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 and does not compensate for business interruption or loss of future revenues or customers. Hughes relies on in-orbit spare satellites and excess transponder capacity at key orbital slots to mitigate the effects of satellite failure on its' ability to provide service. Where insurance costs related to known satellite anomalies are prohibitive, Hughes' insurance policies contain coverage exclusions and Hughes is not insured for certain other satellites. The book value of satellites that were insured with coverage exclusions amounted to $662.7 million and the book value of the satellites that were not insured was $602.9 million at June 30, 2002. Two satellites owned and operated by PanAmSat, and other satellites of a similar design operated by others, have experienced a progressive degradation of their solar arrays causing a reduction in output power. PanAmSat and the manufacturer are monitoring the problem to determine its cause and its expected effect. The power reduction may require PanAmSat to permanently turn off certain transponders on the affected satellites to allow the continued operation of other transponders. At this time, the power degradation has not required PanAmSat to reduce the number of operating transponders on either affected satellite. Hughes has partially insured the affected satellites with policies that cover these problems. However, should it be necessary to turn off a significant number of transponders, there can be no assurance that we will be reimbursed by the insurers, as they may dispute a payment obligation, or the anomaly may occur outside the coverage period. Also, Hughes could recognize a loss on the portion of book value of the satellites that is not insured of up to $133.7 million. Moreover, these problems may not be insured in the future for any loss occurring outside the existing policy periods. Hughes is contingently liable under standby letters of credit and bonds in the aggregate amount of $61.1 million which were undrawn at June 30, 2002 and DLA has guaranteed $3.0 million of bank debt related to non-consolidated DLA local operating companies, which is due in variable amounts over the next five years. Additionally, as described in Note 8 to the consolidated financial statements included in this filing, DLA may be required to repurchase Clarin's 3.98% interest in DLA for $195 million in 2003. In the first quarter of 2002, Hughes recorded a $29.0 million charge to "Other, net" related to an expected requirement to perform on a guarantee obligation of up to $55.4 million for bank debt owed by an investor in HTIL. Hughes has accrued a current liability to the lender and an account receivable from the investor for the guarantee amount. The $29.0 million charge represents a provision for the 79 HUGHES ELECTRONICS CORPORATION portion of the receivable from the investor estimated to be uncollectible. A payment by Hughes pursuant to the guarantee will likely be required in the second half of 2002. The Hughes Board of Directors has approved several benefit plans 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 decisions that will be made relating to employee layoffs, 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 EchoStar Merger would qualify as a change-in-control. At June 30, 2002, minimum future commitments under noncancelable operating leases having lease terms in excess of one year were primarily for real property and aggregated $343.8 million, payable as follows: $58.4 million in the remainder of 2002, $84.8 million in 2003, $54.8 million in 2004, $35.5 million in 2005, $30.4 million in 2006 and $79.9 million thereafter. Certain of these leases contain escalation clauses and renewal or purchase options. At June 30, 2002, the minimum commitments under noncancelable satellite construction and launch contracts totaled $725.7 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 $1.6 billion, payable as follows: $319.4 million in the remainder of 2002, $323.7 million in 2003, $251.1 million in 2004, $167.5 million in 2005, $175.7 million in 2006 and $373.0 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 June 30, 2002, 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. Accounting Changes Hughes adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets'" on January 1, 2002. SFAS No. 144 refines existing impairment accounting guidance and extends the use of accounting for discontinued operations to 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 SFAS No. 144 did not have any impact on Hughes' consolidated results of operations or financial position. 80 HUGHES ELECTRONICS CORPORATION Hughes also adopted SFAS No. 142 on January 1, 2002. 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, or sooner if an event occurs or circumstances change that would more likely than not result in an impairment loss. All other intangible assets are amortized over their estimated useful lives. SFAS No. 142 requires that Hughes perform step one of a two-part transitional impairment test to compare the fair value of each reportable unit with its respective carrying amount, including goodwill. If the carrying value exceeds its fair value, step two of the transitional impairment test must be performed to measure the amount of the impairment loss, if any. SFAS No. 142 also requires that intangible assets be reviewed as of the date of adoption to determine if they continue to qualify as intangible assets under the criteria established under SFAS No. 141, "Business Combinations," and to the extent previously recorded intangible assets do not meet the criteria that they be reclassified to goodwill. In accordance with SFAS No. 142, Hughes completed a review of its intangible assets and determined that previously recorded intangible assets related to dealer networks and subscriber base did not meet the contractual legal criteria or separability criteria as described in SFAS No. 141. As a result, in the first quarter of 2002, Hughes reclassified $209.8 million, net of $146.0 million of accumulated amortization, of previously reported intangible assets to goodwill. Hughes also completed in the first quarter of 2002 the required transitional impairment test for intangible assets with indefinite lives, which consist of FCC Licenses for direct-to-home broadcasting frequencies ("Orbital Slots"), and determined that no impairment existed because the fair value of these assets exceeded the carrying value as of January 1, 2002. In the second quarter of 2002, with the assistance of an independent valuation firm, Hughes completed step one of the transitional test to determine whether a potential impairment existed on goodwill recorded at January 1, 2002. Primarily based on the present value of expected future cash flows, it was determined that the fair value of DIRECTV U.S. and the Satellite Services segment exceeded their carrying values, therefore no further impairment test was required. It was also determined that the carrying value of DLA and DIRECTV Broadband exceeded their fair values, therefore requiring step two of the impairment test be performed. The amount of goodwill recorded at January 1, 2002 for DLA and DIRECTV Broadband was $622.4 million and $107.9 million, respectively. No goodwill or intangible assets existed at the Network Systems segment, other than for equity method investments, and therefore no impairment test was required. Because the carrying value of DLA and DIRECTV Broadband exceeded their fair values, Hughes must complete step two of the impairment test by December 31, 2002. Step two requires the comparison of the implied value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss will be recognized in an amount equal to that excess. In the initial year of the adoption, the impairment loss, if any, is recorded as a cumulative effect of accounting change, net of taxes, and recorded in subsequent years as a pre-tax chare to operating income. Although the amount of any impairment loss related to the goodwill recorded at DLA and DIRECTV Broadband cannot be determined at this time, the amount of any such loss could be material to Hughes' consolidated results of operations. Hughes adopted SFAS No. 141 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. 81 HUGHES ELECTRONICS CORPORATION 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 "Accumulated other comprehensive income (loss)". New Accounting Standards In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 requires the recognition of costs associated with exit or disposal activities when incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces previous accounting guidance provided by Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". Hughes is required to implement SFAS No. 146 on January 1, 2003. Management has not determined the impact, if any, that this statement will have on Hughes' consolidated results of operations or financial position. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections". SFAS No. 145 eliminates the requirement to present gains and losses on the early extinguishment of debt as an extraordinary item, and resolves accounting inconsistencies for certain lease modifications. Hughes' adoption of this standard on January 1, 2003 is not expected to have an impact on Hughes results of operations or financial position. Security Ratings On March 14, 2002, Moody's Investor Services ("Moody's") assigned a Ba3 debt rating to Hughes' Amended Credit Agreement. The rating remains on review for possible downgrade pending the outcome of the EchoStar Merger. On January 16, 2002, Moody's reduced Hughes' senior unsecured bank debt rating from Ba1 to Ba3 (on review for possible downgrade). 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 remedied by the contractually-obligated sale of its approximately 81% stake in PanAmSat and the merger transaction termination fee. 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 likelihood that Hughes could not maintain an investment grade rating under any merger scenario. On March 8, 2002, Standard and Poor's Rating Services ("S&P") lowered Hughes' unsecured long-term corporate credit rating from BB+ to BB-, remaining on Credit Watch negative pending the outcome of the EchoStar Merger. S&P also assigned a BB rating to Hughes' senior secured credit facility (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 might be one rating grade lower. On December 7, 2001, S&P lowered Hughes' long-term corporate credit rating from BBB- 82 HUGHES ELECTRONICS CORPORATION to BB+. This ratings action noted that Hughes needs to deliver planned operating performance improvements to receive an investment grade rating, despite a strong balance sheet in the event that 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 analysis 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 analysis 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. Interest Rate Risk Hughes is subject to interest rate risk related to its outstanding debt. As of June 30, 2002, Hughes' $3,480.0 million of total debt consisted of PanAmSat's fixed rate borrowings of $1,550.0 million and variable rate borrowings of $1,000.0 million, Hughes' variable rate borrowings of $864.8 million, and various other variable and fixed rate borrowings. Outstanding borrowings bore interest rates ranging from 3.75% to 14.50% at June 30, 2002. Hughes is subject to fluctuating interest rates, which may adversely impact its results of operations and cash flows for its variable rate bank borrowings. Also, to the extent interest rates increase, Hughes' cost of financing could increase at such time that debt matures and is refinanced. As of June 30, 2002, the hypothetical impact of a one percentage point increase in interest rates related to Hughes' outstanding variable rate debt would be to increase annual interest expense by approximately $19 million. * * * 83 -----END PRIVACY-ENHANCED MESSAGE-----