-----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, BesqHgPDsQLLlb6EnABxFqCoWr9OiZ1ShwmqEU/De1YUmPD3rc/GCh/DDqWqKIew EvEYptbBmWktqBf4X9thmQ== 0000040730-03-000074.txt : 20030508 0000040730-03-000074.hdr.sgml : 20030508 20030508133023 ACCESSION NUMBER: 0000040730-03-000074 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030508 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: 03687693 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 march10q2003.txt GENERAL MOTORS CORPORATION'S FIRST QUARTER 2003 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 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 . Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X. No . As of April 30, 2003, there were outstanding 560,631,107 shares of the issuer's $1-2/3 par value common stock and 1,107,648,029 shares of GM Class H $0.10 par value common stock. - 1 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES INDEX Page No. -------- Part I - Financial Information Item 1. Financial Statements (Unaudited) Consolidated Statements of Income for the Three Months Ended March 31, 2003 and 2002 3 Supplemental Information to the Consolidated Statements of Income for the Three Months Ended March 31, 2003 and 2002 4 Consolidated Balance Sheets as of March 31, 2003, December 31, 2002, and March 31, 2002 5 Supplemental Information to the Consolidated Balance Sheets as of March 31, 2003, December 31, 2002, and March 31, 2002 6 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 7 Supplemental Information to the Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 8 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 4. Controls and Procedures 27 Part II - Other Information (Unaudited) Item 1. Legal Proceedings 28 Item 6. Exhibits and Reports on Form 8-K 29 Signatures 29 Certifications 30 Exhibit 99 Hughes Electronics Corporation Financial Statements (Unaudited) and Management's Discussion and Analysis of Financial Condition and Results of Operations 32 Exhibit 99.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 79 Exhibit 99.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 80 - 2 - PART I GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended March 31, -------------------- 2003 2002 ---- ---- (dollars in millions except per share amounts) Total net sales and revenues $49,365 $46,214 ------ ------ Cost of sales and other expenses 39,383 38,401 Selling, general, and administrative expenses 5,706 5,601 Interest expense 2,128 1,858 ------- ------- Total costs and expenses 47,217 45,860 Income before income taxes and minority interests 2,148 354 Income tax expense 656 125 Equity income (loss) and minority interests (9) (1) ------- ------- Net income 1,483 228 Dividends on preference stocks - (24) ------- ------- Earnings attributable to common stocks $1,483 $204 ===== === Basic earnings (losses) per share attributable to common stocks (Note 7) Earnings per share attributable to $1-2/3 par value $2.71 $0.58 ==== ==== Losses per share attributable to Class H $(0.04) $(0.14) ==== ==== Earnings (losses) per share attributable to common stocks assuming dilution (Note 7) Earnings per share attributable to $1-2/3 par value $2.71 $0.57 ==== ==== Losses per share attributable to Class H $(0.04) $(0.14) ==== ==== Reference should be made to the notes to consolidated financial statements. - 3 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended March 31, ------------------- 2003 2002 ---- ---- (dollars in millions) AUTOMOTIVE, COMMUNICATIONS SERVICES, AND OTHER OPERATIONS Total net sales and revenues $42,042 $39,773 ------ ------ Cost of sales and other expenses 37,313 36,211 Selling, general, and administrative expenses 3,341 3,690 ------ ------ Total costs and expenses 40,654 39,901 ------ ------ Interest expense 321 162 Net expense from transactions with Financing and Insurance Operations 41 90 ----- ---- Income (loss) before income taxes and minority interests 1,026 (380) Income tax expense (benefit) 226 (160) Equity income (loss) and minority interests 1 11 ----- ---- Net income (loss) - Automotive, Communications Services, and Other Operations $801 $(209) === === FINANCING AND INSURANCE OPERATIONS Total revenues $7,323 $6,441 ----- ----- Interest expense 1,807 1,696 Depreciation and amortization expense 1,506 1,361 Operating and other expenses 2,177 1,905 Provisions for financing and insurance losses 752 835 ----- ----- Total costs and expenses 6,242 5,797 ----- ----- Net income from transactions with Automotive, Communications Services, and Other Operations (41) (90) ----- --- Income before income taxes and minority interests 1,122 734 Income tax expense 430 285 Equity income (loss) and minority interests (10) (12) ----- --- Net income - Financing and Insurance Operations $682 $437 === === The above Supplemental Information is intended to facilitate analysis of General Motors Corporation's businesses: (1) Automotive, Communications Services, and Other Operations; and (2) Financing and Insurance Operations. Reference should be made to the notes to consolidated financial statements. - 4 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Mar. 31, Mar. 31, 2003 Dec. 31, 2002 (Unaudited) 2002 (Unaudited) --------- ------- --------- ASSETS (dollars in millions) Cash and cash equivalents $26,982 $21,449 $19,049 Marketable securities 16,841 16,825 13,282 ------ ------ ------ Total cash and marketable securities 43,823 38,274 32,331 Finance receivables - net 141,273 134,647 112,686 Accounts and notes receivable (less allowances) 16,209 15,715 11,091 Inventories (less allowances) (Note 2) 10,769 9,967 9,802 Deferred income taxes 39,000 39,865 28,677 Equipment on operating leases - (less accumulated depreciation) 36,997 32,988 32,378 Equity in net assets of nonconsolidated associates 4,990 5,044 4,871 Property - net 37,681 37,514 35,512 Intangible assets - net (Note 3) 17,961 17,954 16,972 Other assets 33,733 37,028 40,360 ------- ------- ------- Total assets $382,436 $368,996 $324,680 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable (principally trade) $28,738 $27,452 $26,456 Notes and loans payable 211,726 201,940 166,470 Postretirement benefits other than pensions 38,239 38,187 38,586 Pensions 22,536 22,762 11,113 Deferred income taxes 7,342 7,178 6,318 Accrued expenses and other liabilities 63,654 63,829 55,395 ------- ------- ------- Total liabilities 372,235 361,348 304,338 Minority interests 835 834 766 Stockholders' equity $1-2/3 par value common stock (outstanding, 560,616,422; 560,447,797; and 560,021,275 shares) (Note 7) 934 936 934 Class H common stock (outstanding, 1,107,517,793; 958,284,272; and 877,777,148 shares) (Note 7) 111 96 88 Capital surplus (principally additional paid-in capital) 22,808 21,583 21,589 Retained earnings 11,234 10,031 9,387 ------ ------ ------ Subtotal 35,087 32,646 31,998 Accumulated foreign currency translation adjustments (2,665) (2,784) (3,014) Net unrealized loss on derivatives (196) (205) (256) Net unrealized gains on securities 344 372 428 Minimum pension liability adjustment (23,204) (23,215) (9,580) ------- ------- ------- Accumulated other comprehensive loss (25,721) (25,832) (12,422) ------- ------- ------- Total stockholders' equity 9,366 6,814 19,576 ------- ------- ------- Total liabilities and stockholders' equity $382,436 $368,996 $324,680 ======= ======= ======= Reference should be made to the notes to consolidated financial statements. - 5 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED BALANCE SHEETS Mar. 31, Mar. 31, 2003 Dec. 31, 2002 (Unaudited) 2002 (Unaudited) --------- ------- --------- ASSETS (dollars in millions) Automotive, Communications Services, and Other Operations Cash and cash equivalents $16,977 $13,291 $14,656 Marketable securities 3,239 2,174 781 ------ ------ ------ Total cash and marketable securities 20,216 15,465 15,437 Accounts and notes receivable (less allowances) 6,085 5,861 5,957 Inventories (less allowances) (Note 2) 10,769 9,967 9,802 Equipment on operating leases - (less accumulated depreciation) 5,661 5,305 3,675 Deferred income taxes and other current assets 10,957 10,816 7,974 ------ ------ ------ Total current assets 53,688 47,414 42,845 Equity in net assets of nonconsolidated associates 4,990 5,044 4,871 Property - net 35,856 35,693 33,888 Intangible assets - net (Note 3) 14,623 14,611 13,745 Deferred income taxes 30,473 31,431 22,826 Other assets 7,753 7,781 17,494 ------- ------- ------- Total Automotive, Communications Services, and Other Operations assets 147,383 141,974 135,669 Financing and Insurance Operations Cash and cash equivalents 10,005 8,158 4,393 Investments in securities 13,602 14,651 12,501 Finance receivables - net 141,273 134,647 112,686 Investment in leases and other receivables 39,476 35,517 31,794 Other assets 30,697 34,049 27,637 Net receivable from Automotive, Communications Services, and Other Operations 486 1,089 477 ------- ------- ------- Total Financing and Insurance Operations assets 235,539 228,111 189,488 ------- ------- ------- Total assets $382,922 $370,085 $325,157 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Automotive, Communications Services, and Other Operations Accounts payable (principally trade) $21,659 $20,169 $19,367 Loans payable 815 1,516 1,591 Accrued expenses 41,718 40,518 34,352 Net payable to Financing and Insurance Operations 486 1,089 477 ------- ------- ------- Total current liabilities 64,678 63,292 55,787 Long-term debt 19,228 16,651 16,797 Postretirement benefits other than pensions 34,291 34,275 34,719 Pensions 22,481 22,709 11,072 Other liabilities and deferred income taxes 15,307 15,461 13,741 ------- ------- ------- Total Automotive, Communications Services, and Other Operations liabilities 155,985 152,388 132,116 Financing and Insurance Operations Accounts payable 7,079 7,283 7,089 Debt 191,683 183,773 148,082 Other liabilities and deferred income taxes 17,974 18,993 17,528 ------- ------- ------- Total Financing and Insurance Operations liabilities 216,736 210,049 172,699 ------- ------- ------- Total liabilities 372,721 362,437 304,815 Minority interests 835 834 766 Stockholders' equity $1-2/3 par value common stock (outstanding, 560,616,422; 560,447,797; and 560,021,275 shares) (Note 7) 934 936 934 Class H common stock (outstanding, 1,107,517,793; 958,284,272; and 877,777,148 shares) (Note 7) 111 96 88 Capital surplus (principally additional paid-in capital) 22,808 21,583 21,589 Retained earnings 11,234 10,031 9,387 ------ ------ ------ Subtotal 35,087 32,646 31,998 Accumulated foreign currency translation (2,665) (2,784) (3,014) adjustments Net unrealized loss on derivatives (196) (205) (256) Net unrealized gains on securities 344 372 428 Minimum pension liability adjustment (23,204) (23,215) (9,580) ------ ------ ------ Accumulated other comprehensive loss (25,721) (25,832) (12,422) ------ ------ ------ Total stockholders' equity 9,366 6,814 19,576 ------- ------- ------- Total liabilities and stockholders' equity $382,922 $370,085 $325,157 ======= ======= ======= The above Supplemental Information is intended to facilitate analysis of General Motors Corporation's businesses: (1) Automotive, Communications Services, and Other Operations; and (2) Financing and Insurance Operations. Reference should be made to the notes to consolidated financial statements. - 6 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, --------------------- 2003 2002 ---- ---- (dollars in millions) Net cash provided by operating activities $10,055 $7,707 Cash flows from investing activities Expenditures for property (1,686) (1,904) Investments in marketable securities - acquisitions (2,830) (12,883) Investments in marketable securities - liquidations 2,906 12,182 Net originations and purchases of mortgage servicing rights (461) (551) Increase in finance receivables (33,775) (32,185) Proceeds from sales of finance receivables 23,446 28,196 Operating leases - acquisitions (3,661) (2,991) Operating leases - liquidations 2,510 2,307 Investments in companies, net of cash acquired (32) (161) Proceeds from sale of business units 1,076 - Other (504) 318 ------ ----- Net cash used in investing activities (13,011) (7,672) ------ ----- Cash flows from financing activities Net decrease in loans payable (585) (6,391) Long-term debt - borrowings 19,391 13,667 Long-term debt - repayments (10,066) (6,543) Proceeds from issuing common stocks - 50 Proceeds from sales of treasury stocks - 19 Cash dividends paid to stockholders (280) (304) ----- ----- Net cash provided by financing activities 8,460 498 ----- --- Effect of exchange rate changes on cash and cash equivalents 29 (39) ------ ------ Net increase in cash and cash equivalents 5,533 494 Cash and cash equivalents at beginning of the period 21,449 18,555 ------ ------ Cash and cash equivalents at end of the period $26,982 $19,049 ====== ====== Reference should be made to the notes to consolidated financial statements. - 7 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTAL INFORMATION TO THE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Automotive, Comm. Financing and Serv. and Other Insurance ---------------- -------------- Three Months Ended March 31, ---------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- (dollars in millions) Net cash provided by operating activities $4,680 $3,762 $5,375 $3,945 Cash flows from investing activities Expenditures for property (1,582) (1,888) (104) (16) Investments in marketable securities - acquisitions (1,155) (399) (1,675) (12,484) Investments in marketable securities - liquidations 90 408 2,816 11,774 Net originations and purchases of mortgage servicing rights - - (461) (551) Increase in finance receivables - - (33,775) (32,185) Proceeds from sales of finance receivables - - 23,446 28,196 Operating leases - acquisitions - - (3,661) (2,991) Operating leases - liquidations - - 2,510 2,307 Investments in companies, net of cash acquired (32) (39) - (122) Proceeds from sale of business units 1,076 - - - Other (306) 524 (198) (206) ----- ----- ------ ----- Net cash used in investing activities (1,909) (1,394) (11,102) (6,278) ----- ----- ------ ----- Cash flows from financing activities Net increase (decrease) in loans payable (733) (811) 148 (5,580) Long-term debt - borrowings 2,566 6,414 16,825 7,253 Long-term debt - repayments (36) (392) (10,030) (6,151) Proceeds from issuing common stocks - 50 - - Proceeds from sales of treasury stocks - 19 - - Cash dividends paid to stockholders (280) (304) - - ----- ----- ----- ----- Net cash provided by (used in) financing activities 1,517 4,976 6,943 (4,478) ----- ----- ----- ----- Effect of exchange rate changes on cash and cash equivalents 1 (40) 28 1 Net transactions with Automotive/Financing Operations (603) (1,080) 603 1,080 ----- ----- ----- ----- Net increase (decrease) in cash and cash equivalents 3,686 6,224 1,847 (5,730) Cash and cash equivalents at beginning of the period 13,291 8,432 8,158 10,123 ------ ------ ------ ------ Cash and cash equivalents at end of the period $16,977 $14,656 $10,005 $4,393 ====== ====== ====== ===== The above Supplemental Information is intended to facilitate analysis of General Motors Corporation's businesses: (1) Automotive, Communications Services, and Other Operations; and (2) Financing and Insurance Operations. Reference should be made to the notes to consolidated financial statements. - 8 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Financial Statement Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with 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, 2002 consolidated financial statements and notes thereto included in General Motors Corporation's (the Corporation, General Motors, or GM) 2002 Annual Report on Form 10-K, and all other GM, Hughes Electronics Corporation (Hughes), and General Motors Acceptance Corporation (GMAC) filings with the U.S. Securities and Exchange Commission. GM presents its primary financial statements on a fully consolidated basis. Transactions between businesses have been eliminated in the Corporation's consolidated financial statements. These transactions consist principally of borrowings and other financial services provided by Financing and Insurance Operations (FIO) to Automotive, Communications Services, and Other Operations (ACO). To facilitate analysis, GM presents supplemental information to the statements of income, balance sheets, and statements of cash flows for the following businesses: (1) ACO, 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) FIO, which consists primarily of GMAC. GMAC provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, vehicle and homeowners' insurance, and asset-based lending. Certain amounts for 2002 were reclassified to conform with the 2003 classifications. New Accounting Standards Beginning January 1, 2003, the Corporation began expensing the fair market value of stock options newly granted to employees pursuant to Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. Such expense for the three months ended March 31, 2003 was $13 million, net of tax, recorded in cost of sales and other expenses. For the three months ended March 31, 2002, as permitted by SFAS No. 123, GM applied the intrinsic value method of recognition and measurement under Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees", to its stock options and other stock-based employee compensation awards. No compensation expense related to employee stock options is reflected in net income for this period, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of the grant. In accordance with the disclosure requirements of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", since GM adopted SFAS No. 123 effective January 1, 2003 for newly granted options only, the following table illustrates the effect on net income and earnings per share if compensation cost for all outstanding and unvested stock options and other stock-based employee compensation awards had been determined based on their fair values at the grant date (dollars in millions except per share amounts): - 9 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Financial Statement Presentation (continued) Three Months Ended March 31 ------------------ 2003 2002 ---- ---- Net income, as reported $1,483 $228 Add: stock-based compensation expense with respect to newly granted options, included in reported net income, net of related tax effects 13 - Less: stock-based compensation expense determined with respect to all outstanding options, net of related tax effects (57) (94) ----- --- Pro forma net income $1,439 $134 ===== === Earnings (losses) attributable to common stocks $1-2/3 par value - as reported $1,521 $325 - pro forma 1,499 271 Class H - as reported $(38) $(121) - pro forma (60) (161) Basic earnings (losses) per share attributable to common stocks $1-2/3 par value - as reported $2.71 $0.58 - pro forma 2.67 0.48 Class H - as reported $(0.04) $(0.14) - pro forma (0.06) (0.18) Diluted earnings (losses) per share attributable to common stocks $1-2/3 par value - as reported $2.71 $0.57 - pro forma 2.67 0.48 Class H - as reported $(0.04) $(0.14) - pro forma (0.06) (0.18) In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46), which requires the consolidation of certain entities considered to be variable interest entities (VIEs). An entity is considered to be a VIE when it has equity investors who lack the characteristics of having a controlling financial interest, or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it is determined that the investor will absorb a majority of the VIE's expected losses or residual returns if they occur. FIN 46 provides certain exceptions to these rules, including qualifying special purpose entities (SPEs) subject to the requirements of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." VIEs created after January 31, 2003 must be consolidated immediately, while VIEs that existed prior to February 1, 2003 must be consolidated as of July 1, 2003. GM may be required to consolidate certain VIEs (previously collectively referred to as SPEs) with which it does business. Management is currently reviewing existing VIEs that may require consolidation. With respect to GM's ACO business, it is reasonably possible that certain VIEs with assets totaling approximately $1.1 billion, established exclusively to facilitate GM's ACO leasing activities, may require consolidation. Should GM default on all of its obligations with respect to its involvement in these entities, GM's maximum exposure to loss would be approximately $1.1 billion ($680 million after-tax). With respect to the FIO business, VIE structures are used to facilitate various activities of GMAC, including securitization of loans, mortgage funding, and other investing activities. Based on management's preliminary assessment, it is reasonably possible that VIEs with assets totaling approximately $14.0 billion may require consolidation. Management is considering revising involvement in these entities, which could have an impact on the consolidation analysis under FIN 46. In the absence of any such revisions, the consolidation of such VIEs would have the effect of increasing both assets and liabilities in an amount equal to the assets of the VIEs. GM's exposure to loss related to these entities is approximately $4.4 billion ($2.7 billion after-tax) which primarily relates to retained interests in these facilities. - 10 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Financial Statement Presentation (concluded) Sale of GM Defense Business On March 1, 2003 GM closed the transaction to sell its GM Defense operations (light armored vehicle business) to General Dynamics Corporation for net proceeds of approximately $1.1 billion in cash. The sale resulted in a pre-tax gain of approximately $814 million, or approximately $505 million after-tax ($0.90 per diluted share of GM $1-2/3 par value common stock), which was recorded in net sales and revenues in GM's Consolidated Statements of Income for Other ACO operations. Note 2. Inventories Inventories included the following for Automotive, Communications Services, and Other Operations (dollars in millions): March 31, Dec. 31, March 31, 2003 2002 2002 ----- ---- ---- Productive material, work in process, and supplies $4,857 $4,915 $5,130 Finished product, service parts, etc. 7,693 6,859 6,517 ------ ------ ------ Total inventories at FIFO 12,550 11,774 11,647 Less LIFO allowance 1,781 1,807 1,845 ------ ------ ------ Total inventories (less allowances) $10,769 $9,967 $9,802 ====== ===== ===== Note 3. Goodwill and Acquired Intangible Assets The components of the Corporation's acquired intangible assets as of March 31, 2003, were as follows (dollars in millions): Gross Net Carrying Accumulated Carrying Amount Amortization Amount ---------------------------------- Automotive, Communications Services, and Other Operations - ----------------------------------- Amortizing intangible assets: Patents and intellectual property rights $228 $5 $223 Dealer network and subscriber base 356 183 173 --- --- --- Total $584 $188 396 === === Non-amortizing intangible assets: License fees - orbital slots 432 --- Total acquired intangible assets 828 ----- Goodwill 7,103 Pension intangible asset 6,692 ------ Total intangible assets $14,623 ====== Financing and Insurance Operations - ---------------------------------- Amortizing intangible assets: Customer lists and contracts $67 $25 $42 Trademarks and other 39 13 26 Covenants not to compete 18 18 - --- -- -- Total $124 $56 68 === == Total acquired intangible assets 68 Non-amortizing intangible assets: Goodwill 3,270 ----- Total intangible assets 3,338 ===== Total consolidated intangible assets $17,961 ====== - 11 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 3. Goodwill and Acquired Intangible Assets (concluded) Estimated amortization expense in each of the next five years is as follows: 2004 - $70 million; 2005 - $47 million; 2006 - $46 million; 2007 - $46 million; and 2008 - $43 million. The changes in the carrying amounts of goodwill for the quarter ended March 31, 2003, were as follows (dollars in millions): (1) (1) Total Total GMNA GME Other Hughes ACO GMAC GM ---- --- ----- ------ ----- ---- ----- Balance as of December 31, $139 $338 $57 $6,458 $6,992 $3,273 $10,265 2002 Goodwill acquired during 104 - - - 104 12 116 the period Effect of foreign currency - 7 - - 7 (8) (1) translation Impairment losses - - - - - (7) (7) --- --- -- ------ ----- ----- ------ Balance as of March 31, 2003 $243 $345 $57 $6,458 $7,103 $3,270 $10,373 === === == ===== ===== ===== ====== (1) 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. Product Warranty Liability Policy, product warranty and recall campaigns liability included the following (dollars in millions): Three Months Twelve Months Ended Ended March 31, 2003 Dec. 31, 2002 -------------- ------------- Beginning balance $8,856 $8,177 Payments (1,096) (4,182) Increase in liability (warranties issued during period) 1,072 4,418 Adjustments to liability (pre-existing warranties) 4 323 Effect of foreign currency translation 27 120 ----- ----- Ending balance $8,863 $8,856 ===== ===== Note 5. Commitments and Contingent Matters Commitments At March 31, 2003, GM had unconditionally guaranteed approximately $45 million of the debt of unaffiliated suppliers. The debt is fully collateralized with supplier company assets and accordingly no liability has been recorded. In addition, GM has entered into agreements with certain suppliers that may require GM to make payments based on changes in the suppliers' costs. GM's maximum exposure under such agreements is approximately $38 million. GM has also guaranteed a minimum value of $1.6 billion upon expiration of various leases or approximately 89% of appraised fair value at such time. These leases have terms of up to six years and many contain renewal options. At expiration, the fair values of all such properties are expected to fully mitigate GM's obligations under these guarantees. Guarantees entered into by GM during the first quarter of 2003 were not significant. Accordingly, no liabilities were recorded with respect to such guarantees. The Corporation has guaranteed certain amounts related to the securitization of mortgage loans. In addition, GMAC issues financial standby letters of credit as part of their financing and mortgage operations. At March 31, 2003 approximately $50 million was recorded with respect to these guarantees, the maximum exposure under which is approximately $3.0 billion. In addition to guarantees, GM has entered into agreements indemnifying certain parties with respect to environmental conditions pertaining to ongoing or sold GM properties. Due to the nature of the indemnifications, GM's maximum exposure under these agreements cannot be estimated. No amounts have been recorded for such indemnities as the Corporation's obligations under them are not probable and estimable. - 12 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 5. Commitments and Contingent Matters (continued) Commitments - concluded In addition to the above, in the normal course of business GM periodically enters into agreements that incorporate indemnification provisions. While the maximum amount to which GM may be exposed under such agreements cannot be estimated, it is the opinion of management that these guarantees and indemnifications are not expected to have a material adverse effect on the Corporation's consolidated financial position or results of operations. 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. On March 18, 2003, DIRECTV Latin America, LLC (DLA LLC) filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (Bankruptcy Court). The filing does not include any of its operating companies in Latin America and the Caribbean, which will continue regular operations. DLA LLC continues to manage its business as a debtor-in-possession. As a debtor-in-possession, management is authorized to operate the business, but may not engage in transactions outside the ordinary course of business without Bankruptcy Court approval. Subsequent to the filing of its Chapter 11 petition, DLA LLC obtained Bankruptcy Court orders that, among other things, authorized DLA LLC to pay certain pre-petition obligations related to employee wages and benefits and to take certain actions where such payments or actions will benefit its estate or preserve the going concern value of the business enterprise, thereby enhancing the prospects of reorganization. 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 a dispute resolution 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 at a rate of 9.5% from the date of sale, the total amount of which has been provided for in Hughes' consolidated financial statements. However, Boeing has submitted additional proposed adjustments, which are being resolved through the dispute resolution process. As of March 31, 2003, approximately $670 million of proposed adjustments remain unresolved. Hughes is contesting 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. The final resolution of this matter could result in Hughes making a cash payment to Boeing that would be material to Hughes' consolidated results of operations and financial position. 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 March 31, 2003. 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. Investment in Fiat Auto Holdings At the April 23, 2003, Annual General Shareholders Meeting of Fiat Auto Holdings, B.V. (FAH), FAH adopted a Euro 5 billion recapitalization plan that provides shareholders the option to make pro-rata capital contributions over the next eighteen months. When the plan was adopted, Fiat S.p.A. (Fiat) held 80% of FAH and GM 20%. Fiat has stated that it intends to participate with a Euro 3 billion contribution. Currently, GM does not plan to participate. If and to the extent GM does not participate, GM's interest in FAH may be diluted to a lesser amount and Fiat's interest may increase. - 13 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 5. Commitments and Contingent Matters (concluded) As discussed in the December 31, 2002 Annual Report on Form 10-K, the Master Agreement provides that, from January 24, 2004 to July 24, 2009, Fiat has the right to exercise a put option (the "Put") to require GM to purchase Fiat's FAH shares at fair market value. Whether and when Fiat may seek to exercise the Put is unknown. It is uncertain as to whether the Put would ever be exercised due to the possibilities that it could be affected by subsequent agreements of the companies, it could become non-exercisable under other provisions of the Master Agreement, it could be rendered unenforceable by reason of actions Fiat may have taken, or Fiat may choose to not exercise the Put. If and when the Put is implemented, the fair market value of FAH shares would be determined by investment banks under procedures set forth in the Master Agreement. Until any such valuation is completed, the amount, if any, that GM might have to pay for Fiat's FAH shares is not quantifiable. If GM were to acquire Fiat's FAH shares and thus become the sole owner of Fiat Auto, GM would decide what, if any, additional capitalization would then be appropriate for Fiat Auto. Specifically, if Fiat Auto were to need additional funding, GM would have to decide whether or not to provide such funding and under what conditions to provide any funding. Unless FAH or Fiat Auto were subject to liquidation or insolvency, FAH's consolidated financial statements would be required for financial reporting purposes to be consolidated with those of GM. Any indebtedness, losses and capital needs of FAH and Fiat Auto after their acquisition by GM are not presently determinable, but they could have a material adverse effect on GM. While GM and Fiat have discussed potential alternatives to the Master Agreement, no changes to it have been agreed upon. 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 were required to transform the concepts detailed in the directive into national law. The laws developed in the individual national legislatures throughout Europe will have a significant impact on the amount ultimately paid by the manufacturers for this issue. Management is assessing the impact of this potential legislation on GM's financial position and results of operations, and may include charges to earnings in future periods. 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. In order to implement both the new regulatory changes as well as desired commercial strategies, GME issued a termination letter to all European Union dealers (excluding those already under termination notice) while simultaneously also offering an unconditional Letter of Intent to remain part of GME's network. Dealers and authorized repairers are expected to sign new agreements by September 30, 2003, when the new regulation becomes fully effective. Management does not believe that the future impact of the changes to the block exemption regulation will have a material adverse effect on GM's consolidated financial position or results of operations. Note 6. Comprehensive Income (Loss) GM's total comprehensive income (loss) was as follows (dollars in millions): Three Months Ended March 31, --------------------- 2003 2002 Net income $1,483 $228 Other comprehensive income (loss) 111 (127) ----- --- Total $1,594 $101 ===== === Note 7. Earnings Per Share Attributable to Common Stocks Earnings per share (EPS) attributable to each class of GM common stock was determined based on the attribution of earnings to each such class of common stock for the period divided by the weighted-average number of common shares for each such class outstanding during the period. Diluted EPS attributable to each class of GM common stock considers the impact of potential common shares, unless the inclusion of the potential common shares would have an antidilutive effect. - 14 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 7. Earnings Per Share Attributable to Common Stocks (continued) The attribution of earnings to each class of GM common stock was as follows (dollars in millions): Three Months Ended March 31, ------------------- 2003 2002 ---- ---- Earnings (losses) attributable to common stocks Earnings attributable to $1-2/3 par value $1,521 $325 Losses attributable to Class H $(38) $(121) Earnings attributable to GM $1-2/3 par value common stock for the period represent the earnings attributable to all GM common stocks, reduced by the losses attributable to GM Class H common stock for the respective period. Losses attributable to GM Class H common stock represent the net loss of Hughes, adjusted to exclude: (1) the effects of GM purchase accounting adjustments arising from GM's acquisition of Hughes Aircraft Company, and (2) the write-off of goodwill for DirecTV Latin America and DirectTV Broadband recorded in Hughes' stand alone financial statements and other adjustments. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," GM evaluated the carrying value of goodwill associated with its Direct-to-Home Broadcast reporting unit in the aggregate and determined the goodwill was not impaired. In addition, the calculated losses adjusted for these items are reduced by the amount of dividends accrued on the Series A Preferred Stock of Hughes (as an equivalent measure of the effect that GM's payment of dividends on the GM Series H 6.25% Automatically Convertible Preference Stock would have if paid by Hughes). The calculated losses 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 (990 million and 878 million during the three months ended March 31, 2003 and 2002, 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 1.4 billion and 1.3 billion for the three months ended March 31, 2003 and 2002, respectively. In addition, the denominator used may be adjusted on occasion as deemed appropriate by the GM Board to reflect subdivisions or combinations of the GM Class H common stock, certain transfers of capital to or from Hughes, the contribution of shares of capital stock of GM to or for the benefit of Hughes employees, and the retirement of GM Class H common stock purchased by Hughes. The GM Board's discretion to make such adjustments is limited by criteria set forth in GM's Restated Certificate of Incorporation. Shares of GM Class H common stock delivered by GM in connection with the award of such shares to and the exercise of stock options by employees of Hughes increase the numerator and denominator of the fraction referred to above. On occasion, in anticipation of exercises of stock options, Hughes purchases GM Class H common stock from the open market. Upon purchase, these shares are retired and therefore decrease the numerator and denominator of the fraction referred to above. On March 12, 2003, GM contributed 149.2 million shares of GM Class H common stock valued at approximately $1.24 billion to certain of its U.S. employee benefit plans. The contribution increased the amount of GM Class H common stock held by GM's employee benefit plans to approximately 331 million shares and reduced GM's retained economic interest in Hughes to approximately 19.9% from 30.7%. - 15 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 7. Earnings Per Share Attributable to Common Stocks (concluded) 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 Class H Common Stock Stock ---------------------------------------------------- Per Share Per Share Income Shares Amount (Loss) Shares Amount ------ ------ ------ ------ ------ ------ Three Months Ended March 31, 2003 Income (loss) $1,521 $(38) Less: Dividends on preference stocks - - ----- --- Basic EPS Income (loss) attributable to common stocks $1,521 561 $2.71 $(38) 990 $(0.04) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - - - - ----- --- --- --- Diluted EPS Adjusted income (loss) attributable to sstocks $1,521 561 $2.71 $(38) 990 $(0.04) ===== === ==== == === ==== Three Months Ended March 31, 2002 Income (loss) $333 $(105) Less: Dividends on preference stocks 8 16 --- --- Basic EPS Income (loss) attributable to common stocks $325 559 $0.58 $(121) 878 $(0.14) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 11 - - --- --- --- --- Diluted EPS Adjusted income (loss) attributable to stocks $325 570 $0.57 $(121) 878 $(0.14) === === ==== === === ====
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. In addition, for periods in which there was an adjusted loss attributable to common stocks, options to purchase shares of GM $1-2/3 par value common stock and 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 8. Depreciation and Amortization Depreciation and amortization included in Cost of sales and other expenses for Automotive, Communications Services, and Other Operations was as follows (in millions): Three Months Ended March 31, ------------------ 2003 2002 ---- ---- Depreciation $1,236 $1,132 Amortization of special tools 702 629 Amortization of intangible assets 24 3 ------- -------- Total $1,962 $1,764 ===== ===== - 16 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - concluded (Unaudited) Note 9. Segment Reporting GM's reportable operating segments within its 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 FIO business consist of GMAC and Other. Selected information regarding GM's reportable operating segments were as follows:
(b) Other Total Total GMNA GME GMLAAM GMAP GMA Hughes Other (b) ACO GMAC Financing Financing GM ---- --- ------ ---- --- ------ -------- --- ---- --------- --------- ----- For the Three Months Ended (dollars in millions) March 31, 2003 Manufactured products sales and revenues: External customers $30,471 $6,357 $933 $1,016 $38,777 $2,223 $1,042 $42,042 $7,330 $(7) $7,323 $49,365 Intersegment (508) 265 112 131 - 4 (4) - - - - - ------- ------ -------------- ------ ----- ----- ------ ----- -- ----- ------ Total manufactured products $29,963 $6,622 $1,045 $1,147 $38,777 $2,227 $1,038 $42,042 $7,330 $(7) $7,323 $49,365 ====== ===== ===== ===== ====== ===== ===== ====== ===== == ===== ====== Interest income (a) $111 $82 $7 $1 $201 $6 $(131) $76 $998 $(70) $928 $1,004 Interest expense $311 $91 $17 $2 $421 $81 $(181) $321 $1,774 $33 $1,807 $2,128 Net income (loss) $548 $(65) $(12) $75 $546 $(54) $309 $801 $699 $(17) $682 $1,483 Segment assets (d) $111,538 $19,536 $3,010 $1,833 $135,917 $20,310(c) $(8,844) $147,383 $235,528 $11 $235,539 $382,436 For the Three Months Ended March 31, 2002 Manufactured products sales and revenues: External customers $29,743 $5,384 $1,250 $904 $37,281 $2,007 $485 $39,773 $6,353 $88 $6,441 $46,214 Intersegment (404) 200 51 153 - 5 (5) - - - - - ------ ----- ----- ----- ------ ----- ---- ------ ----- -- ----- ------ Total manufactured products $29,339 $5,584 $1,301 $1,057 $37,281 $2,012 $480 $39,773 $6,353 $88 $6,441 $46,214 ====== ===== ===== ===== ====== ===== === ====== ===== == ===== ====== Interest income (a) $85 $64 $7 $2 $158 $4 $(89) $73 $704 $(89) $615 $688 Interest expense $114 $79 $28 $2 $223 $76 $(137) $162 $1,677 $19 $1,696 $1,858 Net income (loss) $654 $(532) $(40) $7 $89 $(156) $(142) $(209) $439 $(2) $437 $228 Segment assets (d) $97,023 $17,589 $4,017 $1,115 $119,744 $19,684(c) $(3,759) $135,669 $189,413 $75 $189,488 $324,680
(a) Interest income is included in net sales and revenues from external customers. (b) The amount reported for Hughes excludes the unamortized GM purchase accounting adjustments of approximately $57 million. (c) The amount reported for Hughes excludes a write-off of $739 million that was recorded in the first quarter of 2002 by Hughes in its stand-alone financial statements for goodwill impairments at DIRECTV Latin America and DIRECTV Broadband and other adjustments; in accordance with SFAS No. 142, GM evaluated the carrying value of goodwill associated with its Hughes Direct-to-Home Broadcast reporting unit in the aggregate and determined that the goodwill was not impaired. (d) Total GM assets exclude net payable/receivable between ACO and FIO of $486 million and $477 million as of March 31, 2003 and 2002, respectively. * * * * * * - 17 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 10. Subsequent Events On April 9, 2003, GM, Hughes and The News Corporation Limited (News Corp.) announced the signing of definitive agreements that provide for, among other things, the split-off of Hughes from GM and the simultaneous sale of GM's approximately 19.9% economic interest in Hughes to News Corp. for $14 per share, or approximately $3.8 billion. GM would receive at least $3.1 billion in cash with the remainder payable in News Corp. preferred American Depositary Shares ("News Corp. ADSs") and/or cash at News Corp.'s election. News Corp. would acquire an additional 14.1% stake in Hughes from the holders of GM Class H common stock through a mandatory exchange of a portion of their Hughes common stock received in the split-off, which would provide News Corp. with a total of 34% of the then outstanding capital stock of Hughes. In addition, GM would receive a cash dividend from Hughes of $275 million in connection with the transactions. This dividend is expected to be paid by Hughes through available cash balances. Under the terms of the proposed transactions, holders of GM Class H common stock would first exchange their shares for Hughes common stock on a share-for-share basis in the split-off, followed immediately by an exchange of approximately 17.6% of the Hughes common stock they receive in the split-off for approximately $14 per share in News Corp. ADSs and/or cash. The number of News Corp. ADSs payable to GM and Hughes common stockholders, based on a fixed-price of $14 per Hughes share, will be adjusted within a collar range of 20% above or below the News Corp. ADS price of $22.40. This mandatory exchange of about 17.6% of the shares of Hughes common stock for News Corp. ADSs and/or cash would be taxable to the Hughes common stockholders at the time. 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. If the transactions are completed, Rupert Murdoch, chairman and chief executive officer of News Corp., would become chairman of Hughes, and Chase Carey, who is currently serving as an advisor to News Corp., would become president and chief executive officer of Hughes. Eddy Hartenstein, Hughes senior executive vice president, would be named vice chairman of Hughes. Hughes would have 11 directors, the majority of which would be independent directors. The transactions are subject to a number of conditions, including, among other things, obtaining U.S. antitrust and Federal Communications Commission approvals, approval by a majority of each class of GM stockholders - GM $1-2/3 and GM Class H - voting both as separate classes and together as a single class and a favorable ruling from the Internal Revenue Service that the split-off of Hughes from GM would be tax-free to GM and its stockholders for U.S. federal income tax purposes. No assurances can be given that the approvals will be obtained or the transactions will be completed. 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 transactions. During April 2003, the Hughes Board of Directors approved the reclassification of the outstanding Hughes Series B convertible preferred stock into Hughes Class B common stock of equivalent value, and a subsequent stock split of Hughes common stock and Hughes Class B common stock through dividends of additional shares. GM, in its capacity as the holder of all outstanding Hughes capital stock, approved the reclassification. Shortly thereafter, GM converted some of its Hughes common stock into an equivalent number of shares of Hughes Class B common stock. As a result of these transactions, Hughes currently has 1,207,518,237 shares of Hughes common stock and 274,373,316 shares of Hughes Class B common stock issued and outstanding, all of which are owned by GM. The terms of the Hughes common stock and Hughes Class B common stock are identical in all respects (with the exception of provisions regarding stock-on-stock dividends) and, at the option of the holder, the Hughes common stock may be converted at any time into Hughes Class B common stock and vice versa. These transactions had no impact on the outstanding number of shares of GM Class H common stock or the Class H dividend base. In connection with the News Corp. transactions, GM Class H common stock will be exchanged for Hughes common stock, and the Hughes Class B common stock will be sold by GM to News Corp. Immediately after the completion of the News Corp. transactions, all of the shares of Hughes Class B common stock held by News Corp. will be converted into Hughes common stock. - 18 - 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, 2002 consolidated financial statements and notes thereto along with the MD&A included in General Motors Corporation's (the Corporation, General Motors, or GM) 2002 Annual Report on Form 10-K, and all other GM, Hughes Electronics Corporation (Hughes), and General Motors Acceptance Corporation (GMAC) filings with the U.S. 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 (FIO). 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, the elimination of intersegment transactions, certain non-segment specific revenues and expenditures, and certain corporate activities. GM's reportable operating segments within its FIO business consist of GMAC and Other Financing, which includes financing entities operating in the U.S., Canada, Brazil, and Mexico that are not associated with GMAC. The disaggregated financial results for GMA have been prepared using a management approach, which is consistent with the basis and manner in which GM management internally disaggregates financial information for the purpose of assisting in making internal operating decisions. In this regard, certain common expenses were allocated among regions less precisely than would be required for stand-alone financial information prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) and certain expenses (primarily certain U.S. taxes related to non-U.S. operations) were included in the ACO segment. The financial results represent the historical information used by management for internal decision making purposes; therefore, other data prepared to represent the way in which the business will operate in the future, or data prepared on a GAAP basis, may be materially different. - 19 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Vehicle Unit Sales (1) Three Months Ended March 31, ----------------------------------------------------- 2003 2002 ----------------------------------------------------- GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- -- -------- -------- -- -------- (units in thousands) GMNA United States Cars 1,824 454 24.9% 1,900 470 24.7% Trucks 1,999 564 28.2% 2,101 660 31.4% ----- --- ----- ----- Total United States 3,823 1,018 26.6% 4,001 1,130 28.2% Canada, Mexico, and Other 653 151 23.1% 676 178 26.3% --- --- ------ ----- Total GMNA 4,476 1,169 26.1% 4,677 1,308 28.0% GME 4,917 473 9.6% 5,069 465 9.2% GMLAAM 808 128 15.8% 905 139 15.3% GMAP 4,052 166 4.1% 3,605 159 4.4% ----- --- ------ ----- Total Worldwide 14,253 1,936 13.6% 14,256 2,071 14.5% ====== ===== ====== ===== Wholesale Sales (2) Three Months Ended March 31, ---------------------- 2003 2002 ---- ---- (units in thousands) GMNA Cars 598 612 Trucks 840 750 ----- ----- Total GMNA 1,438 1,362 ----- ----- GME Cars 400 395 Trucks 27 29 --- --- Total GME 427 424 --- --- GMLAAM Cars 96 111 Trucks 25 44 --- --- Total GMLAAM 121 155 --- --- GMAP Cars 87 47 Trucks 55 61 --- --- Total GMAP 142 108 --- --- Total Worldwide 2,128 2,049 ===== ===== (1) GM vehicle unit sales represent the transfer of vehicle ownership from GM's initial customer (e.g. a dealer) to a final customer (e.g. a retail consumer). These vehicles are manufactured by GM or manufactured by GM's affiliates and sold either under a GM nameplate or through a GM-owned distribution network. Consistent with industry practice, vehicle unit sales information employs estimates of sales in certain countries where public reporting is not legally required or otherwise available on a consistent basis. (2) Wholesale sales represent the transfer of vehicle ownership from GM to its initial customer (e.g. a dealer). These vehicles are manufactured by GM and certain affiliates and distributed through a GM-owned distribution network. GMA Financial Review GMA's net income was $546 million and net margin was 1.4% on net sales and revenues of $38.8 billion for the first quarter of 2003, compared with net income of $89 million and net margin of 0.2% on net sales and revenues of $37.3 billion for the prior year quarter. Included in the first quarter 2002 results was a $407 million restructuring charge for GME relating to the initiative implemented in the quarter to improve the competitiveness of GM's automotive operations in Europe. The remaining increase in net income and net sales and revenues from the prior year quarter was primarily due to an increase in wholesale sales and cost reductions. These favorable conditions were primarily offset by continued pricing pressures in North America and Europe as well as increased pension and other postretirement employee benefit costs (OPEB) expense in the U.S. - 20 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review (concluded) GMNA's net income was $548 million for the first quarter of 2003, compared with net income of $654 million for the prior year quarter. The decrease in GMNA's first quarter 2003 net income was primarily the result of unfavorable net price of (3.2%) quarter-over-quarter. Net price comprehends the percent increase/(decrease) in revenue recognized by GMNA related to changes in vehicle pricing, sales incentives offers, and any adjustments made to incentives on previously sold vehicles. Net price represents a change in the current period revenue versus the same period in the prior year for a similar vehicle. Increased pension and OPEB expenses and currency exchange losses also resulted in decreased net income from the prior year quarter. These unfavorable conditions were partially offset by increased wholesale sales volume, favorable product mix and material cost savings. GME's net loss was $65 million for the first quarter of 2003, compared with a net loss of $532 million for the prior year quarter. Included in the 2002 net loss was a $407 million restructuring charge relating to the initiative implemented in the quarter to improve the competitiveness of GM's automotive operations in Europe. The remaining improvement in the results in the first quarter of 2003 was primarily due to structural cost reductions at SAAB and improved wholesale sales volume. These favorable conditions were partially offset by a deterioration in net price and currency exchange losses. GMLAAM's net loss was $12 million for the first quarter of 2003, compared with a net loss of $40 million for the prior year quarter. The decrease in net loss for the first quarter of 2003 was primarily due to improvements in Argentina resulting from greater exchange stability and vehicle exports and cost control in Brazil. These favorable conditions were partially offset by increased losses in Venezuela related to lower industry volume, as a result of the adverse economic climate in Venezuela. GMAP's net income was $75 million for the first quarter of 2003, compared with net income of $7 million for the prior year quarter. The increase in net income for the first quarter of 2003 was primarily due to improved equity earnings for the Shanghai GM and Suzuki investments. Hughes Financial Review Total net sales and revenues increased to $2.2 billion for the first quarter of 2003, compared with $2.0 billion for the prior year quarter. Included in the prior year quarter's net sales and revenues was a $29 million loan guarantee charge relating to a Hughes Network Systems affiliate in India. The remaining increase in net sales and revenues for the first quarter of 2003 resulted primarily from increased revenues at DIRECTV(R) U.S. due to growth in subscriber base and higher monthly revenue per subscriber. Hughes' net loss was $54 million for the first quarter of 2003, compared with a net loss of $156 million for the prior year quarter. Included in the 2002 net loss were after-tax charges of $18 million for a loan guarantee relating to a Hughes Network Systems affiliate in India and $51 million for a contractual dispute associated with a General Electric Capital Corporation contract. Also included in the prior quarter net loss was an after-tax gain of $59 million for the favorable resolution of a lawsuit filed against the U.S. government by Hughes on the National Aeronautics and Space Administration's breach of contract to launch 10 satellites on the Space Shuttle. The remaining decrease in the net loss for the first quarter of 2003 was primarily due to an increase in operating profit at DIRECTV U.S. due to increased revenues discussed above, reduced expenses resulting from cost saving initiatives and the approximate $32 million loss recognized by DIRECTV Latin America in the first quarter of 2002 resulting from the devaluation of Argentina's currency. These favorable factors were partially offset by a lower income tax benefit for the first quarter of 2003 due primarily to lower pre-tax losses. On March 18, 2003, DIRECTV Latin America, LLC (DLA LLC) filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (Bankruptcy Court). The filing does not include any of its operating companies in Latin America and the Caribbean, which will continue regular operations. DLA LLC continues to manage its business as a debtor-in-possession. As a debtor-in-possession, management is authorized to operate the business, but may not engage in transactions outside the ordinary course of business without Bankruptcy Court approval. Subsequent to the filing of its Chapter 11 petition, DLA LLC obtained Bankruptcy Court orders that, among other things, authorized DLA LLC to pay certain pre-petition obligations related to employee wages and benefits and to take certain actions where such payments or actions will benefit its estate or preserve the going concern value of the business enterprise, thereby enhancing the prospects of reorganization. Sale of GM Defense Business Other ACO operations included a pre-tax gain of approximately $814 million, or approximately $505 million after-tax ($0.90 per diluted share of GM $1-2/3 par value common stock), recorded in net sales and revenues in GM's Consolidated Statements of Income related to the sale of GM's Defense operations (light armored vehicle business) to General Dynamics Corporation on March 1, 2003. The sale also generated net proceeds of approximately $1.1 billion in cash. - 21 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMAC Financial Review GMAC's net income was $699 million for the first quarter of 2003, compared with net income of $439 million for the prior year quarter. Income from financing operations totaled $302 million for the first quarter of 2003, compared with income of $255 million for the prior year quarter. The increase reflects a combination of higher asset levels and lower credit loss provisions, which more than offset the unfavorable effect of wider borrowing spreads and weakness in lease residuals. Income from insurance operations totaled $26 million for the first quarter of 2003, compared with income of $36 million for the prior year quarter. The overall reduction in earnings reflects a write-down of certain investment securities due to continued weakness in equity markets, partially offset by improved underwriting results. Income from mortgage operations totaled $371 million for the first quarter of 2003, compared with income of $148 million for the prior year quarter. The increased earnings from mortgage operations reflect increased production volumes in both the residential and commercial mortgage divisions. LIQUIDITY AND CAPITAL RESOURCES Financing Structure In the first quarter of 2003, GM and GMAC experienced adequate 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. Downgrades to GM's and GMAC's credit ratings in October 2002 have reduced GM's long-term debt rating by Standard & Poor's to BBB and A3 by Moody's (GMAC is rated A2 by Moody's). On April 9, 2003 Standard & Poor's lowered its debt rating outlook on GM and GMAC to negative from stable. On April 22, 2003 Dominion Bond Rating Service (DBRS) downgraded GM's and GMAC's senior debt rating from A to A (low) and at the same time, confirmed the commercial paper rating at R-1 (low) with a stable outlook. On April 28, 2003, Fitch affirmed GM's and GMAC's long term debt rating at A-. On May 2, 2003, Moody's placed GM's and GMAC's credit rating under review for a possible downgrade. Refer to the table below for a summary of GM's and GMAC's credit ratings. Despite these actions GM's and GMAC's access to the commercial paper and unsecured debt markets remains sufficient to meet the Corporation's capital needs. Moreover, these actions have not had a significant adverse effect on GM's and GMAC's ability to obtain bank credit or to sell asset-backed securities. Accordingly, GM and GMAC expect that they will continue to have adequate access to the capital markets sufficient to meet the Corporation's needs for financial flexibility. GM GMAC GM GMAC GM GMAC - -------------------------------------------------------------------------------- Rating Agency Senior Debt Commercial Paper Outlook - -------------------------------------------------------------------------------- DBRS A (low) A (low) R-1 (low) R-1 (low) Stable Stable Fitch A- A- F-2 F-2 Negative Negative Moody's A-3 A-2 Prime-2 Prime-1 Negative Negative S&P BBB BBB A-2 A-2 Negative Negative 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, an additional $3.2 billion in committed facilities with various maturities and uncommitted lines of credit of $2.7 billion. Similarly, GMAC has a $1.5 billion syndicated line of credit committed through June 2003, $7.4 billion committed through June 2006, $4.2 billion of bilateral committed lines with various maturities, and uncommitted lines of credit of $17.8 billion. In addition, New Center Asset Trust (NCAT) has $18.1 billion of liquidity facilities committed through June 2003. Mortgage Interest Networking Trust (MINT) has $3.8 billion of liquidity facilities committed through April 2003. Effective April 2003, MINT renewed its liquidity facility for $3.4 billion, committed through April 2004. NCAT and MINT are non-consolidated limited purpose statutory trusts established to issue asset-backed commercial paper. See Off-Balance Sheet Arrangements for more discussion. Automotive, Communications Services, and Other Operations At March 31, 2003, cash, marketable securities, and $3.4 billion of assets of the Voluntary Employees' Beneficiary Association (VEBA) trust invested in fixed-income securities totaled $23.6 billion, compared with cash, marketable securities, and $3.0 billion of assets of the VEBA trust invested in fixed-income securities totaling $18.5 billion at December 31, 2002 and $18.4 billion at March 31, 2002. The increase from December 31, 2002 was primarily due to earnings from automotive operations, sale of the GM Defense business, favorable working capital and approximately $2.0 billion of financing initiatives at Hughes. Total assets in the VEBA trust used to pre-fund part of GM's other postretirement benefits liability approximated $6.4 billion at March 31, 2003, compared with $5.8 billion at December 31, 2002 and $5.2 billion at March 31, 2002. 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. - 22 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive, Communications Services, and Other Operations (concluded) Long-term debt was $19.2 billion at March 31, 2003, compared with $16.7 billion at December 31, 2002 and $16.8 billion at March 31, 2002. The ratio of long-term debt to long-term debt and GM's net assets of Automotive, Communications Services, and Other Operations was 181.0% at March 31, 2003, compared with 267.0% at December 31, 2002 and 82.5% at March 31, 2002. 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 175.2% at March 31, 2003, compared with 234.3% at December 31, 2002 and 83.8% at March 31, 2002. Net liquidity, calculated as cash, marketable securities, and $3.4 billion of assets of the VEBA trust invested in fixed-income securities less the total of loans payable and long-term debt, was $3.6 billion at March 31, 2003, compared with, including $3.0 billion of assets of the VEBA, $298 million at December 31, 2002 and $49 million at March 31, 2002. In order to provide financial flexibility to GM and its suppliers, GM maintains a two-part financing program through GECC 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 could last from 10 days and 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- with a negative outlook (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 program would be unavailable to GM and its suppliers. The maximum amount permitted under the program is $2 billion. At March 31, 2003, the outstanding balance under the first part of the program amounted to approximately $1.4 billion, and there was no outstanding balance under the second part of the program. Financing and Insurance Operations At March 31, 2003, GMAC's consolidated assets totaled $235.5 billion, compared with $227.7 billion at December 31, 2002 and $189.4 billion at March 31, 2002. The increase from December 31, 2002 was primarily the result of an increase in earning assets such as finance receivables and loans. The continued use of GM sponsored special rate financing programs, combined with an increased use of securitizations structured as financing transactions (primarily in mortgage operations) resulted in an increase in consumer finance receivables and loans. Additional asset growth was the result of an increase in wholesale receivables outstanding due to higher dealer inventories. Consistent with the growth in assets, GMAC's total debt increased to $191.0 billion at March 31, 2003, compared with $183.1 billion at December 31, 2002 and $147.0 billion at March 31, 2002. GMAC's ratio of total debt to total stockholder's equity at March 31, 2003 and December 31, 2002 was 10.3:1, compared with 8.9:1 at March 31, 2002. GMAC's liquidity, as well as its ability to profit from ongoing activity, is in large part dependent upon its timely access to capital and the costs associated with raising funds in different segments of the capital markets. Liquidity is managed to preserve stable, reliable and cost effective sources of cash to meet all current and future obligations. GMAC's strategy in managing liquidity risk has been to develop diversified funding sources across a global investor base. A weak corporate bond market, combined with further negative rating agency actions, increased GMAC's unsecured borrowing spreads. As a result, GMAC continues to place greater emphasis on securitization and retail debt in its funding mix. Management expects to continue to use diverse funding sources to maintain its financial flexibility and expects that access to the capital markets will continue at levels sufficient to meet GMAC's funding needs. Investment in Fiat Auto Holdings At the April 23, 2003, Annual General Shareholders Meeting of Fiat Auto Holdings, B.V. (FAH), FAH adopted a Euro 5 billion recapitalization plan that provides shareholders the option to make pro-rata capital contributions over the next eighteen months. When the plan was adopted, Fiat S.p.A. (Fiat) held 80% of FAH and GM 20%. Fiat has stated that it intends to participate with a Euro 3 billion contribution. Currently, GM does not plan to participate. If and to the extent GM does not participate, GM's interest in FAH may be diluted to a lesser amount and Fiat's interest may increase. As discussed in the December 31, 2002 Annual Report on Form 10-K, the Master Agreement provides that, from January 24, 2004 to July 24, 2009, Fiat has the right to exercise a put option (the "Put") to require GM to purchase Fiat's - 23 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Investment in Fiat Auto Holdings (concluded) FAH shares at fair market value. Whether and when Fiat may seek to exercise the Put is unknown. It is uncertain as to whether the Put would ever be exercised due to the possibilities that it could be affected by subsequent agreements of the companies, it could become non-exercisable under other provisions of the Master Agreement, it could be rendered unenforceable by reason of actions Fiat may have taken, or Fiat may choose to not exercise the Put. If and when the Put is implemented, the fair market value of FAH shares would be determined by investment banks under procedures set forth in the Master Agreement. Until any such valuation is completed, the amount, if any, that GM might have to pay for Fiat's FAH shares is not quantifiable. If GM were to acquire Fiat's FAH shares and thus become the sole owner of Fiat Auto, GM would decide what, if any, additional capitalization would then be appropriate for Fiat Auto. Specifically, if Fiat Auto were to need additional funding, GM would have to decide whether or not to provide such funding and under what conditions to provide any funding. Unless FAH or Fiat Auto were subject to liquidation or insolvency, FAH's consolidated financial statements would be required for financial reporting purposes to be consolidated with those of GM. Any indebtedness, losses and capital needs of FAH and Fiat Auto after their acquisition by GM are not presently determinable, but they could have a material adverse effect on GM. While GM and Fiat have discussed potential alternatives to the Master Agreement, no changes to it have been agreed upon. 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 truly independent of, and not affiliated with, GM. These institutions maintain substantial equity investments in their SPEs. No officers, directors or employees of GM, GMAC, or their affiliates hold any direct or indirect equity interests in such SPEs. Assets in SPEs were as follows (dollars in millions): Automotive, Communications Services, and March 31, Dec. 31, March 31, Other Operations 2003 2002 2002 - ---------------------------------------- ---------------------------------- Assets leased under operating leases $2,685 $2,904 $2,678 Trade receivables sold 407 439 453 ------ ------ ------ Total $3,092 $3,343 $3,131 ====== ====== ====== Financing and Insurance Operations - ---------------------------------- Receivables sold or securitized: - Mortgage loans $108,854 $112,128 $110,623 - Retail finance receivables 14,855 16,164 12,732 - Wholesale finance receivables 17,520 17,415 16,244 -------- -------- -------- Total $141,229 $145,707 $139,599 ======== ======== ======== In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46), which requires the consolidation of certain entities considered to be variable interest entities (VIEs). An entity is considered to be a VIE when it has equity investors who lack the characteristics of having a controlling financial interest, or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it is determined that the investor will absorb a majority of the VIE's expected losses or residual returns if they occur. FIN 46 provides certain exceptions to these rules, including qualifying special purpose - 24 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Off-Balance Sheet Arrangements (concluded) entities (SPEs) subject to the requirements of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." VIEs created after January 31, 2003 must be consolidated immediately, while VIEs that existed prior to February 1, 2003 must be consolidated as of July 1, 2003. GM may be required to consolidate certain VIEs (previously collectively referred to as SPEs) with which it does business. Management is currently reviewing existing VIEs that may require consolidation. With respect to GM's ACO business, it is reasonably possible that certain VIEs with assets totaling approximately $1.1 billion, established exclusively to facilitate GM's ACO leasing activities, may require consolidation. Should GM default on all of its obligations with respect to its involvement in these entities, GM's maximum exposure to loss would be approximately $1.1 billion ($680 million after-tax). With respect to the FIO business, VIE structures are used to facilitate various activities of GMAC, including securitization of loans, mortgage funding, and other investing activities. Based on management's preliminary assessment, it is reasonably possible that VIEs with assets totaling approximately $14.0 billion may require consolidation. Management is considering revising involvement in these entities, which could have an impact on the consolidation analysis under FIN 46. In the absence of any such revisions, the consolidation of such VIEs would have the effect of increasing both assets and liabilities in an amount equal to the assets of the VIEs. GM's exposure to loss related to these entities is approximately $4.4 billion ($2.7 billion after-tax) which primarily relates to retained interests in these facilities. 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 $11.98 at March 31, 2003, compared with $9.06 at December 31, 2002 and $24.58 at March 31, 2002. Book value per share of GM Class H common stock was $2.40 at March 31, 2003, compared with $1.81 at December 31, 2002 and $4.92 at March 31, 2002. DIVIDENDS Dividends may be paid on GM's 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 February 4, 2003, the GM Board declared a quarterly cash dividend of $0.50 per share on GM $1-2/3 par value common stock, paid March 10, 2003, to holders of record on February 14, 2003. With respect to GM Class H common stock, the GM Board has 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 businesses. EUROPEAN MATTERS During 2001, GM Europe announced its plan 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 and were recorded in the GME region 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 write-downs; 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 per diluted 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). - 25 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONTRIBUTION OF GM CLASS H COMMON STOCK On March 12, 2003, GM contributed 149.2 million shares of GM Class H common stock valued at approximately $1.24 billion to certain of its U.S. employee benefit plans. The contribution increased the amount of GM Class H common stock held by GM's employee benefit plans to approximately 331 million shares and reduced GM's retained economic interest in Hughes to approximately 19.9% from 30.7%. HUGHES TRANSACTIONS On April 9, 2003, GM, Hughes and The News Corporation Limited (News Corp.) announced the signing of definitive agreements that provide for, among other things, the split-off of Hughes from GM and the simultaneous sale of GM's approximately 19.9% economic interest in Hughes to News Corp. for $14 per share, or approximately $3.8 billion. GM would receive at least $3.1 billion in cash with the remainder payable in News Corp. preferred American Depositary Shares ("News Corp. ADSs") and/or cash at News Corp.'s election. News Corp. would acquire an additional 14.1% stake in Hughes from the holders of GM Class H common stock through a mandatory exchange of a portion of their Hughes common stock received in the split-off, which would provide News Corp. with a total of 34% of the then outstanding capital stock of Hughes. In addition, GM would receive a cash dividend from Hughes of $275 million in connection with the transactions. This dividend is expected to be paid by Hughes through available cash balances. Under the terms of the proposed transactions, holders of GM Class H common stock would first exchange their shares for Hughes common stock on a share-for-share basis in the split-off, followed immediately by an exchange of approximately 17.6% of the Hughes common stock they receive in the split-off for approximately $14 per share in News Corp. ADSs and/or cash. The number of News Corp. ADSs payable to GM and Hughes common stockholders, based on a fixed-price of $14 per Hughes share, will be adjusted within a collar range of 20% above or below the News Corp. ADS price of $22.40. This mandatory exchange of about 17.6% of the shares of Hughes common stock for News Corp. ADSs and/or cash would be taxable to the Hughes common stockholders at the time. 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. If the transactions are completed, Rupert Murdoch, chairman and chief executive officer of News Corp., would become chairman of Hughes, and Chase Carey, who is currently serving as an advisor to News Corp., would become president and chief executive officer of Hughes. Eddy Hartenstein, Hughes senior executive vice president, would be named vice chairman of Hughes. Hughes would have 11 directors, the majority of which would be independent directors. The transactions are subject to a number of conditions, including, among other things, obtaining U.S. antitrust and Federal Communications Commission approvals, approval by a majority of each class of GM stockholders - GM $1-2/3 and GM Class H - voting both as separate classes and together as a single class and a favorable ruling from the Internal Revenue Service that the split-off of Hughes from GM would be tax-free to GM and its stockholders for U.S. federal income tax purposes. No assurances can be given that the approvals will be obtained or the transactions will be completed. 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 transactions. INVESTMENT IN GM DAEWOO As of December 31, 2002, GM had invested $251 million in GM Daewoo Auto & Technology Company (GM Daewoo) common stock. The original transaction agreements contemplated the Daewoo Creditor Group receiving approximately 82 million shares (of the total 250 million of authorized shares for this transaction) for a projected 33% equity participation in GM Daewoo, with the remaining shares allocated to GM, Suzuki Motor Corporation and Shanghai Automotive Industry Corporation (SAIC) for projected ownership of 42.1%, 14.9% and 10% in GM Daewoo, respectively. The Korea Development Bank (KDB), which was the sole member of the Daewoo Creditor Group at closing, subscribed for only 29.9% of the total common shares. Through June 30, 2003, GM and the other shareholders have the option to subscribe for the unsubscribed shares. Under the assumption that GM and the other shareholders do not subscribe for the remaining authorized shares, GM expects the capital structure to be allocated based on GM, Suzuki, SAIC and KDB owning 44.6%, 14.9%, 10.6% and 29.9%, respectively. GM will continue to account for its investment in GM Daewoo using the equity method. - 26 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES EMPLOYMENT AND PAYROLLS Worldwide employment at March 31, (in thousands) 2003 2002 ---- ---- GMNA 194 201 GME 66 71 GMLAAM 23 24 GMAP 12 11 Hughes 11 12 GMAC 32 30 Other 7 10 --- --- Total employees 345 359 === === Three Months Ended March 31 ------------------ 2003 2002 ---- ---- Worldwide payrolls - (in billions) $5.4 $5.0 === === CRITICAL ACCOUNTING ESTIMATES The consolidated financial statements of GM are prepared in conformity with GAAP, which requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. GM has identified a number of critical accounting estimates. An accounting estimate is considered critical if: the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made; different estimates reasonably could have been used; or if changes in the estimate that would have a material effect on the Corporation's financial condition or results of operations are reasonably likely to occur from period to period. GM's critical accounting estimates relate to the following areas: sales allowances, policy and warranty, impairment of long-lived assets, pension and OPEB costs, postemployment benefits, allowance for credit losses, investments in operating leases, mortgage servicing rights, and accounting for derivatives and other contracts at fair value. These critical accounting estimates are discussed in the Corporation's 2002 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission. Management believes that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The Corporation has discussed the development, selection and disclosures of these critical accounting estimates with the Audit Committee of GM's Board of Directors, and the Audit Committee has reviewed the Corporation's disclosures relating to these estimates. 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 first quarter of 2003. * * * * * * * ITEM 4. Controls and Procedures The Corporation maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. Within 90 days prior to the date of this report, the Corporation's Chief Executive Officer and Chief Financial Officer evaluated, with the participation of GM's management, the effectiveness of the Corporation's disclosure controls and procedures. Based on the evaluation, which disclosed no significant deficiencies or material weaknesses, the Corporation's Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective. There were no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation. * * * * * * * - 27 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES PART II ITEM 1. LEGAL PROCEEDINGS (a) Material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Corporation became party during the quarter ended March 31, 2003, or subsequent thereto, but before the filing of this report are summarized below: Environmental Matters In March 2003, the Michigan Department of Environmental Quality (MDEQ) asserted a claim for penalties in excess of $100,000 relating to various alleged violations of air discharge regulations at the GM-Powertrain Saginaw Metal Castings Plant. Officials of GM and the MDEQ continue to discuss resolution of these matters. * * * On January 20, 2003, the Georgia Department of Natural Resources (GDNR) delivered a proposed consent order to GM with respect to alleged violations of hazardous waste regulations at GM's plant in Doraville, Georgia seeking fines in excess of $100,000. Officials of GM and the GDNR continue to discuss resolution of this matter. * * * Other Matters On April 11 and 14, 2003, two purported class actions (Young v. Pearce, et al.; Silverstein v. Pearce, et al.) were filed in Delaware Chancery Court on behalf of owners of GM Class H shares against Hughes Electronics Corporation, General Motors Corporation, News Corporation and the Hughes directors. On April 11 and 15, 2003, two purported class actions (Matcovsky, et al. v. Hughes Electronics Corporation, et al.; Brody v. Hughes Electronics Corporation, et al.) were filed in Superior Court in Los Angeles, California, against Hughes, GM and the Hughes and GM directors. The lawsuits allege that the proposed transactions involving News Corp.'s acquisition of a 34% interest in Hughes provides benefits to GM not available to all GM Class H shareholders, in violation of fiduciary duties. GM, Hughes and the director defendants believe these actions are without merit and intend to vigorously defend the lawsuits. * * * In addition to the above cases, two other purported stockholder class actions which name only General Motors and the GM directors have been brought in Delaware Chancery Court challenging the recently announced agreements with News Corp., Wyser-Pratte Management Company v. General Motors Corporation, et al., which was filed April 18, 2003, and Robert LaMarche v. General Motors Corporation, et al., which was filed April 28, 2003. The cases allege that GM and the GM directors performed ultra vires acts and that the GM directors breached their fiduciary duties by approving a transaction that is more favorable to the holders of GM $1-2/3 par value common stock than the holders of GM Class H Common Stock. They claim that the holders of GM Class H Common Stock will be treated unfairly because (i) GM will receive mostly cash for its shares while the holders of GM Class H Common Stock will receive News Corp. ADSs that may fluctuate in value, (ii) GM will be receiving a $275 million payment from Hughes, (iii) a substantial number of shares of GM Class H Common Stock were contributed to various GM employee benefit plans prior to announcement of the deal to improve the prospects of shareholder approval, and (iv) the transaction was announced just prior to the announcement of improved financial results at Hughes and PanAmSat to make it appear that holders of GM Class H Common Stock would receive a premium that would exceed the 20 percent recapitalization premium provided for in the GM Restated Certificate of Incorporation, as amended. Plaintiffs seek to enjoin the shareholder vote on the sale of GM's interest in Hughes, enjoin the transactions from proceeding and unspecified damages. GM and the director defendants believe these actions are without merit and intend to vigorously defend the lawsuits. -28- GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit Page Number Exhibit Name Number - ------ ------------ ------ (99) Hughes Electronics Corporation Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations 32 (99.1) Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 79 (99.2) Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 80 (b) Reports on Form 8-K Fifteen reports on Form 8-K, were filed January 3, 2003, January 9, 2003*(2), January 10, 2003**, January 16, 2003, February 3, 2003, February 13, 2003*, February 25, 2003, February 27, 2003*, February 28, 2003, March 3, 2003 (2), March 7, 2003, March 19, 2003, and March 20, 2003 during the quarter ended March 31, 2003 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 U.S. 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. ** Includes a Form 8-K Amendment by subsequent filing on the following day. * * * * * * 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: May 8, 2003 By: /s/PETER R. BIBLE. --- ------------------------- (Peter R. Bible, Chief Accounting Officer) -29- CERTIFICATION I, G. Richard Wagoner, Jr., Chairman and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of General Motors Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 8, 2003 /s/ G. RICHARD WAGONER, JR. --------------------------- G. Richard Wagoner, Jr. Chairman and Chief Executive Officer - 30 - CERTIFICATION I, John M. Devine, Vice Chairman and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of General Motors Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 8, 2003 /s/ JOHN M. DEVINE ------------------------- John M. Devine Vice Chairman and Chief Financial Officer - 31 - EX-99 3 exhibit99hughes.txt HUGHES ELECTRONICS CORP. FIRST QUARTER 2003 INFO. EXHIBIT 99 HUGHES ELECTRONICS CORPORATION FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED STATEMENTS OF OPERATIONS AND AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS) (Unaudited)
Three Months Ended March 31, -------------------- 2003 2002 -------- -------- (Dollars in Millions) Revenues Direct broadcast, leasing and other services.............................. $2,081.8 $1,844.6 Product sales............................................................. 145.5 180.2 -------- -------- Total Revenues........................................................ 2,227.3 2,024.8 -------- -------- Operating Costs and Expenses, Exclusive of Depreciation and Amortization Expenses Shown Separately Below Broadcast programming and other costs..................................... 1,061.7 905.7 Cost of products sold..................................................... 143.0 173.0 Selling, general and administrative expenses.............................. 717.6 781.6 Depreciation and amortization............................................. 263.1 252.2 -------- -------- Total Operating Costs and Expenses.................................... 2,185.4 2,112.5 -------- -------- Operating Profit (Loss)...................................................... 41.9 (87.7) Interest income.............................................................. 6.2 4.3 Interest expense............................................................. (80.5) (76.3) Reorganization expense....................................................... (6.9) -- Other, net................................................................... (28.1) (41.6) -------- -------- Loss From Continuing Operations Before Income Taxes, Minority Interests and Cumulative Effect of Accounting Change..................................... (67.4) (201.3) Income tax benefit........................................................... 24.2 76.5 Minority interests in net earnings of subsidiaries........................... (7.4) (6.7) -------- -------- Loss from continuing operations before cumulative effect of accounting change (50.6) (131.5) Loss from discontinued operations, net of taxes.............................. (0.3) (24.9) -------- -------- Loss before cumulative effect of accounting change........................... (50.9) (156.4) Cumulative effect of accounting change, net of taxes......................... -- (681.3) -------- -------- Net Loss..................................................................... (50.9) (837.7) Preferred stock dividends.................................................... -- (24.1) -------- -------- Loss Used for Computation of Available Separate Consolidated Net Income (Loss)..................................................................... $ (50.9) $ (861.8) ======== ======== Available Separate Consolidated Net Income (Loss) Average number of shares of General Motors Class H Common Stock outstanding (in millions) (Numerator)...................................... 989.8 877.6 Average Class H dividend base (in millions) (Denominator).................... 1,381.9 1,301.2 Available Separate Consolidated Net Income (Loss)............................ $ (36.5) $ (581.2) ======== ========
- -------- Reference should be made to the Notes to the Consolidated Financial Statements. - 32 - HUGHES ELECTRONICS CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 2003 2002 --------- ------------ (Dollars in Millions) ASSETS Current Assets Cash and cash equivalents............................................. $ 2,962.2 $ 1,128.6 Accounts and notes receivable, net of allowances of $111.4 and $102.4. 1,126.0 1,133.9 Contracts in process.................................................. 123.8 165.9 Inventories........................................................... 290.1 230.3 Deferred income taxes................................................. 84.6 97.7 Prepaid expenses and other............................................ 889.4 900.0 --------- --------- Total Current Assets.............................................. 5,476.1 3,656.4 Satellites, net.......................................................... 4,912.2 4,922.6 Property, net............................................................ 1,966.4 2,017.4 Goodwill, net............................................................ 5,775.2 5,775.2 Intangible Assets, net................................................... 626.2 644.7 Net Investment in Sales-type Leases...................................... 155.8 161.9 Investments and Other Assets............................................. 762.3 706.9 --------- --------- Total Assets...................................................... $19,674.2 $17,885.1 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts payable...................................................... $ 1,150.2 $ 1,039.0 Deferred revenues..................................................... 173.2 166.4 Short-term borrowings and current portion of long-term debt........... 45.1 727.8 Accrued liabilities and other......................................... 1,185.6 1,269.9 --------- --------- Total Current Liabilities......................................... 2,554.1 3,203.1 Long-Term Debt........................................................... 4,969.7 2,390.0 Other Liabilities and Deferred Credits................................... 1,132.3 1,178.4 Deferred Income Taxes.................................................... 530.2 581.2 Commitments and Contingencies Minority Interests....................................................... 563.7 555.3 Stockholder's Equity Capital stock and additional paid-in capital.......................... 10,152.4 10,151.8 Convertible preferred stock, Series B................................. 914.1 914.1 Retained earnings (deficit)........................................... (1,078.0) (1,027.1) --------- --------- Subtotal Stockholder's Equity......................................... 9,988.5 10,038.8 --------- --------- Accumulated Other Comprehensive Loss Minimum pension liability adjustment................................ (32.3) (32.3) Accumulated unrealized losses on securities and derivatives......... (4.7) (3.3) Accumulated foreign currency translation adjustments................ (27.3) (26.1) --------- --------- Accumulated other comprehensive loss.................................. (64.3) (61.7) --------- --------- Total Stockholder's Equity........................................ 9,924.2 9,977.1 --------- --------- Total Liabilities and Stockholder's Equity........................ $19,674.2 $17,885.1 ========= =========
- -------- Reference should be made to the Notes to the Consolidated Financial Statements. - 33 - HUGHES ELECTRONICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, -------------------- 2003 2002 -------- -------- (Dollars in Millions) Cash Flows From Operating Activities Net Cash Provided by Operating Activities..... $ 294.3 $ 95.5 -------- -------- Cash Flows From Investing Activities Investment in companies........................... (10.8) -- Purchase of short-term investments................ (46.5) -- Expenditures for property......................... (74.1) (140.6) Expenditures for satellites....................... (113.4) (205.3) Proceeds from sale of investments................. 3.8 -- Proceeds from insurance claims.................... -- 173.7 -------- -------- Net Cash Used in Investing Activities......... (241.0) (172.2) -------- -------- Cash Flows From Financing Activities Net decrease in short-term borrowings............. (509.9) (877.5) Long-term debt borrowings......................... 2,625.0 1,800.0 Repayment of long-term debt....................... (218.1) (182.4) Debt issuance costs............................... (61.8) (54.6) Stock options exercised........................... 1.1 0.7 Preferred stock dividends paid to General Motors.. -- (23.4) Payment of Raytheon settlement.................... -- (134.2) -------- -------- Net Cash Provided by Financing Activities..... 1,836.3 528.6 -------- -------- Net cash provided by continuing operations........... 1,889.6 451.9 Net cash used in discontinued operations............. (56.0) (38.2) -------- -------- Net increase in cash and cash equivalents............ 1,833.6 413.7 Cash and cash equivalents at beginning of the period. 1,128.6 700.1 -------- -------- Cash and cash equivalents at end of the period....... $2,962.2 $1,113.8 ======== ======== Supplemental Cash Flow Information Interest paid..................................... $ 94.3 $ 69.7 Income taxes paid (refunded)...................... 1.1 (4.6)
- -------- Reference should be made to the Notes to the Consolidated Financial Statements. - 34 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation Hughes Electronics Corporation ("Hughes") is a wholly-owned subsidiary of General Motors Corporation ("GM"). 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 Hughes' Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission ("SEC") on March 11, 2003 and all other Hughes filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report. Beginning in the third quarter of 2002, Hughes changed the classification of certain subscriber acquisition costs. The costs of free programming and the costs of installation and hardware subsidies for subscribers added through DIRECTV's direct sales program are now included as part of "Broadcast programming and other costs" in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) rather than in "Selling, general and administrative expenses" where they had previously been reported. Prior period amounts have been reclassified to conform to the current period presentation. Beginning in the first quarter of 2003, Hughes no longer allocates general corporate expenses to its subsidiaries. Prior period segment information has been reclassified to conform to the current period presentation. Note 2. Accounting Changes and New Accounting Standards Stock-Based Compensation Beginning in the first quarter of 2003, Hughes adopted the fair value based method of accounting for stock-based employee compensation of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" and the disclosure requirements of SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS No. 123." Hughes elected to follow the prospective method of adoption, which will result in the recognition of fair value based compensation cost in the consolidated statements of operations for stock options and other stock-based awards granted to employees on or after January 1, 2003. Stock options and other stock-based awards granted prior to January 1, 2003 continue to be accounted for under the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in the consolidated statements of operations. - 35 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) The following table presents the effect on earnings of recognizing compensation cost as if the fair value based method had been applied to all outstanding and unvested stock options and other stock-based awards:
Three Months Ended March 31, -------------------- 2003 2002 ------ ------- (Dollars in Millions) Loss used for computation of available separate consolidated net income (loss), as reported........................................................................ $(50.9) $(861.8) Less: Stock compensation cost, net of taxes, included above....................... 0.8 1.0 Add: Assumed stock compensation costs, net of taxes, under the fair value based method.......................................................................... (32.9) (58.1) ------ ------- Pro forma loss used for computation of available separate consolidated net income (loss)............................................................... $(83.0) $(918.9) ====== =======
The pro forma amounts for compensation cost are not necessarily indicative of the amounts that would be reported in future periods. Variable Interest Entities On February 1, 2003, Hughes adopted Financial Accounting Standards Board ("FASB") Interpretation No. 46, "Consolidation of Variable Interest Entities--an interpretation of ARB No. 51" ("FIN 46"). FIN 46 requires the consolidation of a variable interest entity ("VIE") where an equity investor achieves a controlling financial interest through arrangements other than voting interests, and it is determined that the investor will absorb a majority of the expected losses and/or receive the majority of residual returns of the VIE. An entity is deemed a VIE, if by intention, the equity investment at risk by the investor is insufficient to permit the VIE to finance its activities without additional subordinated financial support, and under certain other circumstances. The determination as to whether an investment is an investment in a VIE is based on the circumstances on the date of investment or when certain events occur that would indicate a potential change in a previous determination. For investments in VIEs made before February 1, 2003, Hughes will follow the provisions of FIN 46, as required, beginning on July 1, 2003. The application of this standard on July 1, 2003 could result in the consolidation of certain affiliates which were previously accounted for under the equity method of accounting. Hughes has identified the partially-owned local operating companies ("LOC's") providing DIRECTV(R) programming services in Venezuela and Puerto Rico, of which Hughes owns 19.5% and 40.0%, respectively, as potential VIEs. Hughes currently accounts for these investments under the equity method of accounting and reflects approximately 75.0% of their net income or loss in Hughes' consolidated statements of operations due to the accumulation of net losses in excess of the other investors' investments. If consolidation of these LOC's occur as described above, such application of FIN 46 would be reflected as a cumulative effect of accounting change in the consolidated statements of operations. Hughes has not yet determined the impact this standard will have on its consolidated results of operations or financial position, if any. - 36 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) Accounting for Costs Associated with Exit or Disposal Activities Hughes adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," on January 1, 2003. SFAS No. 146 generally 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 ("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)." The adoption of this standard did not have a significant impact on Hughes' consolidated results of operations or financial position. Goodwill and Other Intangible Assets Hughes adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. SFAS No. 142 required 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 value, including goodwill. If the carrying value exceeded the fair value, step two of the transitional impairment test was required to measure the amount of the impairment loss, if any. SFAS No. 142 also required 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 the first quarter of 2002, Hughes completed the required transitional impairment test for intangible assets with indefinite lives, which consisted of Federal Communications Commission 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 impairment test to determine whether a potential impairment existed for goodwill recorded at January 1, 2002. Primarily based on the present value of expected future cash flows, it was determined that the carrying values of the DIRECTV Latin America businesses ("DLA") and DIRECTV Broadband, Inc. ("DIRECTV Broadband") exceeded their fair values, therefore requiring step two of the impairment test be performed. Hughes completed step two of the impairment test for DLA and DIRECTV Broadband in the fourth quarter of 2002 as required by SFAS No. 142. Step two of the transitional test required the comparison of the fair value of the reporting unit goodwill with the carrying value of that goodwill. As a result of completing step two, Hughes determined that the carrying value of reporting unit goodwill exceeded the fair value of that goodwill and that $631.8 million and $107.9 million representing all of the goodwill recorded at DLA and DIRECTV Broadband, respectively, was impaired. Hughes also recorded a $16.0 million charge representing its share of the goodwill impairment of an equity method investee. Therefore, Hughes recorded a cumulative effect of accounting change, net of taxes, of $681.3 million ($755.7 million pre-tax) as of January 1, 2002 in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss). Other Hughes adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections," on January 1, 2003. SFAS No. 145 eliminates - 37 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 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. The adoption of this standard had no impact on Hughes' consolidated results of operations or financial position. New Accounting Standard In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the related revenues should be measured and allocated to the separate units of accounting. EITF Issue No. 00-21 will apply to revenue arrangements entered into after June 30, 2003; however, upon adoption, the EITF allows the guidance to be applied on a retroactive basis, with the change, if any, reported as a cumulative effect of accounting change in the consolidated statements of operations. Hughes has not yet determined the impact this new EITF issue will have on its consolidated results of operations or financial position, if any. Note 3. Inventories Major Classes of Inventories
March 31, December 31, 2003 2002 --------- ------------ (Dollars in Millions) Productive material and supplies.......... $ 32.8 $ 34.7 Work in process........................... 171.5 111.2 Finished goods............................ 120.4 118.9 Provision for excess or obsolete inventory (34.6) (34.5) ------ ------ Total.................................. $290.1 $230.3 ====== ======
Note 4. Intangible Assets Hughes had $626.2 million and $644.7 million of intangible assets at March 31, 2003 and December 31, 2002, respectively, net of accumulated amortization of $213.6 million and $195.1 million at March 31, 2003 and December 31, 2002, respectively. Intangible assets at March 31, 2003, primarily consisted of $432.3 million, net of $30.6 million of accumulated amortization, of Orbital Slots which have indefinite useful lives, and $172.8 million, net of $183.0 million of accumulated amortization, of dealer network and subscriber base intangible assets which are being amortized over their estimated remaining useful lives of 2 and 12 years, respectively. Amortization expense for dealer network and subscriber base intangible assets at the Direct-To-Home Broadcast segment was $2.3 million and $16.2 million, respectively, for the three months ended March 31, 2003. Amortization expense in total was $1.2 million for the three months ended March 31, 2002. Estimated amortization expense in each of the next five years is as follows: $55.5 million in the remainder of 2003; $31.1 million in 2004; $9.2 million in 2005; $9.2 million in 2006; $9.2 million in 2007; and $58.6 million thereafter. The increase in amortization expense in the first quarter of 2003 compared to the first quarter of 2002 is due to the reinstatement of subscriber base and dealer network intangible asset amortization as a result of the issuance of EITF Issue No. 02-17, "Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination" in the fourth quarter of 2002. Prior to the issuance of EITF No. 02-17 in October 2002, Hughes had reclassified its dealer network and subscriber based intangible assets to goodwill as part of the 2002 implementation of SFAS No. 142 and therefore no amortization expense was recorded in the first three quarters of 2002 for these assets. - 38 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) Note 5. Short-Term Borrowings and Long-Term Debt Short-Term Borrowings and Current Portion of Long-Term Debt
Interest Rates at March 31, December 31, March 31, 2003 2003 2002 ----------------- --------- ------------ (Dollars in Millions) Short-term borrowings................................. 4.31%--16.00% $17.9 $ 21.5 Current portion of long-term debt..................... 4.31%-- 4.83% 27.2 706.3 ----- ------ Total short-term borrowings and current portion of long-term debt................................... $45.1 $727.8 ===== ======
Long-Term Debt
Interest Rates at March 31, December 31, March 31, 2003 2003 2002 ----------------- --------- ------------ (Dollars in Millions) Notes payable........... 6.13%--8.50% $2,750.0 $1,550.0 Credit facilities....... 4.31%--5.07% 2,225.0 1,506.3 Other debt.............. 5.03%--12.37% 21.9 40.0 -------- -------- Total debt........... 4,996.9 3,096.3 Less current portion. 27.2 706.3 -------- -------- Total long-term debt. $4,969.7 $2,390.0 ======== ========
Notes Payable and Credit Facilities Notes Payable. On February 28, 2003, DIRECTV Holdings LLC ("DIRECTV"), a wholly-owned subsidiary of Hughes, issued $1.4 billion in senior notes due in 2013 in a Rule 144A private placement transaction. The ten-year senior notes are unsecured indebtedness guaranteed by all of DIRECTV's domestic subsidiaries and bear interest at 8.375%. Principal on the notes is payable upon maturity, while interest is payable semi-annually beginning September 15, 2003. In February 2002, PanAmSat Corporation ("PanAmSat"), an approximately 81% owned subsidiary of Hughes, completed an $800.0 million Rule 144A private placement notes offering, which were exchanged for registered notes in November 2002. These unsecured notes bear interest at an annual rate of 8.5%, payable semi-annually and mature in 2012. PanAmSat issued five, seven, ten and thirty-year fixed rate notes totaling $750.0 million in January 1998. The $200.0 million five-year notes were repaid in January 2003. The outstanding principal balances and interest rates for the seven, ten, and thirty-year notes as of March 31, 2003 were $275.0 million at 6.125%, $150.0 million at 6.375% and $125.0 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 with the new bank facility by substantially all of PanAmSat's assets, including its satellites. Credit Facilities. On March 6, 2003, DIRECTV entered into a $1,675.0 million senior secured credit facility. The senior secured credit facility is comprised of a $375.0 million Term Loan A, - 39 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) of which $175.0 million was outstanding at March 31, 2003, a $1,050.0 million Term Loan B, which was fully drawn as of March 31, 2003, and a $250.0 million revolving credit facility, which was undrawn at March 31, 2003. The senior secured credit facility is secured by substantially all of DIRECTV's assets and guaranteed by all of DIRECTV's domestic subsidiaries. All borrowings under the senior secured credit facility initially bear interest at a rate per annum equal to the London Interbank Offered Rate ("LIBOR") plus 3.50% (4.83% at March 31, 2003). The revolving credit facility and the Term Loan A each have terms of five years and the Term Loan B matures in 2010. Principal payments under the Term Loan A are due in varying amounts from 2004 to 2008. Principal payments under the Term Loan B are due primarily in 2008 to 2010. DIRECTV distributed to Hughes $2.56 billion of net proceeds from the senior secured credit facility and the sale of senior notes, described above. That distribution enabled Hughes to repay the $506.3 million outstanding principal balance plus accrued interest under a prior credit agreement, which was then terminated. The $200.0 million undrawn portion of the Term Loan A is expected to be drawn by DIRECTV by December 2003, and those proceeds may be distributed to Hughes as well. The revolving portion of the senior secured credit facility is available to DIRECTV to fund working capital and other requirements. In February 2002, PanAmSat entered into a bank facility in the amount of $1,250.0 million. The bank facility is comprised of a $250.0 million revolving credit facility, which was undrawn as of March 31, 2003, a $300.0 million Tranche A Term Loan and a $700.0 million Tranche B Term Loan, both of which were fully drawn as of March 31, 2003. This bank facility replaced a previously existing $500.0 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 assets, including its satellites. PanAmSat repaid a $1,725.0 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. PanAmSat's bank facility requires that PanAmSat obtain the consent of the lenders prior to the consummation of The News Corporation Limited ("News Corp.") transactions. PanAmSat has initiated the process for obtaining the consent, however, no assurances can be given that the consent will be obtained. Failure to obtain the consent would constitute an event of default under the facility. Other. $39.8 million in other short-term and long-term debt, related primarily to DLA and Hughes Network Systems, Inc.'s international subsidiaries, was outstanding at March 31, 2003, bearing fixed and floating rates of interest of 4.31% to 16.00%. Principal on these borrowings is due in varying amounts through 2007. DIRECTV and PanAmSat are required to maintain certain financial covenants and are also subject to restrictive covenants under their borrowings. These covenants limit DIRECTV's 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. If DIRECTV or PanAmSat fails to comply with their respective covenants, all or a portion of their borrowings could become immediately payable. At March 31, 2003, DIRECTV and PanAmSat were in compliance with all such covenants. - 40 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) As of March 31, 2003, restricted cash of $45.7 million was included as part of "Prepaid expenses and other" on the Consolidated Balance Sheets. This cash was deposited to secure certain letters of credit and obligations of Hughes' majority-owned foreign subsidiaries. Restrictions on the cash will be removed as the letters of credit expire and the foreign subsidiaries' obligations are satisfied or terminated. Hughes' notes payable and credit facilities mature as follows: $17.9 million in the remainder of 2003; $94.9 million in 2004; $407.7 million in 2005; $138.6 million in 2006; $184.2 million in 2007; and $4,171.5 million thereafter. Note 6. Comprehensive Income (Loss) Hughes' total comprehensive loss was as follows:
Three Months Ended March 31, ----------------- 2003 2002 ------ ------- (Dollars in Millions) Net loss.................................................................... $(50.9) $(837.7) Other comprehensive loss: Foreign currency translation adjustments................................... (1.2) (1.4) Unrealized losses on securities and derivatives: Unrealized holding losses................................................ (1.1) (16.2) Less: reclassification adjustment for gains recognized during the period. (0.3) -- ------ ------- Other comprehensive loss................................................. (2.6) (17.6) ------ ------- Total comprehensive loss............................................... $(53.5) $(855.3) ====== =======
Note 7. Available Separate Consolidated Net Income (Loss) GM Class H common stock is a "tracking stock" of GM designed to provide holders with financial returns based on the financial performance of Hughes. Holders of GM Class H common stock have no direct rights in the equity or assets of Hughes, but rather have rights in the equity and assets of GM (which includes 100% of the stock of Hughes). Amounts available for the payment of dividends on GM Class H common stock are based on the Available Separate Consolidated Net Income (Loss) ("ASCNI") of Hughes. The ASCNI of Hughes is determined quarterly and is equal to the net income (loss) of Hughes, excluding the effects of the GM purchase accounting adjustment arising from GM's acquisition of Hughes and reduced by the effects of preferred stock dividends paid and/or payable to GM (earnings (loss) used for computation of ASCNI), - 41 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 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 of Directors ("GM Board") under the GM Restated Certificate of Incorporation, as amended, 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 the 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 employees and the exercise of stock options by employees of Hughes increase 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. On March 12, 2003, GM contributed 149.2 million shares of GM Class H common stock to certain of its U.S. employee benefit plans, increasing the number of shares of GM Class H common stock outstanding. The contribution increased the amount of GM Class H common stock held by GM's employee benefit plans to approximately 331 million shares, and reduced GM's retained economic interest in Hughes to approximately 19.9% from 30.7%. - 42 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) The following table sets forth comparative information regarding GM Class H common stock and the GM Class H dividend base for the three months ended March 31:
2003 2002 ------- ------- (Shares in Millions) GM Class H Common Stock Outstanding Shares at January 1..................................................... 958.3 877.5 Shares issued for stock options exercised............................... -- 0.3 Shares contributed by GM to certain of its U.S. employee benefit plans.. 149.2 -- ------- ------- Shares at March 31...................................................... 1,107.5 877.8 ======= ======= Weighted average number of shares of GM Class H common stock outstanding (Numerator)........................................................... 989.8 877.6 ======= ======= GM Class H Dividend Base GM Class H dividend base at January 1................................... 1,381.9 1,301.1 Increase for stock options exercised.................................... -- 0.3 ------- ------- GM Class H dividend base at March 31.................................... 1,381.9 1,301.4 ======= ======= Weighted average GM Class H dividend base (Denominator)................. 1,381.9 1,301.2 ======= =======
Note 8. DLA LLC Reorganization On March 18, 2003, DIRECTV Latin America, LLC ("DLA LLC") filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware ("Bankruptcy Court"). The filing does not include any of DLA LLC's operating companies in Latin America and the Caribbean, which will continue regular operations. DLA LLC continues to manage its business as a debtor-in-possession ("DIP"). As a DIP, management is authorized to operate the business, but may not engage in transactions outside the ordinary course of business without Bankruptcy Court approval. Subsequent to the filing of its Chapter 11 petition, DLA LLC obtained Bankruptcy Court orders that, among other things, authorized DLA LLC to pay certain pre-petition obligations related to employee wages and benefits and to take certain actions where such payments or actions will benefit its estate or preserve the going concern value of the business enterprise, thereby enhancing the prospects of reorganization. Under bankruptcy law, actions by creditors to collect pre-petition indebtedness owed by DLA LLC at the filing date are stayed and other pre-petition contractual obligations may not be enforced against DLA LLC. In addition, DLA LLC has the right, subject to Bankruptcy Court approval and other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. Parties to rejected executory contracts may file claims with the Bankruptcy Court. As of March 31, 2003, the Bankruptcy Court has approved DLA LLC's rejection of certain programming contracts with estimated remaining minimum payments totaling $767.8 million at the time of rejection. DLA LLC no longer broadcasts the programming related to rejected contracts. Hughes has agreed to provide a senior secured DIP financing facility in an amount of up to $300 million to supplement DLA LLC's existing cash flow and help ensure that vendors, programmers, employees and other parties receive payment for services provided after the filing of DLA LLC's Chapter 11 petition. Pursuant to interim orders, DLA LLC may borrow up to $35 million, subject to the - 43 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) terms of the loan documents. Assuming the final approval of the DIP financing, an additional $265 million of the DIP financing would become available to DLA LLC, subject to the terms of the loan documents. Due to material uncertainties, it is not possible to predict the length of time DLA LLC will operate under Chapter 11 protection, the outcome of the proceedings in general, whether DLA LLC will continue to operate under its current organizational structure, or the effect of the proceedings on DLA LLC's business and the Chapter 11 recovery by creditors and equity holders of DLA LLC. Hughes' Consolidated Balance Sheets as of March 31, 2003 include liabilities subject to compromise of DLA LLC of approximately $156.5 million. Additional liabilities subject to compromise may arise subsequent to the filing date of the Chapter 11 petition resulting from, among other things, rejection of executory contracts, including certain programming contracts, and allowance by the Bankruptcy Court of contingent claims and other disputed amounts. On April 17, 2003, DLA LLC filed with the Bankruptcy Court schedules setting forth DLA LLC's assets and liabilities as of the date of the petition as reflected in DLA LLC's records. The amounts of claims filed by DLA LLC's creditors could differ significantly from the scheduled amounts. Reorganization expense shown in Hughes' consolidated statements of operations includes the costs incurred to file the bankruptcy petition, ongoing related legal and consulting costs, and other charges related to the reorganization. As DLA LLC estimates allowed claims for amounts not previously recognized as liabilities subject to compromise, DLA LLC expects to record the accrual of such amounts as reorganization expense in accordance with SFAS No. 5, "Accounting for Contingencies." Such expense could be material in amount. Because of the inherent uncertainty of the bankruptcy process, the timing of the recording of such claims cannot be determined. Adjustments of liabilities to their reorganization values, as determined by the Bankruptcy Court, will also be reflected in reorganization expense. Hughes expects to retain control of DLA LLC upon emergence from Chapter 11 and therefore expects to continue to consolidate DLA LLC. For the quarter ended March 31, 2003, DLA LLC had revenues of $101.7 million and net loss of $118.7 million. Net loss includes reorganization expense of $6.9 million. As of March 31, 2003, DLA LLC had approximately $803.8 million in assets, consisting principally of accounts receivable amounting to $642.7 million principally from LOC's, net fixed assets of $63.9 million and cash of $7.1 million. Liabilities subject to compromise as of March 31, 2003 totaled $1,537.8 million, which includes $1,381.3 million of unsecured debt obligations owed to Hughes. Note 9. Discontinued Operations On February 28, 2003, DIRECTV Broadband completed the transition of its customers to alternative service providers and shut down its high-speed Internet service business. In the fourth quarter of 2002, Hughes recorded a charge of $92.8 million related to accruals for employee severance benefits, contract termination payments and the write-off of customer premise equipment. Included in the $92.8 million charge were accruals for employee severance benefits of $21.3 million and contract termination payments of $18.6 million. During the first quarter of 2003, there were payments and adjustments of $11.5 million and $13.8 million related to employee severance benefits and contract - 44 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) termination payments, respectively. As of March 31, 2003, $9.8 million related to accruals for employee severance benefits and $4.8 million related to contract termination payments were remaining. Revenues, operating costs and expenses, and other non-operating results for the discontinued operations of DIRECTV Broadband have been excluded from Hughes' results from continuing operations for all periods presented herein. Alternatively, the financial results for DIRECTV Broadband are presented in Hughes' Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) in a single line item entitled "Loss from discontinued operations, net of taxes" and the net cash flows are presented in the Condensed Consolidated Statements of Cash Flows as "Net cash used in discontinued operations." Summarized financial information for DIRECTV Broadband is as follows:
Three Months Ended March 31, ----------------- 2003 2002 ----- ------ (Dollars in Millions) Revenues...................................................................... $ 6.5 $ 13.6 Loss from discontinued operations, net of income tax benefit of $0.2 and $15.3 (0.3) (24.9)
Note 10. Segment Reporting Hughes' segments, which are differentiated by their products and services, include Direct-To-Home Broadcast, Satellite Services, and Network Systems. Direct-To-Home Broadcast is engaged in acquiring, promoting, selling and/or distributing digital entertainment programming via satellite to residential and commercial customers. Satellite Services is engaged in the selling, leasing and operating of satellite transponders and providing services for cable television systems, news companies, Internet service providers and private business networks. The Network Systems segment is a provider of satellite-based private business networks and broadband Internet access, and a supplier of DIRECTV(R) receiving equipment (set-top boxes and dishes). Other includes the corporate office and other entities. - 45 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) Selected information for Hughes' operating segments are reported as follows:
Direct- To-Home Satellite Network Broadcast Services Systems Other Eliminations Total --------- --------- ------- ------ ------------ -------- (Dollars in Millions) For the Three Months Ended: March 31, 2003 External Revenues................. $1,840.7 $ 165.5 $205.9 $ 15.2 -- $2,227.3 Intersegment Revenues............. 7.2 34.3 41.5 -- $(83.0) -- -------- -------- ------ ------ ------ -------- Total Revenues.................... $1,847.9 $ 199.8 $247.4 $ 15.2 $(83.0) $2,227.3 ======== ======== ====== ====== ====== ======== Operating Profit (Loss)........... $ 38.3 $ 76.3 $(39.8) $(31.1) $ (1.8) $ 41.9 Add: Depreciation and amortization 173.0 72.3 17.6 0.8 (0.6) 263.1 -------- -------- ------ ------ ------ -------- EBITDA (1)........................ $ 211.3 $ 148.6 $(22.2) $(30.3) $ (2.4) $ 305.0 ======== ======== ====== ====== ====== ======== March 31, 2002 External Revenues................. $1,626.7 $ 164.3 $225.4 $ 8.4 -- $2,024.8 Intersegment Revenues............. 3.7 42.8 17.4 -- $(63.9) -- -------- -------- ------ ------ ------ -------- Total Revenues.................... $1,630.4 $ 207.1 $242.8 $ 8.4 $(63.9) $2,024.8 ======== ======== ====== ====== ====== ======== Operating Profit (Loss)........... $ (164.0) $ 57.1 $(48.5) $ 65.5 $ 2.2 $ (87.7) Add: Depreciation and amortization 143.1 94.0 18.0 1.1 (4.0) 252.2 -------- -------- ------ ------ ------ -------- EBITDA (1)........................ $ (20.9) $ 151.1 $(30.5) $ 66.6 $ (1.8) $ 164.5 ======== ======== ====== ====== ====== ======== As of: March 31, 2003 Goodwill, net..................... $2,888.5 $2,238.7 $ 2.4 $645.6 -- $5,775.2 Intangible Assets, net............ 605.2 -- -- 21.0 -- 626.2 December 31, 2002 Goodwill, net..................... $2,888.5 $2,238.7 $ 2.4 $645.6 -- $5,775.2 Intangible Assets, net............ 623.7 -- -- 21.0 -- 644.7 -------- -------- ------ ------ ------ --------
- -------- (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 believes EBITDA is a measure of performance used by some investors, equity analysts and others to make informed investment decisions. Multiples of current or projected EBITDA are used to estimate current or prospective enterprise value. Hughes management believes that EBITDA is a common measure used to compare Hughes' operating performance and enterprise value 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 $94.3 million and $69.7 million for the three months ended March 31, 2003 and 2002, 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. - 46 - HUGHES ELECTRONICS CORPORATION NOTES TO THE 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 Ended March 31, ----------------- 2003 2002 ------ ------- (Dollars in Millions) EBITDA....................................................................... $305.0 $ 164.5 Depreciation and amortization................................................ 263.1 252.2 ------ ------- Operating Profit (Loss)...................................................... 41.9 (87.7) Interest income.............................................................. 6.2 4.3 Interest expense............................................................. (80.5) (76.3) Reorganization expense....................................................... (6.9) -- Other, net................................................................... (28.1) (41.6) ------ ------- Loss From Continuing Operations Before Income Taxes, Minority Interests and Cumulative Effect of Accounting Change..................................... (67.4) (201.3) Income tax benefit........................................................... 24.2 76.5 Minority interest in net earnings of subsidiaries............................ (7.4) (6.7) ------ ------- Loss from continuing operations before cumulative effect of accounting change (50.6) (131.5) Loss from discontinued operations, net of taxes.............................. (0.3) (24.9) ------ ------- Loss before cumulative effect of accounting change........................... (50.9) (156.4) Cumulative effect of accounting change, net of taxes......................... -- (681.3) ------ ------- Net Loss..................................................................... $(50.9) $(837.7) ====== =======
Note 11. 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 a dispute resolution 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 at a rate of 9.5% from the date of sale, the total amount of which has been provided for in Hughes' consolidated financial statements. However, Boeing has submitted additional proposed adjustments, which are being resolved through the dispute resolution process. As of March 31, 2003, approximately $670 million of proposed adjustments remain unresolved. Hughes is contesting 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. The final resolution of this matter could result in Hughes making a cash payment to Boeing that would be material to Hughes' consolidated results of operations and financial position. 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 - 47 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) 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 March 31, 2003. After discussion with counsel representing Hughes in those actions, it is the opinion of management that such liability is not expected to have a material adverse effect on Hughes' consolidated results of operations and financial position. Other Contingencies The in-orbit satellites of Hughes and its subsidiaries are subject to the risk of failing prematurely due to, among other things, mechanical failure, collision with objects in space or an inability to maintain proper orbit. Satellites are subject to the risk of launch delay and failure, destruction and damage while on the ground or during launch and failure to become fully operational once launched. Delays in the production or launch of a satellite or the complete or partial loss of a satellite, in-orbit or during launch, could have a material adverse impact on the operation of Hughes' businesses. Hughes has, in the past, experienced technical anomalies on some of its satellites. Service interruptions caused by 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. 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 $539.5 million and the book value of the satellites that were not insured was $1,022.4 million at March 31, 2003. In May 2003, the insurance policies covering nine of PanAmSat's satellites will expire. PanAmSat is currently negotiating renewal policies for these satellites. Upon the expiration of the existing insurance policies, there can be no assurance that PanAmSat will be able to procure new insurance for its satellites. In addition, new satellite insurance may only be available with higher premiums, higher deductibles, shorter coverage periods, higher loss percentages required for constructive total loss claims, additional satellite health-related policy exclusions, or other terms which may make such insurance commercially unreasonable. Accordingly, PanAmSat may elect to discontinue insuring certain satellites. An uninsured failure of one or more of PanAmSat's satellites could have a material adverse effect on Hughes' consolidated results of operations and financial position. In addition, higher premiums on insurance policies will increase costs, thereby reducing operating income by the amount of such increased premiums. On February 19, 2003, PanAmSat filed proofs of loss under the insurance policies for Galaxy XI and PAS-1R for constructive total losses based on degradation of the solar panels. Service to existing customers has not been affected, and PanAmSat expects that both of these satellites will continue to serve these customers. The insurance policies for these satellites total approximately $289 million and $345 million, respectively, and both include a salvage provision for PanAmSat to share 10% of future - 48 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) revenues from these satellites with their respective insurers if the proof of loss is accepted. The availability and use of the proceeds from these insurance claims are restricted by the agreements governing PanAmSat's debt obligations. No assurances can be made that the proof of loss with respect to these two satellites will be accepted by the insurers. PanAmSat is working with the satellite manufacturer to determine the long-term implications to the satellites and will continue to assess the operational impact these losses may have. At this time, based upon all information currently available to PanAmSat, as well as planned modifications to the operation of the satellites in order to maximize revenue generation, PanAmSat currently expects to operate these satellites for the duration of their estimated useful lives, although a portion of the transponder capacity on these satellites will not be useable during such time. Hughes currently believes that the net book values of these satellites are fully recoverable and does not expect a material impact on 2003 revenues as a result of the difficulties on these two satellites. In the first quarter of 2003, PanAmSat and the manufacturer of the Galaxy VIII-iR satellite terminated the Galaxy VIII-iR satellite construction contract by mutual agreement. As of March 31, 2003, PanAmSat had a receivable due from the satellite manufacturer of $69.5 million. PanAmSat expects to collect this receivable in December 2003. In addition, PanAmSat has agreed with the Galaxy VIII-iR launch vehicle provider to defer the use of the launch to a future satellite. Hughes is contingently liable under letters of credit and bonds in the aggregate amount of $60.7 million which were undrawn at March 31, 2003, and DLA LLC has guaranteed $3.0 million of bank debt related to non-consolidated LOC's, which is due in varying amounts through 2005. Additionally, DLA LLC may be required to repurchase Grupo Clarin S.A.'s ("Clarin") 3.98% interest in DLA LLC for $195 million in November 2003. In the first quarter of 2003, Clarin notified DLA LLC that it believes that DLA LLC's decision to initiate discussions to address DLA LLC's financial and operational challenges has caused DLA LLC to be responsible immediately to purchase Clarin's equity interest in DLA LLC. DLA LLC has filed a motion to reject its obligation under this contract as part of its reorganization proceedings. See Note 8 for additional information regarding DLA LLC's reorganization. The Hughes Board of Directors has approved several benefit plans designed to provide benefits for the retention of about 217 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 $107 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, as of March 31, 2003, approximately 21.2 million employee stock options to purchase shares of GM Class H common stock will vest upon a qualifying change-in-control and up to an additional 8.4 million employee stock options could vest if employees are laid off within one year of a change-in-control. The successful completion of the News Corp. transactions would be considered a change-in-control for purposes of these benefits. - 49 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) Note 12. Subsequent Events News Corporation Transactions On April 9, 2003, GM, Hughes and News Corp. announced the signing of definitive agreements that provide for, among other things, the split-off of Hughes from GM and the simultaneous sale of GM's approximately 19.9% economic interest in Hughes to News Corp. for $14 per share, or approximately $3.8 billion. GM would receive at least $3.1 billion in cash with the remainder payable in News Corp. preferred American Depositary Shares ("News Corp. ADSs") and/or cash at News Corp.'s election. News Corp. would acquire an additional 14.1% stake in Hughes from the holders of GM Class H common stock through a mandatory exchange of a portion of their Hughes common stock received in the split-off, which would provide News Corp. with a total of 34% of the outstanding capital stock of Hughes. In addition, GM would receive a cash dividend from Hughes of $275 million in connection with the transactions. Hughes expects to pay this dividend using available cash balances. Under the terms of the proposed transactions, holders of GM Class H common stock would first exchange their shares for Hughes common stock on a share-for-share basis in the split-off, followed immediately by an exchange of approximately 17.6% of the Hughes common stock they receive in the split-off for approximately $14 per share in News Corp. ADSs and/or cash. The number of News Corp. ADSs payable to GM and Hughes common stockholders, based on a fixed-price of $14 per Hughes share, will be adjusted within a collar range of 20% above or below the News Corp. ADS price of $22.40. This mandatory exchange of about 17.6% of the shares of Hughes common stock for News Corp. ADSs and/or cash would be taxable to the Hughes common stockholders at the time. 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. Hughes will cease to be a member of the GM consolidated group for federal income tax purposes upon the completion of the Hughes split-off. Pursuant to the amended income tax allocation agreement between GM and Hughes, Hughes will carry forward its federal income tax attributes that have not been utilized by the GM consolidated group to the extent permitted by the Internal Revenue Code. Hughes will be compensated by GM for its net operating losses, if any, at a rate of 24%. To the extent Hughes' federal income tax attributes, including net operating losses, have been utilized by the GM consolidated group, Hughes will be compensated by GM following separation with the maximum compensation from GM limited to approximately $75 million. If the transactions are completed, Rupert Murdoch, chairman and chief executive officer of News Corp., would become chairman of Hughes, and Chase Carey, who is currently serving as an advisor to News Corp., would become president and chief executive officer of Hughes. Eddy Hartenstein, Hughes' senior executive vice president, would be named vice chairman of Hughes. Hughes would have 11 directors, the majority of whom would be independent directors. The transactions are subject to a number of conditions, including, among other things, obtaining U.S. antitrust and Federal Communications Commission approvals, approval by a majority of each class of GM stockholders--GM $1- 2/3 and GM Class H--voting both as separate classes and together as a single class and a favorable ruling from the Internal Revenue Service that the split-off of Hughes from GM would be tax-free to GM and its stockholders for U.S. federal income tax purposes. No assurances can be given that the approvals will be obtained or the transactions will be completed. The - 50 - HUGHES ELECTRONICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (concluded) 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 transactions. In response to the announcement of the transactions, the customers and strategic partners of Hughes may delay or defer decisions, which could have a material adverse effect on Hughes' businesses, regardless of whether the transactions are ultimately completed. Similarly, current and prospective employees of Hughes may experience uncertainty about their future roles with Hughes upon completion of the transactions, which may materially adversely affect Hughes' ability to attract and retain key management, sales, marketing and technical personnel. Hughes Equity Recapitalization During April 2003, the Hughes Board of Directors approved the reclassification of the outstanding Hughes Series B convertible preferred stock into Hughes Class B common stock of equivalent value, and a subsequent stock split of Hughes common stock and Hughes Class B common stock through dividends of additional shares. GM, in its capacity as the holder of all outstanding Hughes capital stock, approved the reclassification. Shortly thereafter, GM converted some of its Hughes common stock into an equivalent number of shares of Hughes Class B common stock. As a result of these transactions, Hughes currently has 1,207,518,237 shares of Hughes common stock and 274,373,316 shares of Hughes Class B common stock issued and outstanding, all of which are owned by GM. The terms of the Hughes common stock and Hughes Class B common stock are identical in all respects (with the exception of provisions regarding stock-on-stock dividends) and, at the option of the holder, the Hughes common stock may be converted at any time into Hughes Class B common stock and vice versa. These transactions had no impact on the outstanding number of shares of GM Class H common stock or the Class H dividend base. In connection with the News Corp. transactions, GM Class H common stock will be exchanged for Hughes common stock, and the Hughes Class B common stock will be sold by GM to News Corp. Immediately after the completion of the News Corp. transactions, all of the shares of Hughes Class B common stock held by News Corp. will be converted into Hughes common stock. * * * - 51 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY DATA
Three Months Ended March 31, ----------------------- 2003 2002 ----------- ------------ (Dollars in Millions) (Unaudited) Consolidated Statements of Operations Data: Total revenues......................................................... $ 2,227.3 $ 2,024.8 Total operating costs and expenses..................................... 2,185.4 2,112.5 --------- --------- Operating profit (loss)................................................ 41.9 (87.7) Other expenses, net.................................................... (109.3) (113.6) Income tax benefit..................................................... 24.2 76.5 Minority interests in net earnings of subsidiaries..................... (7.4) (6.7) --------- --------- Loss from continuing operations before cumulative effect of accounting change............................................................... (50.6) (131.5) Loss from discontinued operations, net of taxes........................ (0.3) (24.9) --------- --------- Loss before cumulative effect of accounting change..................... (50.9) (156.4) Cumulative effect of accounting change, net of taxes................... -- (681.3) --------- --------- Net loss............................................................... (50.9) (837.7) Preferred stock dividends.............................................. -- (24.1) --------- --------- Loss Used for Computation of Available Separate Consolidated Net Income (Loss)............................................................... $ (50.9) $ (861.8) ========= ========= March 31, 2003 December 31, (Unaudited) 2002 ----------- ------------ (Dollars in Millions) Consolidated Balance Sheet Data: Cash and cash equivalents.............................................. $ 2,962.2 $ 1,128.6 Total current assets................................................... 5,476.1 3,656.4 Total assets........................................................... 19,674.2 17,885.1 Total current liabilities.............................................. 2,554.1 3,203.1 Long-term debt......................................................... 4,969.7 2,390.0 Minority interests..................................................... 563.7 555.3 Convertible preferred stock, Series B.................................. 914.1 914.1 Total stockholder's equity............................................. 9,924.2 9,977.1
- 52 - HUGHES ELECTRONICS CORPORATION SUMMARY DATA -- (continued)
Three Months Ended March 31, -------------------- 2003 2002 -------- ------- (Dollars in Millions) (Unaudited) Other Data: Operating Profit (Loss)............. $ 41.9 $ (87.7) Add: Depreciation and amortization.. 263.1 252.2 -------- ------- EBITDA(1)........................... $ 305.0 $ 164.5 ======== ======= Operating Profit Margin............. 1.9 % N/A EBITDA Margin(1).................... 13.7 % 8.1 % Capital expenditures................ $ 187.5 $ 345.9 Cash flows from operating activities 294.3 95.5 Cash flows from investing activities (241.0) (172.2) Cash flows from financing activities 1,836.3 528.6
- -------- (1) EBITDA is defined as operating profit (loss), plus depreciation and amortization. EBITDA margin is calculated by dividing EBITDA by total revenues. 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 believes EBITDA is a measure of performance used by some investors, equity analysts and others to make informed investment decisions. Multiples of current or projected EBITDA are used to estimate current or prospective enterprise value. Hughes management believes that EBITDA is a common measure used to compare Hughes' operating performance and enterprise value 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 $94.3 million and $69.7 million for the three months ended March 31, 2003 and 2002, respectively. As a result, EBITDA does not reflect funds available for investment in the business of Hughes, dividends or other discretionary uses. EBITDA and EBITDA margin as presented herein may not be comparable to similarly titled measures reported by other companies. - 53 - HUGHES ELECTRONICS CORPORATION SUMMARY DATA -- (concluded) Selected Segment Data
Direct-To-Home Satellite Network Eliminations Broadcast Services Systems and Other Total -------------- --------- ------- ------------ -------- (Dollars in Millions) For the Three Months Ended: March 31, 2003 Total Revenues.................... $1,847.9 $199.8 $247.4 $(67.8) $2,227.3 % of Total Revenue................ 83.0 % 9.0 % 11.1% (3.1%) 100.0 % Operating Profit (Loss)........... $ 38.3 $ 76.3 $(39.8) $(32.9) $ 41.9 Add: Depreciation and amortization 173.0 72.3 17.6 0.2 263.1 -------- ------ ------ ------ -------- EBITDA............................ $ 211.3 $148.6 $(22.2) $(32.7) $ 305.0 ======== ====== ====== ====== ======== Operating Profit Margin........... 2.1 % 38.2% N/A N/A 1.9 % EBITDA Margin..................... 11.4 % 74.4% N/A N/A 13.7 % Capital Expenditures.............. $ 73.2 $ 33.1 $ 54.1 $ 27.1 $ 187.5 March 31, 2002 Total Revenues.................... $1,630.4 $207.1 $242.8 $(55.5) $2,024.8 % of Total Revenue................ 80.5 % 10.2% 12.0% (2.7%) 100.0 % Operating Profit (Loss)........... $ (164.0) $ 57.1 $(48.5) $ 67.7 $ (87.7) Add: Depreciation and amortization 143.1 94.0 18.0 (2.9) 252.2 -------- ------ ------ ------ -------- EBITDA............................ $ (20.9) $151.1 $(30.5) $ 64.8 $ 164.5 ======== ====== ====== ====== ======== Operating Profit Margin........... N/A 27.6% N/A N/A N/A EBITDA Margin..................... N/A 73.0% N/A N/A 8.1 % Capital Expenditures.............. $ 124.6 $ 74.0 $128.3 $ 19.0 $ 345.9
- 54 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) 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 Hughes' Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission ("SEC") on March 11, 2003 and all other Hughes filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report. This Quarterly Report may contain certain statements that Hughes believes are, or may be considered to be, "forward-looking statements," within the meaning of various provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as we "believe," "expect," "anticipate," "intend," "plan," "foresee" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause Hughes' actual results to differ materially from 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, including political, economic and social uncertainties in many Latin American countries in which the Latin America DIRECTV businesses ("DLA") operate, potential adverse effects of the DIRECTV Latin America, LLC ("DLA LLC") Chapter 11 bankruptcy proceedings, 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, ability to renew programming contracts under favorable terms, 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 discussed below. 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. News Corporation Transactions On April 9, 2003, GM, Hughes and The News Corporation Limited ("News Corp.") announced the signing of definitive agreements that provide for, among other things, the split-off of Hughes from GM and the simultaneous sale of GM's approximately 19.9% economic interest in Hughes to News Corp. for $14 per share, or approximately $3.8 billion. GM would receive at least $3.1 billion in cash with the remainder payable in News Corp. preferred American Depositary Shares ("News Corp. ADSs") and/or cash at News Corp.'s election. News Corp. would acquire an additional 14.1% stake in Hughes from the holders of GM Class H common stock through a mandatory exchange of a portion of their Hughes common stock received in the split-off, which would provide News Corp. with a total of 34% of the outstanding capital stock of Hughes. In addition, GM would receive a cash dividend from Hughes of $275 million in connection with the transactions. Hughes expects to pay this dividend using available cash balances. Under the terms of the proposed transactions, holders of GM Class H common stock would first exchange their shares for Hughes common stock on a share-for-share basis in the split-off, followed immediately by an exchange of approximately 17.6% of the Hughes common stock they receive in the - 55 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) split-off for approximately $14 per share in News Corp. ADSs and/or cash. The number of News Corp. ADSs payable to GM and Hughes common stockholders, based on a fixed-price of $14 per Hughes share, will be adjusted within a collar range of 20% above or below the News Corp. ADS price of $22.40. This mandatory exchange of about 17.6% of the shares of Hughes common stock for News Corp. ADSs and/or cash would be taxable to the Hughes common stockholders at the time. 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. Hughes will cease to be a member of the GM consolidated group for federal income tax purposes upon the completion of the Hughes split-off. Pursuant to the amended income tax allocation agreement between GM and Hughes, Hughes will carry forward its federal income tax attributes that have not been utilized by the GM consolidated group to the extent permitted by the Internal Revenue Code. Hughes will be compensated by GM for its net operating losses, if any, at a rate of 24%. To the extent Hughes' federal income tax attributes, including net operating losses, have been utilized by the GM consolidated group, Hughes will be compensated by GM following separation with the maximum compensation from GM limited to approximately $75 million. If the transactions are completed, Rupert Murdoch, chairman and chief executive officer of News Corp., would become chairman of Hughes, and Chase Carey, who is currently serving as an advisor to News Corp., would become president and chief executive officer of Hughes. Eddy Hartenstein, Hughes' senior executive vice president, would be named vice chairman of Hughes. Hughes would have 11 directors, the majority of whom would be independent directors. The transactions are subject to a number of conditions, including, among other things, obtaining U.S. antitrust and Federal Communications Commission approvals, approval by a majority of each class of GM stockholders--GM $1- 2/3 and GM Class H--voting both as separate classes and together as a single class and a favorable ruling from the Internal Revenue Service that the split-off of Hughes from GM would be tax-free to GM and its stockholders for U.S. federal income tax purposes. No assurances can be given that the approvals will be obtained or the transactions will be completed. 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 transactions. In response to the announcement of the transactions, the customers and strategic partners of Hughes may delay or defer decisions, which could have a material adverse effect on Hughes' businesses, regardless of whether the transactions are ultimately completed. Similarly, current and prospective employees of Hughes may experience uncertainty about their future roles with Hughes upon completion of the transactions, which may materially adversely affect Hughes' ability to attract and retain key management, sales, marketing and technical personnel. General Business Overview The continuing operations of Hughes are comprised of the following segments: Direct-To-Home Broadcast, Satellite Services and Network Systems. Hughes' business segments are described in more detail below, including a discussion of significant transactions affecting the comparability of operating results for the three months ended March 31, 2003 and 2002. - 56 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) On February 28, 2003, DIRECTV Broadband, Inc. ("DIRECTV Broadband") completed the transition of its customers to alternative service providers and shut down its high-speed Internet service business. Revenues, operating costs and expenses, and other non-operating results for the discontinued operations of DIRECTV Broadband have been excluded from Hughes' results from continuing operations for all periods presented herein. Alternatively, the financial results for DIRECTV Broadband are presented in Hughes' Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) in a single line item entitled "Loss from discontinued operations, net of taxes" and the net cash flows are presented in the Condensed Consolidated Statements of Cash Flows as "Net cash used in discontinued operations." See further discussion of this item in "Discontinued Operations" below. Direct-To-Home Broadcast Segment The Direct-To-Home Broadcast segment consists primarily of the DIRECTV(R) digital satellite direct-to-home television services located in the United States and Latin America. The DIRECTV U.S. business represents the results of DIRECTV Holdings LLC and its consolidated subsidiaries. DIRECTV U.S. is the largest provider of direct broadcast satellite television services in the United States, with 11.4 million subscribers as of March 31, 2003. On June 4, 2002, DIRECTV, Inc., a wholly-owned subsidiary of DIRECTV Holdings LLC, 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 programming and related hardware. As a result, in 2002 DIRECTV, Inc. 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" in the first quarter of 2002 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." The Direct-To-Home Broadcast segment also includes the operating results of DLA. DLA includes DLA LLC, Hughes' 74.7% owned subsidiary that provides DIRECTV programming to local operating companies ("LOC's") located in Latin America and the Caribbean basin. DLA also includes the LOC's that are the exclusive distributors of DIRECTV in Mexico, Brazil, Argentina, Colombia, Trinidad and Tobago and Uruguay; and SurFin Ltd., a company that provides financing of subscriber receiver equipment to certain DLA LOC's. The non-operating results of DLA include Hughes' share of the results of unconsolidated LOC's that are the exclusive distributors of DIRECTV in Venezuela and Puerto Rico and are included in "Other, net." Hughes records 100% of the net losses incurred by DLA LLC and certain other consolidated LOC's due to the accumulation of net losses in excess of the minority investors' investment and Hughes' continued funding of those businesses. On March 18, 2003, DLA LLC filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware ("Bankruptcy Court") in order to address its financial and operational challenges. The filing does not include any of DLA LLC's operating companies in Latin America and the Caribbean, which will continue regular operations. See "DLA LLC Reorganization" below for additional information. Satellite Services Segment The Satellite Services segment represents the results of PanAmSat Corporation ("PanAmSat"), Hughes' approximately 81% owned subsidiary. PanAmSat is a leading provider of video, broadcasting and network services via satellite. PanAmSat leases transponder capacity on its satellites, and is the - 57 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) distribution platform for the delivery of entertainment and information to cable television systems, television broadcast affiliates, direct-to-home television operators, Internet service providers, telecommunications companies and other corporations and governments. 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 outright sales and sales-type lease transactions. In October 2001, PanAmSat filed a proof of loss under an insurance policy on PAS-7 related to circuit failures, which occurred in September 2001 and resulted in a reduction of 28.9% of the satellite's total power available for communications. During 2002, PanAmSat's insurers settled the claim by payment to PanAmSat of $215.0 million. PanAmSat recorded a net gain of approximately $40.1 million related to this insurance claim in the first quarter of 2002. Network Systems Segment The Network Systems segment represents the results of Hughes Network Systems, Inc. ("HNS"), which is a leading supplier of broadband satellite services and products to both enterprises and consumers through its DIRECWAY(R) services. HNS designs, manufactures and installs advanced networking solutions for businesses worldwide using very small aperture terminals. HNS is also a leading supplier of DIRECTV(R) receiving equipment (set-top boxes and dishes). As a result of operating losses incurred over the last several years and the high cash requirements for subscriber acquisition costs, HNS does not currently intend to increase the subscriber base aggressively for the DIRECWAY consumer business. Other 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 United States 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. Beginning in the third quarter of 2002, Hughes changed the classification of certain subscriber acquisition costs. The costs of free programming and the costs of installation and hardware subsidies for subscribers added through DIRECTV's direct sales program are now included as part of "Broadcast programming and other costs" in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) rather than in "Selling, general and administrative expenses" where they had previously been reported. Prior period amounts have been reclassified to conform to the current period presentation. Beginning in the first quarter of 2003, Hughes no longer allocates general corporate expenses to its subsidiaries. Prior period segment information has been reclassified to conform to the current period presentation. Results of Operations Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 Revenues. Revenues for the first quarter of 2003 increased 10.0% to $2,227.3 million, compared with $2,024.8 million for the first quarter of 2002. The increase in revenues resulted primarily from - 58 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) $217.5 million of higher revenues in the Direct-To-Home Broadcast segment from the addition of new DIRECTV subscribers and higher average monthly revenue per subscriber ("ARPU") in the United States. ARPU represents average monthly revenue per subscriber and is calculated by dividing average monthly revenues for the period by average DIRECTV owned and operated subscribers for the period. Operating Costs and Expenses. Operating costs and expenses increased to $2,185.4 million for the first quarter of 2003 from $2,112.5 million for the first quarter of 2002. Broadcast programming and other costs increased by $156.0 million in the first quarter of 2003 from the same period in 2002 due to higher costs at the Direct-To-Home Broadcast segment resulting from higher programming costs associated with the increase in subscribers and programming rate increases. Costs of products sold decreased by $30.0 million in the first quarter of 2003 from the first quarter of 2002 primarily due to lower sales in the Carrier businesses at the Network Systems segment. Selling, general and administrative expenses decreased by $64.0 million during the first quarter of 2003 compared to the same period in 2002 due primarily to lower expenses resulting from cost saving initiatives and a $56 million loss recorded for the GECC dispute in 2002, partially offset by the $95 million net gain recorded in 2002 for the NASA claim. Depreciation and amortization increased by $10.9 million during the first quarter of 2003 compared to the first quarter of 2002. EBITDA. EBITDA is defined as operating profit (loss), plus depreciation and amortization. EBITDA margin is calculated by dividing EBITDA by total revenues. A description of EBITDA and a reconciliation of EBITDA to reported operating profit (loss), the most directly comparable financial measure under accounting principles generally accepted in the United States, is provided in the "Summary Data" above. EBITDA for the first quarter of 2003 was $305.0 million and EBITDA margin was 13.7%, compared to EBITDA of $164.5 million and EBITDA margin of 8.1% for the first quarter of 2002. The increase in EBITDA and EBITDA margin resulted from the additional profit resulting from the higher revenues at the Direct-To-Home Broadcast segment, reduced expenses resulting from cost saving initiatives and the $56 million loss recorded for the GECC dispute in 2002, partially offset by the $95 million net gain recorded in 2002 for the NASA claim. Operating Profit (Loss). The operating profit for the first quarter of 2003 was $41.9 million and operating profit margin was 1.9%, compared to an operating loss of $87.7 million for the first quarter of 2002. The improvement in operating profit and operating profit margin resulted from the additional margins from the higher revenues at the Direct-To-Home Broadcast segment, reduced expenses resulting from cost saving initiatives and the $56 million loss recorded for the GECC dispute in 2002, partially offset by the $95 million net gain recorded in 2002 for the NASA claim. Interest Income and Expense. Interest income increased to $6.2 million for the first quarter of 2003 compared to interest income of $4.3 million for the same period of 2002. Interest expense increased to $80.5 million for the first quarter of 2003 from $76.3 million for the first quarter of 2002. The increase in interest expense resulted from higher average outstanding borrowings and a higher weighted average interest rate in 2003 partially offset by the $27 million of interest recorded in connection with the GECC dispute in the first quarter of 2002. Changes in cash and cash equivalents and debt are discussed in more detail below under "Liquidity and Capital Resources." Reorganization Expense. Reorganization expense for the first quarter of 2003 was $6.9 million. Reorganization expense includes legal and consulting costs incurred by DLA LLC related to its bankruptcy proceedings. See "DLA LLC Reorganization" below for additional information. - 59 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Other, Net. Other, net decreased to a loss of $28.1 million for the first quarter of 2003 from a loss of $41.6 million for the same period of 2002. Other, net for the first quarter of 2003 resulted primarily from $22.6 million of equity method investee losses. Other, net for the first quarter of 2002 resulted primarily from a $29.0 million charge recorded for a loan guarantee obligation related to a Hughes affiliate in India and $10.2 million of equity method investee losses. Income Taxes. Hughes recognized an income tax benefit of $24.2 million for the first quarter of 2003 compared to $76.5 million for the first quarter of 2002. The lower tax benefit for the first quarter of 2003 was primarily due to lower pre-tax losses. Loss from Continuing Operations Before Cumulative Effect of Accounting Change. Hughes reported a loss before cumulative effect of accounting change of $50.6 million for the first quarter of 2003 compared to $131.5 million for the same period of 2002. Loss from Discontinued Operations. On February 28, 2003, Hughes completed the shut down of DIRECTV Broadband. As a result, DIRECTV Broadband has been reported as a discontinued operation in the consolidated financial statements, and its revenues, operating costs and expenses and other non-operating results are excluded from the continuing operating results of the Direct-To-Home Broadcast segment for all periods presented herein. The loss from discontinued operations, net of taxes, was $0.3 million and $24.9 million for the first quarter of 2003 and 2002, respectively. Cumulative Effect of Accounting Change. Hughes adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002. The adoption of this standard resulted in the discontinuation of amortization of goodwill and intangible assets with indefinite lives. In accordance with the transition provisions of SFAS No. 142, on January 1, 2002 Hughes recorded a one-time after-tax charge of $681.3 million related to the initial impairment test as a cumulative effect of accounting change. See "Accounting Changes" below for additional information. Direct-To-Home Broadcast Segment Direct-To-Home Broadcast segment revenues for the first quarter of 2003 increased 13.3% to $1,847.9 million from $1,630.4 million for the first quarter of 2002. The Direct-To-Home Broadcast segment had positive EBITDA of $211.3 million for the first quarter of 2003 compared with negative EBITDA of $20.9 million for the first quarter of 2002. The operating profit for the segment was $38.3 million for first quarter of 2003 compared to an operating loss of $164.0 million for the first quarter of 2002. United States. Revenues for DIRECTV U.S. grew to $1,708 million of the first quarter of 2003, a 17% increase over first quarter of 2002 revenues of $1,466 million. The increase in revenues resulted primarily from the larger subscriber base in 2003 and an increase in ARPU. As of March 31, 2003, DIRECTV had approximately 11.4 million subscribers compared to about 10.5 million subscribers as of March 31, 2002. Excluding subscribers in the National Rural Telecommunications Cooperative territories, DIRECTV owned and operated subscribers totaled 9.8 million and 8.8 million at March 31, 2003 and 2002, respectively. DIRECTV added 275,000 net new owned and operated subscribers for the first quarter of 2003, compared to 350,000 net new owned and operated subscribers for the first quarter of 2002. Average monthly subscriber churn represents the monthly percentage of DIRECTV owned and operated subscribers whose service is disconnected, and is calculated by dividing the average monthly number of disconnected DIRECTV owned and operated subscribers during the period by average DIRECTV owned and operated subscribers for the period. Average monthly subscriber churn was 1.5% for the first quarter of 2003 compared to 1.6% for the first quarter of 2002. ARPU for - 60 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) DIRECTV U.S. was $59.10 and $56.70 for the quarters ended March 31, 2003 and 2002, respectively. The increased ARPU was due to increased customer purchases of expanded local channel offerings and higher fees resulting from the increased number of subscribers with multiple set-top receivers. EBITDA was $234 million for the first quarter of 2003 compared to EBITDA of $40 million for the first quarter of 2002. The operating profit for the first quarter of 2003 was $110 million compared to an operating loss of $45 million for the first quarter of 2002. The increase in EBITDA was primarily attributable to the additional profit resulting from the higher revenues discussed above, lower subscriber acquisition costs due to fewer gross subscriber acquisitions and the $56 million loss recorded for the GECC dispute in 2002, partially offset by higher retention, upgrade and other marketing costs. The change in operating loss was due to the improvement in EBITDA partially offset by a $21 million increase in depreciation expense associated with capital expenditures since March 31, 2002 and a $19 million increase in amortization expense due to the reinstatement of amortization expense related to intangible assets with indefinite lives in accordance with Emerging Issues Task Force ("EITF") Issue No. 02-17, "Recognition of Customer Relationship Assets Acquired in a Business Combination" during the fourth quarter of 2002. Latin America. Revenues for DLA decreased 15% to $140 million for the first quarter of 2003 from $165 million for the first quarter of 2002. The change in revenues resulted from the devaluation of the Brazilian and Venezuelan currencies and a smaller subscriber base. Subscribers declined from about 1.64 million as of March 31, 2002 to about 1.53 million as of March 31, 2003. DLA lost approximately 54,000 net subscribers for the first quarter of 2003 compared to 32,000 net new subscriber additions for the first quarter of 2002. The decline in net subscribers for the first quarter of 2003 was primarily due to the economic turmoil following the general strike in Venezuela. ARPU was $30.10 and $33.90 for the quarters ended March 31, 2003 and 2002, respectively. The decrease in ARPU was primarily the result of the devaluation of the Brazilian and Venezuelan currencies against the U.S. dollar. Consistent with DIRECTV U.S., DLA ARPU is now calculated by dividing average monthly revenues in the period by average subscribers during the period. EBITDA was a negative $22 million for the first quarter of 2003 compared to negative EBITDA of $61 million for the first quarter of 2002. The change in EBITDA was primarily due to the $32 million loss related to currency devaluation in 2002 and lower 2003 expenses resulting from cost saving initiatives. These improvements were partially offset by lower gross profit on the lower revenues mentioned above. DLA incurred an operating loss of $71 million in the first quarter of 2003 compared to an operating loss of $119 million in the first quarter of 2002. The decreased operating loss resulted from the improvement in EBITDA as well as a decrease in depreciation expense of $9 million. Satellite Services Segment Revenues for the Satellite Services segment for the first quarter of 2003 decreased $7.3 million to $199.8 million from $207.1 million for the same period in the prior year. This decline was primarily due to a termination fee received in 2002 from one of PanAmSat's video customers. EBITDA was $148.6 million for the first quarter of 2003, a 1.7% decrease over the first quarter 2002 EBITDA of $151.1 million. EBITDA margin for the first quarter of 2003 was 74.4% compared to 73.0% for the first quarter of 2002. The higher EBITDA margin was principally due to increased operational efficiencies and lower bad debt expense partially offset by the 2002 termination fee discussed above. The decrease in EBITDA was primarily due to the termination fee received in 2002. Also impacting the change in EBITDA and EBITDA margin were several significant items in the first quarter of 2002, including a $40 million net gain related to the settlement of the PAS-7 insurance claim, - 61 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) net facilities restructuring and severance charges of $13 million and 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 one of PanAmSat's customers. Operating profit was $76.3 million and operating profit margin was 38.2% for the first quarter of 2003 compared to $57.1 million and 27.6% for the first quarter of 2002. The increase in operating profit and operating profit margin resulted from lower depreciation expense resulting from the Galaxy VIII-i satellite reaching full depreciation in July 2002, partially offset by the decline in EBITDA. Network Systems Segment Revenues for the Network Systems segment for the first quarter of 2003 increased $4.6 million to $247.4 million, compared to $242.8 million for the first quarter of 2002. The increase in revenues resulted from increased sales of DIRECTV receiving equipment, which totaled about 629,000 units for the first quarter of 2003 compared to about 430,000 units for the same period of 2002, and revenues from a larger DIRECWAY subscriber base. These increases were partially offset by decreased sales in the Carrier businesses. As of March 31, 2003, DIRECWAY had approximately 152,000 subscribers in North America compared to 111,000 as of March 31, 2002. The Network Systems segment reported negative EBITDA of $22.2 million for the first quarter of 2003, compared to negative EBITDA of $30.5 million for the first quarter of 2002. The Network Systems segment had an operating loss of $39.8 million for the first quarter of 2003, compared to an operating loss of $48.5 million for the first quarter of 2002. The improvement in EBITDA and operating loss resulted from a lower loss in the DIRECWAY business due to improved efficiencies associated with the larger subscriber base, and a $6 million charge related to severance benefits in the first quarter of 2002. Eliminations and Other The elimination of revenues increased to $67.8 million for the first quarter of 2003 from $55.5 million for the first quarter of 2002. The increase was primarily due to increased shipments of DIRECTV receiving equipment from the Network Systems segment to the Direct-To-Home Broadcast segment partially offset by a decrease in transponder leasing revenues from the Satellite Services segment to the Direct-To-Home Broadcast segment. Operating profit (loss) from Eliminations and Other decreased to an operating loss of $32.9 million for the first quarter of 2003 from an operating profit of $67.7 million for the first quarter of 2002. The decrease in operating profit resulted primarily from the $95 million net gain recorded in 2002 for the NASA claim. Liquidity and Capital Resources During the first quarter of 2003, Hughes' cash and cash equivalents balance increased to $2,962.2 million. The increase in cash and cash equivalents resulted primarily from additional net borrowings of $1,897.0 million and cash provided by operations of $294.3 million partially offset by expenditures for satellites and property of $187.5 million, debt issuance costs of $61.8 million, cash used in discontinued operations of $56.0 million and the $46.5 million purchase of short-term investments. Of the $2,962.2 million cash and cash equivalents balance at March 31, 2003, $273.8 million and $619.2 million is generally available only to DIRECTV and PanAmSat, respectively. As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) at March 31, 2003 and December 31, 2002 was 2.14 and 1.14, respectively. Working capital increased by $2,468.7 - 62 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) million to $2,922.0 million at March 31, 2003 from working capital of $453.3 million at December 31, 2002. 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 DIRECTV financing transactions described in more detail below. Hughes expects to have cash requirements for its continuing operations for the remainder of 2003 of about $250 million. This cash will be used primarily for capital expenditures for satellites and property, interest expense and investments in affiliated companies, including DLA. The above cash requirements do not include non-operational cash requirements such as the $275 million dividend to GM in connection with the News Corp. transactions, cash required for the shut down of the DIRECTV Broadband business and a potential purchase price adjustment payment to The Boeing Company ("Boeing"). For further discussion of the Boeing purchase price adjustment, see "Commitments and Contingencies" below. Hughes' cash requirements are expected to be funded from a combination of existing cash balances, cash provided from operations and amounts available under credit facilities. The proceeds of the DIRECTV financing transactions described below are expected to provide sufficient liquidity to fund Hughes through cash flow breakeven. Common Stock Dividend Policy. Dividends may be paid on the GM Class H common stock only when, as, and if declared by GM's Board of Directors in its sole discretion. The GM Board of Directors 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, with the exception of the dividend to be paid to GM in connection with the News Corp. transactions. Future Hughes earnings, if any, are expected to be retained for the development of the businesses of Hughes. Hughes Equity Recapitalization. During April 2003, the Hughes Board of Directors approved the reclassification of the outstanding Hughes Series B convertible preferred stock into Hughes Class B common stock of equivalent value, and a subsequent stock split of Hughes common stock and Hughes Class B common stock through dividends of additional shares. GM, in its capacity as the holder of all outstanding Hughes capital stock, approved the reclassification. Shortly thereafter, GM converted some of its Hughes common stock into an equivalent number of shares of Hughes Class B common stock. As a result of these transactions, Hughes currently has 1,207,518,237 shares of Hughes common stock and 274,373,316 shares of Hughes Class B common stock issued and outstanding, all of which are owned by GM. The terms of the Hughes common stock and Hughes Class B common stock are identical in all respects (with the exception of provisions regarding stock-on-stock dividends) and, at the option of the holder, the Hughes common stock may be converted at any time into Hughes Class B common stock and vice versa. These transactions had no impact on the outstanding number of shares of GM Class H common stock or the Class H dividend base. In connection with the News Corp. transactions, GM Class H common stock will be exchanged for Hughes common stock, and the Hughes Class B common stock will be sold by GM to News Corp. Immediately after the completion of the News Corp. transactions, all of the shares of Hughes Class B common stock held by News Corp. will be converted into Hughes common stock. Cash Flow Information. Cash provided by operating activities was $294.3 million for the first quarter of 2003, compared to cash provided by operating activities of $95.5 million for the first quarter of 2002. The increase in operating cash flows was primarily the result of the lower net loss from continuing operations in 2003 and a decrease in working capital during 2003 compared to an increase in working capital during 2002. Cash used in investing activities was $241.0 million in the three months ended March 31, 2003, and $172.2 million for the same period in 2002. The increase in cash used in investing activities in the - 63 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) first quarter of 2003 primarily resulted from $173.7 million of reduced proceeds from insurance claims and an increase of $46.5 million related to the purchase of short-term investments, of which $45.7 million represents restricted cash discussed in further detail below, partially offset by reduced expenditures for satellites and property. Cash provided by financing activities was $1,836.3 million for the first quarter of 2003, compared to $528.6 million for the first quarter of 2002. Financing activities in 2003 include net borrowings of $1,897.0 million partially offset by debt issuance costs of $61.8 million. Financing activities in 2002 include net borrowings of $740.1 million, partially offset by the $134.2 million final payment of the Raytheon settlement, debt issuance costs of $54.6 million and the payment of preferred stock dividends to GM. Cash used in discontinued operations was $56.0 million for the first quarter of 2003, compared to $38.2 million for the first quarter of 2002. Notes Payable and Credit Facilities. Notes Payable. On February 28, 2003, DIRECTV Holdings LLC ("DIRECTV"), a wholly-owned subsidiary of Hughes, issued $1.4 billion in senior notes due in 2013 in a Rule 144A private placement transaction. The ten-year senior notes are unsecured indebtedness guaranteed by all of DIRECTV's domestic subsidiaries and bear interest at 8.375%. Principal on the notes is payable upon maturity, while interest is payable semi-annually beginning September 15, 2003. In February 2002, PanAmSat completed an $800.0 million Rule 144A private placement notes offering, which were exchanged for registered notes in November 2002. These unsecured notes bear interest at an annual rate of 8.5%, payable semi-annually and mature in 2012. PanAmSat issued five, seven, ten and thirty-year fixed rate notes totaling $750.0 million in January 1998. The $200.0 million five-year notes were repaid in January 2003. The outstanding principal balances and interest rates for the seven, ten, and thirty-year notes as of March 31, 2003 were $275.0 million at 6.125%, $150.0 million at 6.375% and $125.0 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 with the new bank facility by substantially all of PanAmSat's assets, including its satellites. Credit Facilities. On March 6, 2003, DIRECTV entered into a $1,675.0 million senior secured credit facility. The senior secured credit facility is comprised of a $375.0 million Term Loan A, of which $175.0 million was outstanding at March 31, 2003, a $1,050.0 million Term Loan B, which was fully drawn as of March 31, 2003, and a $250.0 million revolving credit facility, which was undrawn at March 31, 2003. The senior secured credit facility is secured by substantially all of DIRECTV's assets and guaranteed by all of DIRECTV's domestic subsidiaries. All borrowings under the senior secured credit facility initially bear interest at a rate per annum equal to the London Interbank Offered Rate ("LIBOR") plus 3.50% (4.83% at March 31, 2003). The revolving credit facility and the Term Loan A each have terms of five years and the Term Loan B matures in 2010. Principal payments under the Term Loan A are due in varying amounts from 2004 to 2008. Principal payments under the Term Loan B are due primarily in 2008 to 2010. DIRECTV distributed to Hughes $2.56 billion of net proceeds from the senior secured credit facility and the sale of senior notes, described above. That distribution enabled Hughes to repay the $506.3 million outstanding principal balance plus accrued interest under a prior credit agreement, which was then terminated. The $200 million undrawn portion of the Term Loan A is expected to be drawn by DIRECTV by December 2003, and those proceeds may be distributed to - 64 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Hughes as well. The revolving portion of the senior secured credit facility is available to DIRECTV to fund working capital and other requirements. In February 2002, PanAmSat entered into a bank facility in the amount of $1,250.0 million. The bank facility is comprised of a $250.0 million revolving credit facility, which was undrawn as of March 31, 2003, a $300.0 million Tranche A Term Loan and a $700.0 million Tranche B Term Loan, both of which were fully drawn as of March 31, 2003. This bank facility replaced a previously existing $500.0 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 assets, including its satellites. PanAmSat repaid a $1,725.0 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. PanAmSat's bank facility requires that PanAmSat obtain the consent of the lenders prior to the consummation of the News Corp. transactions. PanAmSat has initiated the process for obtaining the consent, however, no assurances can be given that the consent will be obtained. Failure to obtain the consent would constitute an event of default under the facility. 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 March 2003 and November and February 2002. The March 2003 amendment extended the commitment to March 31, 2004. The November 2002 amendment reduced the size of the facility to $1,500.0 million and provided for a commitment through August 31, 2003. The amended facility is comprised of a $1,500.0 million tranche secured by a $1,500.0 million Hughes cash deposit. Borrowings under the facility bear interest at GMAC's cost of funds plus 0.125%. The $1,500.0 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 $1,500.0 million GMAC cash deposit, and accordingly offsets it against amounts borrowed from GMAC under the $1,500.0 million tranche in the consolidated statement of financial position. The facility was fully drawn as of March 31, 2003. Other. $39.8 million in other short-term and long-term debt, related primarily to DLA and HNS' international subsidiaries, was outstanding at March 31, 2003, bearing fixed and floating rates of interest of 4.31% to 16.00%. Principal on these borrowings is due in varying amounts through 2007. DIRECTV and PanAmSat are required to maintain certain financial covenants and are also subject to restrictive covenants under their borrowings. These covenants limit DIRECTV's 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. If DIRECTV or PanAmSat fails to comply with their respective covenants, all or a portion of their borrowings could become immediately payable. At March 31, 2003, DIRECTV and PanAmSat were in compliance with all such covenants. - 65 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) As of March 31, 2003, restricted cash of $45.7 million was included as part of "Prepaid expenses and other" on the Consolidated Balance Sheets. This cash was deposited to secure certain letters of credit and obligations of Hughes' majority-owned foreign subsidiaries. Restrictions on the cash will be removed as the letters of credit expire and the foreign subsidiaries' obligations are satisfied or terminated. Hughes' notes payable and credit facilities mature as follows: $17.9 million in the remainder of 2003; $94.9 million in 2004; $407.7 million in 2005; $138.6 million in 2006; $184.2 million in 2007; and $4,171.5 million thereafter. Satellite Fleet. As of March 31, 2003, Hughes had a fleet of 29 satellites, seven owned by DIRECTV and 22 owned and operated by PanAmSat. In April 2003, PanAmSat launched a new satellite, Galaxy XII. Seven additional satellites are currently under construction, including one for DIRECTV, three for PanAmSat and three for the SPACEWAY(R) platform under development by HNS. Capital expenditures related to satellites totaled $113.4 million and $205.3 million for the three months ended March 31, 2003 and 2002, respectively. Commitments and Contingencies Litigation In connection with the 2000 sale by Hughes of its satellite systems manufacturing businesses to Boeing, the stock purchase agreement provides for potential adjustment to the purchase price based upon the final closing date financial statements of the satellite systems manufacturing businesses. The stock purchase agreement also provides for a dispute resolution 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 at a rate of 9.5% from the date of sale, the total amount of which has been provided for in Hughes' consolidated financial statements. However, Boeing has submitted additional proposed adjustments, which are being resolved through the dispute resolution process. As of March 31, 2003, approximately $670 million of proposed adjustments remain unresolved. Hughes is contesting 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. The final resolution of this matter could result in Hughes making a cash payment to Boeing that would be material to Hughes' consolidated results of operations and financial position. 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 March 31, 2003. After discussion with counsel representing Hughes in those actions, it - 66 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) is the opinion of management that such liability is not expected to have a material adverse effect on Hughes' consolidated results of operations and financial position. Other Contingencies The in-orbit satellites of Hughes and its subsidiaries are subject to the risk of failing prematurely due to, among other things, mechanical failure, collision with objects in space or an inability to maintain proper orbit. Satellites are subject to the risk of launch delay and failure, destruction and damage while on the ground or during launch and failure to become fully operational once launched. Delays in the production or launch of a satellite or the complete or partial loss of a satellite, in-orbit or during launch, could have a material adverse impact on the operation of Hughes' businesses. Hughes has, in the past, experienced technical anomalies on some of its satellites. Service interruptions caused by 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. 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 $539.5 million and the book value of the satellites that were not insured was $1,022.4 million at March 31, 2003. In May 2003, the insurance policies covering nine of PanAmSat's satellites will expire. PanAmSat is currently negotiating renewal policies for these satellites. Upon the expiration of the existing insurance policies, there can be no assurance that PanAmSat will be able to procure new insurance for its satellites. In addition, new satellite insurance may only be available with higher premiums, higher deductibles, shorter coverage periods, higher loss percentages required for constructive total loss claims, additional satellite health-related policy exclusions, or other terms which may make such insurance commercially unreasonable. Accordingly, PanAmSat may elect to discontinue insuring certain satellites. An uninsured failure of one or more of PanAmSat's satellites could have a material adverse effect on Hughes' consolidated results of operations and financial position. In addition, higher premiums on insurance policies will increase costs, thereby reducing operating income by the amount of such increased premiums. On February 19, 2003, PanAmSat filed proofs of loss under the insurance policies for Galaxy XI and PAS-1R for constructive total losses based on degradation of the solar panels. Service to existing customers has not been affected, and PanAmSat expects that both of these satellites will continue to serve these customers. The insurance policies for these satellites total approximately $289 million and $345 million, respectively, and both include a salvage provision for PanAmSat to share 10% of future revenues from these satellites with their respective insurers if the proof of loss is accepted. The availability and use of the proceeds from these insurance claims are restricted by the agreements governing PanAmSat's debt obligations. No assurances can be made that the proof of loss with respect to these two satellites will be accepted by the insurers. PanAmSat is working with the satellite manufacturer to determine the long-term implications to the satellites and will continue to assess the operational impact these losses may have. At this time, based upon all information currently available to PanAmSat, as well as planned modifications to the operation of the satellites in order to maximize - 67 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) revenue generation, PanAmSat currently expects to operate these satellites for the duration of their estimated useful lives, although a portion of the transponder capacity on these satellites will not be useable during such time. Hughes currently believes that the net book values of these satellites are fully recoverable and does not expect a material impact on 2003 revenues as a result of the difficulties on these two satellites. In the first quarter of 2003, PanAmSat and the manufacturer of the Galaxy VIII-iR satellite terminated the Galaxy VIII-iR satellite construction contract by mutual agreement. As of March 31, 2003, PanAmSat had a receivable due from the satellite manufacturer of $69.5 million. PanAmSat expects to collect this receivable in December 2003. In addition, PanAmSat has agreed with the Galaxy VIII-iR launch vehicle provider to defer the use of the launch to a future satellite. Hughes is contingently liable under letters of credit and bonds in the aggregate amount of $60.7 million which were undrawn at March 31, 2003, and DLA LLC has guaranteed $3.0 million of bank debt related to non-consolidated LOC's, which is due in varying amounts through 2005. Additionally, DLA LLC may be required to repurchase Grupo Clarin S.A.'s ("Clarin") 3.98% interest in DLA LLC for $195 million in November 2003. In the first quarter of 2003, Clarin notified DLA LLC that it believes that DLA LLC's decision to initiate discussions to address DLA LLC's financial and operational challenges has caused DLA LLC to be responsible immediately to purchase Clarin's equity interest in DLA LLC. DLA LLC has filed a motion to reject its obligation under this contract as part of its reorganization proceedings. See "DLA LLC Reorganization" below for further discussion. The Hughes Board of Directors has approved several benefit plans designed to provide benefits for the retention of about 217 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 $107 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, as of March 31, 2003, approximately 21.2 million employee stock options to purchase shares of GM Class H common stock will vest upon a qualifying change-in-control and up to an additional 8.4 million employee stock options could vest if employees are laid off within one year of a change-in-control. The successful completion of the News Corp. transactions would be considered a change-in-control for purposes of these benefits. Commitments At March 31, 2003, minimum future commitments under noncancelable operating leases having lease terms in excess of one year were primarily for real property and aggregated $589.7 million, payable as follows: $214.2 million in the remainder of 2003, $156.4 million in 2004, $98.5 million in 2005, $49.3 million in 2006, $34.3 million in 2007, and $37.0 million thereafter. Certain of these leases contain escalation clauses and renewal or purchase options. Hughes has minimum commitments under noncancelable satellite construction and launch contracts, programming agreements, manufacturer subsidies agreements, and telemetry, tracking and control services agreements. As of March 31, 2003, minimum payments over the terms of applicable contracts are anticipated to be approximately $3,348.3 million, payable as follows: $603.2 million in the remainder of 2003, $556.3 million in 2004, $442.7 million in 2005, $626.5 million in 2006, $727.4 - 68 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) million in 2007, and $392.2 million thereafter. The Bankruptcy Court has granted DLA LLC's motion to reject certain contracts for programming commitments with remaining obligations of $767.8 million at March 31, 2003, included above. See "DLA LLC Reorganization" below for additional information. DLA LLC Reorganization On March 18, 2003, DLA LLC filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in Bankruptcy Court. The filing does not include any of DLA LLC's operating companies in Latin America and the Caribbean, which will continue regular operations. DLA LLC continues to manage its business as a debtor-in-possession ("DIP"). As a DIP, management is authorized to operate the business, but may not engage in transactions outside the ordinary course of business without Bankruptcy Court approval. Subsequent to the filing of its Chapter 11 petition, DLA LLC obtained Bankruptcy Court orders that, among other things, authorized DLA LLC to pay certain pre-petition obligations related to employee wages and benefits and to take certain actions where such payments or actions will benefit its estate or preserve the going concern value of the business enterprise, thereby enhancing the prospects of reorganization. Under bankruptcy law, actions by creditors to collect pre-petition indebtedness owed by DLA LLC at the filing date are stayed and other pre-petition contractual obligations may not be enforced against DLA LLC. In addition, DLA LLC has the right, subject to Bankruptcy Court approval and other conditions, to assume or reject any pre-petition executory contracts and unexpired leases. Parties to rejected executory contracts may file claims with the Bankruptcy Court. As of March 31, 2003, the Bankruptcy Court has approved DLA LLC's rejection of certain programming contracts with estimated remaining minimum payments totaling $767.8 million at the time of rejection. DLA LLC no longer broadcasts the programming related to rejected contracts. Hughes has agreed to provide a senior secured DIP financing facility in an amount of up to $300 million to supplement DLA LLC's existing cash flow and help ensure that vendors, programmers, employees and other parties receive payment for services provided after the filing of DLA LLC's Chapter 11 petition. Pursuant to interim orders, DLA LLC may borrow up to $35 million, subject to the terms of the loan documents. Assuming the final approval of the DIP financing, an additional $265 million of the DIP financing would become available to DLA LLC, subject to the terms of the loan documents. Due to material uncertainties, it is not possible to predict the length of time DLA LLC will operate under Chapter 11 protection, the outcome of the proceedings in general, whether DLA LLC will continue to operate under its current organizational structure, or the effect of the proceedings on DLA LLC's business and the Chapter 11 recovery by creditors and equity holders of DLA LLC. Hughes' Consolidated Balance Sheets as of March 31, 2003 include liabilities subject to compromise of DLA LLC of approximately $156.5 million. Additional liabilities subject to compromise may arise subsequent to the filing date of the Chapter 11 petition resulting from, among other things, rejection of executory contracts, including certain programming contracts, and allowance by the Bankruptcy Court of contingent claims and other disputed amounts. On April 17, 2003, DLA LLC filed with the Bankruptcy Court schedules setting forth DLA LLC's assets and liabilities as of the date of the petition as reflected in DLA LLC's records. The amounts of claims filed by DLA LLC's creditors could differ significantly from the scheduled amounts. Reorganization expense shown in Hughes' consolidated statements of operations includes the costs incurred to file the bankruptcy petition, ongoing related legal and consulting costs, and other - 69 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) charges related to the reorganization. As DLA LLC estimates allowed claims for amounts not previously recognized as liabilities subject to compromise, DLA LLC expects to record the accrual of such amounts as reorganization expense in accordance with SFAS No. 5, "Accounting for Contingencies." Such expense could be material in amount. Because of the inherent uncertainty of the bankruptcy process, the timing of the recording of such claims cannot be determined. Adjustments of liabilities to their reorganization values, as determined by the Bankruptcy Court, will also be reflected in reorganization expense. Hughes expects to retain control of DLA LLC upon emergence from Chapter 11 and therefore expects to continue to consolidate DLA LLC. Discontinued Operations On February 28, 2003, DIRECTV Broadband completed the transition of its customers to alternative service providers and shut down its high-speed Internet service business. In the fourth quarter of 2002, Hughes recorded a charge of $92.8 million related to accruals for employee severance benefits, contract termination payments and the write-off of customer premise equipment. Included in the $92.8 million charge were accruals for employee severance benefits of $21.3 million and contract termination payments of $18.6 million. During the first quarter of 2003, there were payments and adjustments of $11.5 million and $13.8 million related to employee severance benefits and contract termination payments, respectively. As of March 31, 2003, $9.8 million related to accruals for employee severance benefits and $4.8 million related to contract termination payments were remaining. 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, judgments and assumptions that affect amounts reported therein. Management bases its estimates, judgments and assumptions 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 may involve a higher degree of estimation, judgment and complexity. For a summary of all of Hughes' accounting policies, including those discussed below, see Note 2 to the Consolidated Financial Statements included in Hughes' Annual Report on Form 10-K for the year ended December 31, 2002 filed with the SEC on March 11, 2003. 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 estimated cash flows associated with the asset under review, 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. Changes in estimates of future cash flows could result in a write-down of the asset 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 SFAS No. 142, "Goodwill and Other - 70 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Intangible Assets," which is described in "Accounting Changes," below. Hughes uses estimates of fair value to determine the amount of impairment, if any, of recorded goodwill and intangible assets with indefinite lives. Fair value is determined primarily using the estimated future cash flows associated with the asset under review, discounted at a rate commensurate with the risk involved. Changes in estimates of discounted cash flows could result in a write-down of the asset in a future period. Financial Instruments and Investments. Hughes maintains investments in equity securities of unaffiliated companies. 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 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 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. Reserves for Doubtful Accounts. Management estimates the amount of required reserves for the potential non-collectibility of accounts receivable based upon past experience of collection and consideration of other relevant factors. However, past experience may not be indicative of future collections and therefore additional charges could be incurred in the future to reflect differences between estimated and actual collections. Contingent Matters. A significant amount of management estimate is required in determining when, or if, an accrual should be recorded for a contingent matter and the amount of such accrual, if any. Estimates are developed in consultation with outside counsel and are based on an analysis of potential outcomes. 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' consolidated results of operations and financial position. Accounting Changes Stock-Based Compensation Beginning in the first quarter of 2003, Hughes adopted the fair value based method of accounting for stock-based employee compensation of SFAS No. 123, "Accounting for Stock-Based Compensation" and the disclosure requirements of SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS No. 123." Hughes elected to follow the prospective method of adoption, which will result in the recognition of fair value based compensation cost in the consolidated statements of operations for stock options and other stock-based awards granted to employees on or after January 1, 2003. Stock options and other stock-based awards granted prior to January 1, 2003 continue to be accounted for under the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in the consolidated statements of operations. Variable Interest Entities On February 1, 2003, Hughes adopted Financial Accounting Standards Board ("FASB") Interpretation No. 46, "Consolidation of Variable Interest Entities--an interpretation of ARB No. 51" - 71 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) ("FIN 46"). FIN 46 requires the consolidation of a variable interest entity ("VIE") where an equity investor achieves a controlling financial interest through arrangements other than voting interests, and it is determined that the investor will absorb a majority of the expected losses and/or receive the majority of residual returns of the VIE. An entity is deemed a VIE, if by intention, the equity investment at risk by the investor is insufficient to permit the VIE to finance its activities without additional subordinated financial support, and under certain other circumstances. The determination as to whether an investment is an investment in a VIE is based on the circumstances on the date of investment or when certain events occur that would indicate a potential change in a previous determination. For investments in VIEs made before February 1, 2003, Hughes will follow the provisions of FIN 46, as required, beginning on July 1, 2003. The application of this standard on July 1, 2003 could result in the consolidation of certain affiliates which were previously accounted for under the equity method of accounting. Hughes has identified the partially-owned LOC's providing DIRECTV programming services in Venezuela and Puerto Rico, of which Hughes owns 19.5% and 40.0%, respectively, as potential VIEs. Hughes currently accounts for these investments under the equity method of accounting and reflects approximately 75.0% of their net income or loss in Hughes' consolidated statements of operations due to the accumulation of net losses in excess of the other investors' investments. If consolidation of these LOC's occur as described above, such application of FIN 46 would be reflected as a cumulative effect of accounting change in the consolidated statements of operations. Hughes has not yet determined the impact this standard will have on its consolidated results of operations or financial position, if any. Accounting for Costs Associated with Exit or Disposal Activities Hughes adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," on January 1, 2003. SFAS No. 146 generally 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 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)." The adoption of this standard did not have a significant impact on Hughes' consolidated results of operations or financial position. Goodwill and Other Intangible Assets Hughes adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. SFAS No. 142 required 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 value, including goodwill. If the carrying value exceeded the fair value, step two of the transitional impairment test was required to measure the amount of the impairment loss, if any. SFAS No. 142 also required 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 the first quarter of 2002, Hughes completed the required transitional impairment test for intangible assets with indefinite lives, which consisted of Federal Communications Commission 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. - 72 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) In the second quarter of 2002, with the assistance of an independent valuation firm, Hughes completed step one of the transitional impairment test to determine whether a potential impairment existed for goodwill recorded at January 1, 2002. Primarily based on the present value of expected future cash flows, it was determined that the carrying values of DLA and DIRECTV Broadband exceeded their fair values, therefore requiring step two of the impairment test be performed. Hughes completed step two of the impairment test for DLA and DIRECTV Broadband in the fourth quarter of 2002 as required by SFAS No. 142. Step two of the transitional test required the comparison of the fair value of the reporting unit goodwill with the carrying value of that goodwill. As a result of completing step two, Hughes determined that the carrying value of reporting unit goodwill exceeded the fair value of that goodwill and that $631.8 million and $107.9 million representing all of the goodwill recorded at DLA and DIRECTV Broadband, respectively, was impaired. Hughes also recorded a $16.0 million charge representing its share of the goodwill impairment of an equity method investee. Therefore, Hughes recorded a cumulative effect of accounting change, net of taxes, of $681.3 million ($755.7 million pre-tax) as of January 1, 2002 in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss). Other Hughes adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections," on January 1, 2003. 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. The adoption of this standard had no impact on Hughes' consolidated results of operations or financial position. New Accounting Standard In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the related revenues should be measured and allocated to the separate units of accounting. EITF Issue No. 00-21 will apply to revenue arrangements entered into after June 30, 2003; however, upon adoption, the EITF allows the guidance to be applied on a retroactive basis, with the change, if any, reported as a cumulative effect of accounting change in the consolidated statements of operations. Hughes has not yet determined the impact this EITF issue will have on its consolidated results of operations or financial position, if any. Security Ratings 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. Ratings in the B range generally indicate that the obligor currently has financial capacity to meet its financial commitments but there is limited assurance over any long period of time that interest and principal payments will be made or that other terms will be maintained. 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. - 73 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Hughes On February 28, 2003, Moody's Investor Services ("Moody's") withdrew Hughes' Ba3 senior secured credit rating after Hughes' prior credit agreement was repaid and terminated on that date. At that time, Moody's affirmed Hughes' Ba3 senior implied rating. The rating outlook remained stable for Hughes. On April 9, 2003, Standard & Poor's Ratings Services ("S&P") affirmed its long-term corporate credit rating on Hughes of B+. At the same time, S&P revised its Credit Watch implications on Hughes from developing to positive. The rating action stemmed from the announcement of the News Corp. transactions. DIRECTV On April 9, 2003, Moody's affirmed its stable outlook and Ba3 senior implied rating of DIRECTV. The ratings action followed the announcement of the News Corp. transactions. The affirmation is based upon Moody's expectation that the acquisition will not have a material impact on the credit metrics. On February 19, 2003, Moody's assigned to DIRECTV a Ba2 senior secured rating with respect to its senior secured credit facilities and a B1 senior unsecured rating on the $1.4 billion of senior unsecured notes. Moody's has also assigned a Ba3 senior implied and a B2 issuer rating to DIRECTV. Moody's assigned a stable outlook to DIRECTV's ratings. The rating outlook presumed diminishing capital and investment requirements, combined with operating profit improvement to generate eventual free cash flow, and therefore the ratings were considered to be moderately prospective. On February 12, 2003, S&P assigned a BB- rating on the senior secured credit facilities and a B rating on the $1.4 billion of senior unsecured notes. The ratings were placed on Credit Watch with positive implications, based on S&P's assessment of the likelihood that Hughes or DIRECTV could be acquired by an entity with higher credit quality than Hughes. PanAmSat On April 9, 2003, Moody's affirmed its stable outlook and Ba3 senior implied rating of PanAmSat. The ratings action followed the announcement of the News Corp. transactions. On April 9, 2003, S&P affirmed its credit ratings for PanAmSat of B+ for long-term corporate credit rating, BB- for senior secured debt, and B- for senior unsecured debt. At the same time, S&P revised its Credit Watch implications on PanAmSat from developing to positive. The rating action stemmed from the announcement of the News Corp. transactions. Market Risk Disclosure The following discussion and the estimated amounts generated from the sensitivity analyses referred to below include forward-looking statements of market risk which assume for analytical purposes that certain adverse market conditions may occur. Actual future market conditions may differ materially from such assumptions because the amounts noted below are the result of analyses used for the purpose of assessing possible risks and the mitigation thereof. Accordingly, the forward-looking statements should not be considered projections by Hughes of future events or losses. Interest Rate Risk Hughes is subject to fluctuating interest rates, which may adversely impact its consolidated results of operations and cash flows. Hughes had outstanding debt of $5.0 billion at March 31, 2003 which - 74 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (concluded) consisted of PanAmSat's fixed rate borrowings of $1,350 million and variable rate borrowings of $1,000 million, DIRECTV's fixed rate borrowings of $1,400 million and variable rate borrowings of $1,225 million, and various other floating and fixed rate borrowings, bearing interest at rates ranging from 4.3% to 16.0%. As of March 31, 2003, 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 $22 million. * * * - 75 - HUGHES ELECTRONICS CORPORATION CONTROLS AND PROCEDURES Hughes Electronics Corporation ("Hughes") maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. Within 90 days prior to the date of this report, Hughes' Chief Executive Officer and Hughes' Chief Financial Officer evaluated, with the participation of Hughes' management, the effectiveness of Hughes' disclosure controls and procedures. Based on the evaluation, which disclosed no significant deficiencies or material weaknesses, Hughes' Chief Executive Officer and Hughes' Chief Financial Officer concluded that Hughes' disclosure controls and procedures are effective. There were no significant changes in Hughes' internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation. - 76 - HUGHES ELECTRONICS CORPORATION CERTIFICATIONS I, Jack A. Shaw, Director, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hughes Electronics Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 7, 2003 By /s/ JACK A. SHAW ----------------------------- Jack A. Shaw Director, President and Chief Executive Officer - 77 - HUGHES ELECTRONICS CORPORATION CERTIFICATIONS I, Michael J. Gaines, Senior Vice President and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Hughes Electronics Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 7, 2003 By /s/ MICHAEL J. GAINES ----------------------------- Michael J. Gaines Senior Vice President and Chief Financial Officer - 78 - EX-99 4 exhibit991rgw.txt G. RICHARD WAGONER'S CERTIFICATION EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of General Motors Corporation (the "Corporation") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, G. Richard Wagoner, Jr., Chairman and Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ G. RICHARD WAGONER, JR. - --------------------------- G. Richard Wagoner, Jr. Chairman and Chief Executive Officer May 8, 2003 - 79 - EX-99 5 exhibit992jmd.txt JOHN M. DEVINE'S CERTIFICATION EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of General Motors Corporation (the "Corporation") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John M. Devine, Vice Chairman and Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ JOHN M. DEVINE - ------------------------- John M. Devine Vice Chairman and Chief Financial Officer May 8, 2003 - 80 - -----END PRIVACY-ENHANCED MESSAGE-----