EXHIBIT 99
HUGHES ELECTRONICS CORPORATION
FINANCIAL STATEMENTS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS)
(Unaudited)
Three Months Six Months Ended
Ended June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Dollars in Millions)
Revenues
Direct broadcast, leasing and other
services............................ $1,738.6 $1,565.4 $3,436.8 $3,037.8
Product sales........................ 246.5 271.6 441.3 502.3
-------- -------- -------- --------
Total Revenues..................... 1,985.1 1,837.0 3,878.1 3,540.1
-------- -------- -------- --------
Operating Costs and Expenses
Broadcast programming and other
costs............................... 786.6 686.7 1,525.3 1,354.5
Cost of products sold................ 189.2 245.9 343.7 434.4
Selling, general and administrative
expenses............................ 927.3 724.8 1,813.9 1,418.9
Depreciation and amortization........ 305.0 224.6 570.7 434.8
-------- -------- -------- --------
Total Operating Costs and
Expenses.......................... 2,208.1 1,882.0 4,253.6 3,642.6
-------- -------- -------- --------
Operating Loss......................... (223.0) (45.0) (375.5) (102.5)
Interest income........................ 19.0 4.3 42.8 8.2
Interest expense....................... (42.8) (57.8) (93.4) (102.7)
Other, net............................. (10.9) (43.3) (3.7) (282.5)
-------- -------- -------- --------
Loss From Continuing Operations Before
Income Taxes, Minority Interests and
Cumulative Effect of Accounting
Change................................ (257.7) (141.8) (429.8) (479.5)
Income tax benefit..................... 74.8 54.8 124.7 276.6
Minority interests in net losses of
subsidiaries.......................... 26.4 4.5 50.7 12.1
-------- -------- -------- --------
Loss from continuing operations before
cumulative effect of accounting
change................................ (156.5) (82.5) (254.4) (190.8)
Income from discontinued operations,
net of taxes.......................... -- 13.4 -- 39.8
-------- -------- -------- --------
Loss before cumulative effect of
accounting change..................... (156.5) (69.1) (254.4) (151.0)
Cumulative effect of accounting change,
net of taxes.......................... -- -- (7.4) --
-------- -------- -------- --------
Net Loss............................... (156.5) (69.1) (261.8) (151.0)
Adjustment to exclude the effect of GM
purchase accounting................... 0.8 5.3 1.6 10.6
-------- -------- -------- --------
Loss excluding the effect of GM
purchase accounting adjustment........ (155.7) (63.8) (260.2) (140.4)
Preferred stock dividends.............. (24.1) (24.1) (48.2) (48.8)
-------- -------- -------- --------
Loss Used for Computation of Available
Separate Consolidated Net Income
(Loss)................................ $ (179.8) $ (87.9) $ (308.4) $ (189.2)
======== ======== ======== ========
Available Separate Consolidated Net
Income (Loss)
Average number of shares of General
Motors Class H Common Stock
outstanding (in millions)
(Numerator)........................... 875.9 562.7 875.7 488.0
Average Class H dividend base (in
millions) (Denominator)............... 1,299.6 1,297.0 1,299.4 1,295.8
Available Separate Consolidated Net
Income (Loss)......................... $ (121.2) $ (38.1) $ (207.8) $ (71.3)
======== ======== ======== ========
- --------
Reference should be made to the Notes to the Consolidated Financial Statements.
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HUGHES ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2001 2000
--------- ------------
(Dollars in Millions)
ASSETS
Current Assets
Cash and cash equivalents............................ $ 1,052.3 $ 1,508.1
Accounts and notes receivable (less allowances)...... 1,235.1 1,253.0
Contracts in process................................. 154.6 186.0
Inventories.......................................... 396.1 338.0
Deferred income taxes................................ 114.3 89.9
Prepaid expenses and other........................... 881.9 778.7
--------- ---------
Total Current Assets............................. 3,834.3 4,153.7
Satellites, net........................................ 4,540.2 4,230.0
Property, net.......................................... 2,027.9 1,707.8
Net Investment in Sales-type Leases.................... 196.8 221.1
Intangible Assets, net................................. 7,354.9 7,151.3
Investments and Other Assets........................... 1,514.1 1,815.4
--------- ---------
Total Assets..................................... $19,468.2 $19,279.3
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable..................................... $ 1,367.6 $ 1,224.2
Deferred revenues.................................... 176.2 137.6
Short-term borrowings and current portion of long-
term debt........................................... 908.5 24.6
Accrued liabilities and other........................ 1,257.8 1,304.5
--------- ---------
Total Current Liabilities........................ 3,710.1 2,690.9
Long-Term Debt......................................... 953.1 1,292.0
Other Liabilities and Deferred Credits................. 1,580.7 1,647.3
Deferred Income Taxes.................................. 666.8 769.3
Commitments and Contingencies
Minority Interests..................................... 540.2 553.7
Stockholder's Equity
Capital stock and additional paid-in capital......... 10,130.1 9,973.8
Preferred stock...................................... 1,497.1 1,495.7
Retained earnings.................................... 321.6 631.6
--------- ---------
Subtotal Stockholder's Equity.......................... 11,948.8 12,101.1
--------- ---------
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment............... (16.1) (16.1)
Accumulated unrealized gains on securities and
derivatives....................................... 103.3 257.0
Accumulated foreign currency translation
adjustments....................................... (18.7) (15.9)
--------- ---------
Accumulated other comprehensive income............... 68.5 225.0
--------- ---------
Total Stockholder's Equity....................... 12,017.3 12,326.1
--------- ---------
Total Liabilities and Stockholder's Equity....... $19,468.2 $19,279.3
========= =========
- --------
Reference should be made to the Notes to the Consolidated Financial Statements.
- 24 -
HUGHES ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------
2001 2000
--------- ---------
(Dollars in
Millions)
Cash Flows from Operating Activities
Net Cash Provided by (Used in) Operating Activities...... $ (97.5) $ 147.3
--------- ---------
Cash Flows from Investing Activities
Investment in companies, net of cash acquired............ (209.4) (103.4)
Expenditures for property................................ (393.3) (405.1)
Expenditures for satellites.............................. (468.1) (374.3)
Proceeds from disposal of property....................... 0.2 12.0
Proceeds from sale of investments........................ 67.8 36.6
Proceeds from insurance claims........................... 132.4 36.2
--------- ---------
Net Cash Used in Investing Activities.................. (870.4) (798.0)
--------- ---------
Cash Flows from Financing Activities
Net increase in short-term borrowings.................... 437.4 295.4
Long-term debt borrowings................................ 1,144.4 3,426.5
Repayment of long-term debt.............................. (1,036.8) (3,096.0)
Stock options exercised.................................. 13.9 47.9
Preferred stock dividends paid to General Motors......... (46.8) (46.8)
--------- ---------
Net Cash Provided by Financing Activities.............. 512.1 627.0
--------- ---------
Net cash used in continuing operations................... (455.8) (23.7)
Net cash provided by discontinued operations............. -- 63.1
--------- ---------
Net increase (decrease) in cash and cash equivalents..... (455.8) 39.4
Cash and cash equivalents at beginning of the period..... 1,508.1 238.2
--------- ---------
Cash and cash equivalents at end of the period........... $ 1,052.3 $ 277.6
========= =========
- --------
Reference should be made to the Notes to the Consolidated Financial Statements.
- 25 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial reporting. In the opinion of
management, all adjustments (consisting only of normal recurring items) which
are necessary for a fair presentation have been included. The results for
interim periods are not necessarily indicative of results that may be expected
for any other interim period or for the full year. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Hughes Electronics Corporation ("Hughes") Annual Report on Form 10-K for the
year ended December 31, 2000 and the Hughes Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001, filed with the Securities and Exchange
Commission ("SEC") on March 6, 2001 and May 10, 2001, respectively, and all
other Hughes filings, including Current Reports on Form 8-K, filed with the SEC
through the date of this report.
Certain prior period amounts have been reclassified to conform to the June
30, 2001 presentation.
Revenues, operating costs and expenses, and other non-operating results for
the discontinued operations of the satellite systems manufacturing businesses
("Satellite Businesses"), which were sold to The Boeing Company ("Boeing") on
October 6, 2000, are excluded from Hughes' results from continuing operations
for 2000. Alternatively, the financial results of the Satellite Businesses for
2000 are presented in Hughes' Consolidated Statements of Operations and
Available Separate Consolidated Net Income (Loss) in a single line item entitled
"Income from discontinued operations, net of taxes," and the net cash flows are
presented in the Condensed Consolidated Statements of Cash Flows as "Net cash
provided by discontinued operations." See further discussion in Note 8.
The accompanying consolidated financial statements include the applicable
portion of intangible assets, including goodwill, and related amortization
resulting from the purchase accounting adjustment associated with General Motors
Corporation's ("GM") purchase of Hughes in 1985, of which a substantial portion
is allocated to the Satellite Businesses.
Note 2. Accounting Policies
Accounting Change
Hughes adopted Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities on January 1, 2001.
In accordance with the transition provisions of SFAS No. 133, Hughes recorded a
one-time after-tax charge of $7.4 million on January 1, 2001 as a cumulative
effect of accounting change in the Consolidated Statements of Operations and
Available Separate Consolidated Net Income (Loss) and an after- tax unrealized
gain of $0.4 million in Other Comprehensive Income (Loss) ("OCI").
SFAS No. 133 requires Hughes to carry all derivative financial instruments on
the balance sheet at fair value. Hughes uses derivative contracts to minimize
the financial impact of changes in the fair value of recognized assets,
liabilities, and unrecognized firm commitments, or the variability of cash flows
associated with forecasted transactions in accordance with internal risk
management policies. Changes in fair value of designated, qualified and
effective fair value hedges are recognized in earnings as offsets to the changes
in fair value of the related hedged items. Changes in fair value of designated,
qualified and effective cash flow hedges are deferred and recorded as a
component of OCI until the hedged transactions occur and are recognized in
earnings. The ineffective portion and changes related to amounts excluded from
the effectiveness assessment of a hedging derivative's change in fair value are
immediately recognized in "Other, net." Hughes assesses, both
- 26 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
at the inception of the hedge and on an on-going basis, whether the derivatives
are highly effective. Hedge accounting is prospectively discontinued when hedge
instruments are no longer highly effective. In addition to derivative contracts
entered into for hedging purposes, Hughes holds financial instruments obtained
in connection with supplier contracts, such as stock purchase warrants, which
are also accounted for as derivatives under SFAS No. 133. Adjustments to the
fair value of these non-hedging derivative instruments are reflected in "Other,
net."
The net deferred loss from effective cash flow hedges in OCI of $1.1 million
at June 30, 2001 is expected to be recognized in earnings during the next twelve
months.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations initiated after
July 1, 2001 be accounted for using the purchase method. SFAS No. 142 requires
that existing and future goodwill and intangible assets with indefinite lives
not be amortized, but written down, as needed, based upon an impairment analysis
that must occur at least annually. All other intangible assets are amortized
over their estimated useful lives. Hughes will be required to adopt SFAS No. 142
on January 1, 2002 which will require an assessment of goodwill and intangible
assets acquired prior to July 1, 2001. Intangible assets that no longer qualify
for separate accounting, if any, will be combined with goodwill, while certain
intangible assets not previously identified, if any, may be prospectively
accounted for separately from goodwill. Management is currently assessing the
impact of these standards on Hughes' results of operations and financial
position. Goodwill amortization for the six months ended June 30, 2001 was
$101.7 million. These statements will have no impact on Hughes' consolidated
cash flows.
Note 3. Inventories
Major Classes of Inventories
June 30, December 31,
2001 2000
-------- ------------
(Dollars in Millions)
Productive materials and supplies...................... $ 75.2 $ 89.5
Work in process........................................ 149.3 128.3
Finished goods......................................... 171.6 120.2
------ ------
Total................................................ $396.1 $338.0
====== ======
- 27 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4. Comprehensive Income (Loss)
Hughes' total comprehensive income (loss) was as follows:
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
2001 2000 2001 2000
------- ------- ------- -------
(Dollars in Millions)
Net loss............................... $(156.5) $ (69.1) $(261.8) $(151.0)
Other comprehensive income (loss):
Foreign currency translation
adjustments......................... (4.0) 6.2 (2.8) (19.1)
Cumulative effect of accounting
change.............................. -- -- 0.4 --
Unrealized gains (losses) on
securities and derivatives:
Unrealized holding gains (losses).. 19.4 (189.2) (130.5) (18.2)
Less: reclassification adjustment
for gains recognized during the
period............................ (1.3) -- (23.6) --
------- ------- ------- -------
Other comprehensive income (loss).. 14.1 (183.0) (156.5) (37.3)
------- ------- ------- -------
Total comprehensive loss......... $(142.4) $(252.1) $(418.3) $(188.3)
======= ======= ======= =======
Note 5. Available Separate Consolidated Net Income (Loss)
GM Class H common stock is a "tracking stock" of GM designed to provide
holders with financial returns based on the financial performance of Hughes.
Holders of GM Class H common stock have no direct rights in the equity or assets
of Hughes, but rather have rights in the equity and assets of GM (which includes
100% of the stock of Hughes).
Amounts available for the payment of dividends on GM Class H common stock are
based on the Available Separate Consolidated Net Income (Loss) ("ASCNI") of
Hughes. The ASCNI of Hughes is determined quarterly and is equal to the net
income (loss) of Hughes, excluding the effects of the GM purchase accounting
adjustment arising from GM's acquisition of Hughes and reduced by the effects of
preferred stock dividends paid and/or payable to GM (earnings (loss) used for
computation of ASCNI), multiplied by a fraction, the numerator of which is equal
to the weighted-average number of shares of GM Class H common stock outstanding
during the period (875.9 million and 562.7 million during the second quarters of
2001 and 2000, respectively) and the denominator of which is a number equal to
the weighted-average number of shares of GM Class H common stock which, if
issued and outstanding, would represent 100% of the tracking stock interest in
the earnings of Hughes (Average Class H dividend base). The Average Class H
dividend base was 1,299.6 million and 1,297.0 million during the second quarters
of 2001 and 2000, respectively.
In addition, the denominator used in determining the ASCNI of Hughes may be
adjusted from time-to-time as deemed appropriate by the GM Board to reflect
subdivisions or combinations of the GM Class H common stock, certain transfers
of capital to or from Hughes, the contribution of shares of capital stock of GM
to or for the benefit of Hughes employees and the retirement of GM Class H
common stock purchased by Hughes. The GM Board's discretion to make such
adjustments is limited by criteria set forth in GM's Restated Certificate of
Incorporation.
During the second quarter of 2000, GM completed an exchange offer in which GM
repurchased 86 million shares of GM $1 2/3 par value common stock and issued 92
million shares (prior to giving effect to the stock split during 2000) of GM
Class H common stock. In addition, on June 12, 2000, GM contributed
approximately 54 million shares (prior to giving effect to the stock split
during 2000) and approximately 7 million shares (prior to the stock split during
2000) of GM Class H common stock to its U.S. Hourly-Rate Employees Pension Plan
and VEBA trust, respectively.
- 28 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 6, 2000, the GM Board declared a three-for-one stock split of the GM
Class H common stock. The stock split was in the form of a 200% stock dividend,
paid on June 30, 2000 to GM Class H common stockholders of record on June 13,
2000. As a result, the number of shares of GM Class H common stock presented for
all periods have been adjusted to reflect the stock split, unless otherwise
noted.
Since January 1, 1999, shares of Class H common stock delivered by GM in
connection with the award of such shares to and the exercise of stock options by
employees of Hughes increases the numerator and denominator of the fraction
referred to above. Prior to January 1, 1999, the exercise of stock options did
not affect the GM Class H dividend base (denominator). From time to time, in
anticipation of exercises of stock options, Hughes may purchase Class H common
stock on the open market. Upon purchase, these shares are retired and therefore
decrease the numerator and denominator of the fraction referred to above.
Note 6. Hughes Series A Preferred Stock
On June 24, 1999, as part of a strategic alliance with Hughes, America
Online, Inc. ("AOL") invested $1.5 billion in shares of GM Series H preference
stock. The GM Series H preference stock will automatically convert on June 24,
2002 into GM Class H common stock based upon a variable conversion factor linked
to the GM Class H common stock price at the time of conversion, and accrues
quarterly dividends at a rate of 6.25% per year. It may be converted earlier in
certain limited circumstances. GM immediately invested the $1.5 billion received
from AOL in shares of Hughes Series A Preferred Stock designed to correspond to
the financial terms of the GM Series H preference stock. Dividends on the Hughes
Series A Preferred Stock are payable to GM quarterly at an annual rate of 6.25%.
The underwriting discount on the Hughes Series A Preferred Stock is amortized
over three years. Upon conversion of the GM Series H preference stock into GM
Class H common stock, Hughes will redeem the Hughes Series A Preferred Stock
through a cash payment to GM equal to the fair market value of the GM Class H
common stock issuable upon the conversion. Simultaneous with GM's receipt of the
cash redemption proceeds, GM will make a capital contribution to Hughes of the
same amount.
Note 7. Short-Term Borrowings and Long-Term Debt
Short-Term Borrowings and Current Portion of Long-Term Debt
Interest
Rates at
June 30, June 30, December 31,
2001 2001 2000
----------- -------- ------------
(Dollars in Millions)
Revolving credit facility................. 4.96% $450.0
Other short-term borrowings............... 10.00% 3.4 $ 3.4
Current portion of long-term debt......... 4.92%-9.36% 455.1 21.2
------ -----
Total short-term borrowings and current
portion of long-term debt.............. $908.5 $24.6
====== =====
- 29 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Term Debt
Interest
Rates at
June 30, June 30, December 31,
2001 2001 2000
------------ -------- ------------
(Dollars in Millions)
Notes payable............................. 4.92%-6.88% $ 796.5 $ 817.7
Revolving credit facilities............... 6.39%-6.57% 583.3 464.9
Other debt................................ 9.36%-12.37% 28.4 30.6
-------- --------
Total debt.............................. 1,408.2 1,313.2
Less current portion...................... 455.1 21.2
-------- --------
Total long-term debt.................... $ 953.1 $1,292.0
======== ========
Note 8. Acquisitions, Investments and Divestitures
Acquisitions and Investments
On May 1, 2001, DIRECTV Latin America, LLC ("DLA"), which operates the Latin
America DIRECTV business, acquired from Grupo Clarin S.A. ("Clarin") a 51%
ownership interest in Galaxy Entertainment Argentina S.A. ("GEA"), a local
operating company in Argentina that provides direct-to-home broadcast services,
and other assets, consisting primarily of programming and advertising rights.
The purchase price, valued at $169 million, consisted of a 3.98% ownership
interest in DLA and a put option that will allow Clarin to sell in November 2003
its 3.98% interest back to DLA for $195 million in cash. As a result of the
transaction, Hughes' interest in DLA decreased from 77.8% to 74.7% and Hughes'
ownership in GEA increased from 20% to 58.1%. Hughes' portion of the purchase
price, which amounted to about $130 million, was recorded as an increase to
additional paid in capital with the offset allocated to the net assets acquired,
including goodwill.
On April 3, 2001, Hughes acquired Telocity Delaware, Inc. ("Telocity"), a
company that provides land-based digital subscriber line ("DSL") services,
through the completion of a tender offer and merger. Telocity is now operating
as DIRECTV Broadband, Inc., and is included as part of the Direct-To-Home
Broadcast segment. The purchase price, which totaled $197.8 million in cash,
will be allocated to the net assets acquired (primarily goodwill) prior to year
end. The June 30, 2001 consolidated financial statements reflect a preliminary
allocation of the purchase price for the Telocity transaction based upon
information currently available. Adjustments relating to tangible and intangible
assets and accrued liabilities are estimates pending the completion of
independent appraisals currently in process. Additionally, the preliminary
purchase price allocation assumes that Hughes will make an election to treat the
transaction as an asset acquisition for income tax purposes, pending further
analysis by Hughes management. The purchase price allocation is expected to be
completed by December 31, 2001.
- 30 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following selected unaudited pro forma information is being provided to
present a summary of the combined results of Hughes and Telocity for 2001 and
2000 as if the acquisition had occurred as of the beginning of the respective
periods, giving effect to purchase accounting adjustments. The pro forma data is
presented for informational purposes only and may not necessarily reflect the
results of operations of Hughes had Telocity operated as part of Hughes for each
of the periods presented, nor are they necessarily indicative of the results of
future operations. The pro forma information excludes the effect of
non-recurring charges.
Six Months Ended
June 30,
------------------
2001 2000
-------- --------
(Dollars in
Millions)
Total revenues........................................... $3,886.2 $3,541.9
Net loss................................................. (309.5) (219.2)
On January 1, 2001, DLA acquired from Bavaria S.A. an additional 14.2%
ownership interest in Galaxy Entretenimiento de Colombia ("GEC"), a DLA local
operating company located in Colombia. As a result of the transaction, Hughes'
ownership interest in GEC increased from 44.2% to 55.2%. The purchase price
consisted of prior capital contributions of $4.4 million made by DLA during 2000
on behalf of Bavaria S.A.
The above acquisitions were accounted for using the purchase method of
accounting and resulted in their consolidation from their respective dates of
acquisition. Accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on their estimated fair values at the
date of acquisition. The excess of the purchase price over the estimated fair
values of the net assets acquired has been recorded as goodwill, resulting in
goodwill additions of $341.9 million for the six months ended June 30, 2001.
Divestitures
On October 6, 2000, Hughes completed the sale of its Satellite Businesses for
$3.75 billion in cash, plus the estimated book value of the closing net assets
of the businesses sold in excess of a target amount. The transaction resulted in
the recognition of a pre-tax gain of $2,036.0 million, or $1,132.3 million
after-tax. Included in this gain is a net after-tax curtailment loss of $42
million related to pension and other postretirement benefit plan assets and
liabilities associated with the Satellite Businesses. The purchase price is
subject to adjustment based upon the final closing net assets as discussed in
Note 10.
Summarized financial information for the discontinued operations (excluding
intercompany transactions) follows:
Six Months Ended
June 30, 2000
----------------
(Dollars in
Millions)
Revenues.................................................... $801.2
Income tax provision........................................ 23.8
Net income.................................................. 39.8
In a separate, but related transaction, Hughes also sold to Boeing its 50%
interest in HRL Laboratories LLC ("HRL") for $38.5 million, which represented
the net book value of HRL at October 6, 2000.
On March 1, 2000, Hughes announced that the operations of DIRECTV Japan
Management, Inc., DIRECTV Japan, Inc., and certain related companies
(collectively "DIRECTV Japan") would be discontinued. Pursuant to an agreement
with Japan Digital Broadcasting Services Inc. (now named Sky Perfect
- 31 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Communications, Inc. or "Sky Perfect"), qualified subscribers to the DIRECTV
Japan service were offered the opportunity to migrate to the Sky Perfect
service, for which DIRECTV Japan was paid a commission for each subscriber who
actually migrated and Hughes acquired a 6.6% interest in Sky Perfect. As a
result, Hughes wrote-off its net investment in DIRECTV Japan of $164.6 million
and accrued exit costs of $403.7 million and involuntary termination benefits of
$14.5 million. Accrued exit costs consist of claims arising out of contracts
with dealers, manufacturers, programmers and others, satellite transponder and
facility and equipment leases, subscriber migration and termination costs, and
professional service fees and other. The write-off and accrual were partially
offset by the difference between the cost of the Sky Perfect shares acquired and
the estimated fair value of the shares ($428.8 million), as determined by an
independent appraisal, and by $40.2 million for anticipated contributions from
other DIRECTV Japan shareholders. The net effect of the transaction was a charge
to "Other, net" of $170.6 million at March 31, 2000.
In the fourth quarter of 2000, $106.6 million of accrued exit costs were
reversed and $0.6 million of involuntary termination benefits were added,
resulting in a net credit adjustment to "Other, net" of $106.0 million. The
adjustments made to the exit cost accrual were primarily attributable to earlier
than anticipated cessation of the DIRECTV Japan broadcasting service, greater
than anticipated commission payments for subscriber migration and favorable
settlements of various contracts and claims. About $22.4 million was paid for
accrued exit costs and no payments were made for involuntary termination
benefits during the second quarter of 2001. The balances remaining at June 30,
2001 for accrued exit costs and involuntary termination benefits were $78.7
million and $0.9 million, respectively.
DIRECTV Japan employed approximately 290 personnel as of March 31, 2000, of
which 244 were terminated during 2000. All remaining personnel were terminated
in the first quarter of 2001.
In the fourth quarter of 2000, Sky Perfect completed an initial public
offering, at which date the fair value of Hughes' interest (diluted by the
public offering to approximately 5.3%) in Sky Perfect was approximately $343
million. In the fourth quarter of 2000, a portion of the decline in the value of
the Sky Perfect investment was determined to be "other than temporary" based on
investment research analysis, resulting in a write-down of the carrying value of
the investment by $86 million from $428.8 million to $342.8 million. At June 30,
2001, the market value of the investment was $123.5 million, or $219.3 million
less than the carrying value at that date. Hughes believes that this decrease
represents a temporary decline in value, and as a result, has recorded this
change as an unrealized loss, net of taxes, as part of OCI. If the market value
of the Sky Perfect investment does not recover significantly, Hughes may be
required to record an additional adjustment for an "other than temporary"
decline as a charge to earnings prior to year-end.
Note 9. Segment Reporting
Hughes' segments, which are differentiated by their products and services,
include Direct-To-Home Broadcast, Satellite Services, and Network Systems.
Direct-To-Home Broadcast is engaged in acquiring, promoting, selling and/or
distributing digital entertainment programming via satellite to residential and
commercial customers and providing land-based DSL services. Satellite Services
is engaged in the selling, leasing and operating of satellite transponders and
providing services for cable television systems, news companies, Internet
service providers and private business networks. The Network Systems segment is
a provider of satellite-based private business networks and broadband Internet
access, and a supplier of DIRECTV(TM) receiving equipment (set-top boxes and
dishes). Other includes the corporate office and other entities.
- 32 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selected information for Hughes' operating segments are reported as follows:
Direct-To-
Home Satellite Network
Broadcast Services Systems Other Eliminations Total
---------- --------- ------- ------ ------------ --------
(Dollars in Millions)
For the Three Months
Ended:
June 30, 2001
External Revenues....... $1,524.1 $168.4 $ 284.3 $ 8.3 -- $1,985.1
Intersegment Revenues... 3.6 39.9 17.9 -- $ (61.4) --
-------- ------ ------- ------ ------- --------
Total Revenues.......... $1,527.7 $208.3 $ 302.2 $ 8.3 $ (61.4) $1,985.1
======== ====== ======= ====== ======= ========
Operating Profit
(Loss)................. $ (182.9) $ 32.8 $ (56.5) $(22.9) $ 6.5 $ (223.0)
June 30, 2000
External Revenues....... $1,241.3 $286.1 $ 304.8 $ 4.8 -- $1,837.0
Intersegment Revenues... 10.9 36.2 67.0 2.2 $(116.3) --
-------- ------ ------- ------ ------- --------
Total Revenues.......... $1,252.2 $322.3 $ 371.8 $ 7.0 $(116.3) $1,837.0
======== ====== ======= ====== ======= ========
Operating Profit
(Loss)................. $ (134.8) $139.8 $ (17.1) $(31.2) $ (1.7) $ (45.0)
For the Six Months
Ended:
June 30, 2001
External Revenues....... $3,010.1 $334.9 $ 517.6 $ 15.5 -- $3,878.1
Intersegment Revenues... 7.5 78.6 32.8 0.1 $(119.0) --
-------- ------ ------- ------ ------- --------
Total Revenues.......... $3,017.6 $413.5 $ 550.4 $ 15.6 $(119.0) $3,878.1
======== ====== ======= ====== ======= ========
Operating Profit
(Loss)................. $ (328.4) $ 73.9 $(109.1) $(21.4) $ 9.5 $ (375.5)
June 30, 2000
External Revenues....... $2,408.0 $550.5 $ 573.8 $ 7.8 -- $3,540.1
Intersegment Revenues... 18.0 70.9 162.5 2.8 $(254.2) --
-------- ------ ------- ------ ------- --------
Total Revenues.......... $2,426.0 $621.4 $ 736.3 $ 10.6 $(254.2) $3,540.1
======== ====== ======= ====== ======= ========
Operating Profit
(Loss)................. $ (260.8) $267.1 $ (17.0) $(60.7) $ (31.1) $ (102.5)
Note 10. Contingencies
In connection with the sale by Hughes of the Satellite Businesses to Boeing,
the terms of the stock purchase agreement provide for an adjustment to the
purchase price based upon the final closing net assets of the Satellite
Businesses compared to the estimated closing net assets. The stock purchase
agreement also provides a process for resolving any disputes that might arise in
connection with the final determination of the final closing net assets.
Boeing has submitted proposed changes to the closing net assets, and Hughes
is currently in discussions with Boeing to achieve a resolution. Although Hughes
believes it has adequately provided for an adjustment to the purchase price, the
total amount of any such adjustment cannot be determined at this time. It is
possible that the ultimate resolution of this matter could result in Hughes
making a cash payment to Boeing that would be material to Hughes' consolidated
financial statements.
Additionally, as part of the sale of the Satellite Businesses, Hughes
retained limited liability for certain possible fines and penalties and the
financial consequences of debarment associated with potential criminal
- 33 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
violations of U.S. export control laws, which are currently being investigated,
related to the businesses now owned by Boeing, should such sanctions be imposed
by either the Department of Justice or State Department against the Satellite
Businesses. Hughes does not expect any sanctions imposed to have a material
adverse effect on its consolidated financial statements.
In connection with the 1997 spin-off of Hughes' defense electronics business
and the subsequent merger of that business with Raytheon, the terms of the
merger agreement provided processes for resolving disputes that might arise in
connection with post-closing financial adjustments that were also called for by
the terms of the merger agreement. These financial adjustments might require a
cash payment from Raytheon to Hughes or vice versa.
A dispute currently exists regarding the post-closing adjustments which
Hughes and Raytheon have proposed to one another and related issues regarding
the adequacy of disclosures made by Hughes to Raytheon in the period prior to
consummation of the merger. Hughes and Raytheon are proceeding with the dispute
resolution process. It is possible that the ultimate resolution of the post-
closing financial adjustment and of related disclosure issues may result in
Hughes making a payment to Raytheon that would be material to Hughes. However,
the amount of any payment that either party might be required to make to the
other cannot be determined at this time. Hughes intends to vigorously pursue
resolution of the disputes through the arbitration processes, opposing the
adjustments proposed by Raytheon, and seeking the payment from Raytheon that
Hughes has proposed.
General Electric Capital Corporation ("GECC") and DIRECTV entered into a
contract on July 31, 1995, in which GECC agreed to establish and manage a
private label consumer credit program for consumer purchases of hardware and
related DIRECTV(R) programming. Under the contract, GECC also agreed to provide
certain related services to DIRECTV, including credit risk scoring, billing and
collections services. DIRECTV agreed to act as a surety for loans complying with
the terms of the contract. Hughes guaranteed DIRECTV's performance under the
contract. A complaint and counterclaim were filed by the parties in the U.S.
District Court for the District of Connecticut concerning GECC's performance and
DIRECTV's obligation to act as a surety. A trial commenced on June 12, 2000 with
GECC presenting evidence to the jury for damages of $157 million. DIRECTV sought
damages from GECC of $45 million. On July 21, 2000, the jury returned a verdict
in favor of GECC and awarded contract damages in the amount of $133.0 million.
The trial judge issued an order granting GECC $48.5 million in interest under
Connecticut's offer-of-judgment statute. With this order, the total judgment
entered in GECC's favor was $181.5 million. Hughes and DIRECTV filed a notice of
appeal on December 29, 2000. The appeal briefs have been submitted and oral
argument is expected in mid-September 2001. Hughes and DIRECTV believe that it
is reasonably possible that the jury verdict will be overturned and a new trial
granted. However, if Hughes were not to prevail in this manner, Hughes could be
required to make a cash payment to GECC that would be material to Hughes'
consolidated financial statements.
Hughes Communications Galaxy, Inc. ("HCGI") filed a lawsuit on March 22, 1991
against the U.S. Government based upon the National Aeronautics and Space
Administration's breach of contract to launch ten satellites on the Space
Shuttle. The U.S. Court of Federal Claims granted HCGI's motion for summary
judgment on the issue of liability on November 30, 1995. A trial was held on May
1, 1998 on the issue of damages. On June 30, 2000, a final judgment was entered
in favor of HCGI in the amount of $103 million. On July 13, 2000, HCGI filed a
notice to appeal the judgment with the U.S. Court of Appeals for the Federal
Circuit and is requesting a greater amount than was previously awarded to HCGI.
On August 4, 2000, the Government filed its cross appeal. As a result of the
uncertainty regarding the outcome of this matter, no amount has been recorded in
- 34 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
the consolidated financial statements to reflect the award. Oral arguments were
heard on July 11, 2001. Final resolution of this issue could result in a gain
that would be material to Hughes.
Litigation is subject to uncertainties and the outcome of individual
litigated matters is not predictable with assurance. In addition to the above
items, various legal actions, claims, and proceedings are pending against
Hughes, including those arising out of alleged breaches of contractual
relationships; antitrust and patent infringement matters; and other items
arising in the ordinary course of business. Hughes has established reserves for
matters in which losses are probable and can be reasonably estimated. Some of
the matters may involve compensatory, punitive, or other treble damage claims,
or sanctions, that if granted, could require Hughes to pay damages or make other
expenditures in amounts that are not currently estimable. After discussion with
counsel, it is the opinion of management that such liability is not expected to
have a material adverse effect on Hughes' consolidated financial statements.
Hughes purchases in-orbit and launch insurance for its satellite fleet to
mitigate the potential financial impact of in-orbit and launch failures. The
insurance generally does not compensate for business interruption or loss of
future revenues or customers. Certain of Hughes' insurance policies contain
exclusions related to known anomalies and Hughes is self-insured for certain
other satellites. The portion of the book value of satellites that were self-
insured or with coverage exclusions amounted to approximately $964.9 million at
June 30, 2001.
Note 11. Subsequent Event
On July 31, 2001, Hughes sold a 3% interest in Thomson Multimedia S. A. for
approximately $132 million in cash, resulting in a pre-tax gain of approximately
$108 million that will be recognized in the third quarter of 2001.
- 35 -
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUMMARY DATA
Three
Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Dollars in Millions)
(Unaudited)
Consolidated Statements of Operations
Data:
Total revenues........................ $1,985.1 $1,837.0 $3,878.1 $3,540.1
Total operating costs and expenses.... 2,208.1 1,882.0 4,253.6 3,642.6
-------- -------- -------- --------
Operating loss........................ (223.0) (45.0) (375.5) (102.5)
Other expenses, net................... (34.7) (96.8) (54.3) (377.0)
Income tax benefit.................... 74.8 54.8 124.7 276.6
Minority interests in net losses of
subsidiaries......................... 26.4 4.5 50.7 12.1
-------- -------- -------- --------
Loss from continuing operations before
cumulative effect of accounting
change............................... (156.5) (82.5) (254.4) (190.8)
Income from discontinued operations,
net of taxes......................... -- 13.4 -- 39.8
Cumulative effect of accounting
change, net of taxes................. -- -- (7.4) --
-------- -------- -------- --------
Net loss.............................. (156.5) (69.1) (261.8) (151.0)
Adjustment to exclude the effect of GM
purchase accounting.................. 0.8 5.3 1.6 10.6
Preferred stock dividends............. (24.1) (24.1) (48.2) (48.8)
-------- -------- -------- --------
Loss Used for Computation of Available
Separate Consolidated Net Income
(Loss)............................... $ (179.8) $ (87.9) $ (308.4) $ (189.2)
======== ======== ======== ========
Other Data:
EBITDA(1)............................. $ 82.0 $ 179.6 $ 195.2 $ 332.3
EBITDA Margin(1)...................... 4.1% 9.8% 5.0% 9.4%
Depreciation and amortization......... $ 305.0 $ 224.6 $ 570.7 $ 434.8
Capital expenditures.................. 510.2 365.1 861.4 779.4
June 30,
2001 December 31,
(Unaudited) 2000
----------- ------------
(Dollars in Millions)
Consolidated Balance Sheet Data:
Cash and cash equivalents.............................. $ 1,052.3 $ 1,508.1
Total current assets................................... 3,834.3 4,153.7
Total assets........................................... 19,468.2 19,279.3
Total current liabilities.............................. 3,710.1 2,690.9
Long-term debt......................................... 953.1 1,292.0
Minority interests..................................... 540.2 553.7
Total stockholder's equity............................. 12,017.3 12,326.1
- --------
(1) EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with
accounting principles generally accepted in the United States of America.
Hughes management believes it is a meaningful measure of performance and is
commonly used by other communications, entertainment and media service
providers. EBITDA does not give effect to cash used for debt service
requirements and thus does not reflect funds available for investment in the
business of Hughes, dividends or other discretionary uses. EBITDA margin is
calculated by dividing EBITDA by total revenues. EBITDA and EBITDA margin as
presented herein may not be comparable to similarly titled measures reported
by other companies.
- 36 -
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
SUMMARY DATA--Concluded
Selected Segment Data
(Unaudited)
Direct-
To-Home Satellite Network Eliminations
Broadcast Services Systems and Other Total
--------- --------- ------- ------------ --------
(Dollars in Millions)
For the Three Months
Ended:
June 30, 2001
Total Revenues........... $1,527.7 $208.3 $ 302.2 $ (53.1) $1,985.1
-------- ------ ------- ------- --------
Operating Profit (Loss).. $ (182.9) $ 32.8 $ (56.5) $ (16.4) $ (223.0)
Operating Profit Margin.. N/A 15.7% N/A N/A N/A
EBITDA................... $ (1.3) $134.5 $ (36.8) $ (14.4) $ 82.0
EBITDA Margin............ N/A 64.6% N/A N/A 4.1%
-------- ------ ------- ------- --------
Depreciation and
Amortization............ $ 181.6 $101.7 $ 19.7 $ 2.0 $ 305.0
Capital Expenditures..... 226.3 94.2 167.1 22.6 510.2
-------- ------ ------- ------- --------
June 30, 2000
Total Revenues........... $1,252.2 $322.3 $ 371.8 $(109.3) $1,837.0
-------- ------ ------- ------- --------
Operating Profit (Loss).. $ (134.8) $139.8 $ (17.1) $ (32.9) $ (45.0)
Operating Profit Margin.. N/A 43.4% N/A N/A N/A
EBITDA................... $ (14.0) $221.4 $ 0.8 $ (28.6) $ 179.6
EBITDA Margin............ N/A 68.7% 0.2% N/A 9.8%
-------- ------ ------- ------- --------
Depreciation and
Amortization............ $ 120.8 $ 81.6 $ 17.9 $ 4.3 $ 224.6
Capital Expenditures..... 219.1 50.2 94.2 1.6 365.1
-------- ------ ------- ------- --------
For the Six Months Ended:
June 30, 2001
Total Revenues........... $3,017.6 $413.5 $ 550.4 $(103.4) $3,878.1
-------- ------ ------- ------- --------
Operating Profit (Loss).. $ (328.4) $ 73.9 $(109.1) $ (11.9) $ (375.5)
Operating Profit Margin.. N/A 17.9% N/A N/A N/A
EBITDA................... $ 4.7 $274.5 $ (75.1) $ (8.9) $ 195.2
EBITDA Margin............ 0.2% 66.4% N/A N/A 5.0%
-------- ------ ------- ------- --------
Depreciation and
Amortization............ $ 333.1 $200.6 $ 34.0 $ 3.0 $ 570.7
Capital Expenditures..... 353.9 161.4 345.3 0.8 861.4
-------- ------ ------- ------- --------
June 30, 2000
Total Revenues........... $2,426.0 $621.4 $ 736.3 $(243.6) $3,540.1
-------- ------ ------- ------- --------
Operating Profit (Loss).. $ (260.8) $267.1 $ (17.0) $ (91.8) $ (102.5)
Operating Profit Margin.. N/A 43.0% N/A N/A N/A
EBITDA................... $ (23.2) $422.4 $ 17.6 $ (84.5) $ 332.3
EBITDA Margin............ N/A 68.0% 2.4% N/A 9.4%
-------- ------ ------- ------- --------
Depreciation and
Amortization............ $ 237.6 $155.3 $ 34.6 $ 7.3 $ 434.8
Capital Expenditures..... 387.1 208.2 161.8 22.3 779.4
-------- ------ ------- ------- --------
- 37 -
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
The following management's discussion and analysis should be read in
conjunction with the Hughes management's discussion and analysis included in the
Hughes Electronics Corporation ("Hughes") Annual Report on Form 10-K for the
year ended December 31, 2000 and the Hughes Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001 filed with the Securities and Exchange
Commission ("SEC") on March 6, 2001 and May 10, 2001, respectively, and all
other Hughes filings, including Current Reports on Form 8-K, filed with the SEC
through the date of this report.
This Quarterly Report may contain certain statements that Hughes believes
are, or may be considered to be, "forward-looking statements," within the
meaning of various provisions of the Securities Act of 1933 and of the
Securities Exchange Act of 1934. These forward-looking statements generally can
be identified by use of statements that include phrases such as we "believe,"
"expect," "anticipate," "intend," "plan," "foresee" or other similar words or
phrases. Similarly, statements that describe our objectives, plans or goals also
are forward-looking statements. All of these forward-looking statements are
subject to certain risks and uncertainties that could cause Hughes' actual
results to differ materially from those contemplated by the relevant forward-
looking statement. The principal important risk factors which could cause actual
performance and future actions to differ materially from forward-looking
statements made herein include economic conditions, product demand and market
acceptance, government action, local political or economic developments in or
affecting countries where Hughes has operations, ability to obtain export
licenses, competition, ability to achieve cost reductions, ability to timely
perform material contracts, technological risk, limitations on access to
distribution channels, the success and timeliness of satellite launches, in-
orbit performance of satellites, ability of customers to obtain financing,
Hughes' ability to access capital to maintain its financial flexibility and the
effects of any strategic transactions involving Hughes that General Motors
Corporation ("GM"), the parent company of Hughes, may enter into as noted below.
Additionally, the in-orbit satellites of Hughes and its 81% owned subsidiary,
PanAmSat Corporation ("PanAmSat"), are subject to the risk of failing
prematurely due to, among other things, mechanical failure, collision with
objects in space or an inability to maintain proper orbit. Satellites are
subject to the risk of launch delay and failure, destruction and damage while on
the ground or during launch and failure to become fully operational once
launched. Delays in the production or launch of a satellite or the complete or
partial loss of a satellite, in-orbit or during launch, could have a material
adverse impact on the operations of Hughes' businesses. With respect to both
in-orbit and launch problems, insurance carried by Hughes and PanAmSat generally
does not compensate for business interruption or loss of future revenues or
customers. Hughes has, in the past, experienced technical anomalies on some of
its satellites. Service interruptions caused by these anomalies, depending on
their severity, could result in claims by affected customers for termination of
their transponder agreements, cancellation of other service contracts or the
loss of other customers.
Readers are urged to consider these factors carefully in evaluating the
forward-looking statements. The forward-looking statements included in this
Quarterly Report are made only as of the date of this Quarterly Report and
Hughes undertakes no obligation to publicly update these forward-looking
statements to reflect subsequent events or circumstances.
Due to rapid consolidation in the media and telecommunications industries, GM
has announced that it is now considering alternative strategic transactions
involving Hughes and other participants in those industries. Any such
transaction might involve the separation of Hughes from GM. GM's objective in
this effort is to maximize the enterprise value of Hughes for the long-term
benefit of the holders of GM's Class H common stock and GM $1 2/3 par value
common stock through a structure that maintains the financial strength of GM. No
assurance can be given that any transaction will be agreed upon with any party
or that other conditions, including any stockholder or regulatory approvals,
will be satisfied.
On June 6, 2000, the GM Board declared a three-for-one stock split of the
GM Class H common stock. The stock split was in the form of a 200% stock
dividend, paid on June 30, 2000 to GM Class H common stockholders of record on
June 13, 2000. As a result, the numbers of shares of GM Class H common stock
presented for all periods have been adjusted to reflect the stock split, unless
otherwise noted.
- 38 -
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
General
Business Overview
The continuing operations of Hughes are comprised of the following segments:
Direct-To-Home Broadcast, Satellite Services and Network Systems. The satellite
systems manufacturing businesses ("Satellite Businesses"), which Hughes sold to
The Boeing Company ("Boeing") on October 6, 2000, are reported as discontinued
operations for 2000. While 2000 includes the operating results of the Satellite
Businesses through the date of sale, there are no comparable results in 2001.
This transaction is discussed more fully in Note 8 to the consolidated financial
statements and below in "Liquidity and Capital Resources-- Acquisitions,
Investments and Divestitures."
The Direct-To-Home Broadcast segment consists primarily of the DIRECTV
digital multi-channel entertainment businesses located in the United States and
Latin America and DIRECTV Broadband, Inc. ("DIRECTV Broadband"), formerly know
as Telocity Delaware, Inc. ("Telocity"), which was acquired in April 2001.
DIRECTV Broadband is a provider of digital subscriber line ("DSL") services
purchased from wholesale providers. This transaction is discussed more fully in
Note 8 to the consolidated financial statements and "Liquidity and Capital
Resources--Acquisitions, Investments and Divestitures," below.
Since DIRECTV Broadband was purchased in April 2001, no comparative financial
data is provided for 2000.
The Latin America DIRECTV businesses are comprised of DIRECTV Latin America,
LLC ("DLA"), which provides DIRECTV services in Latin America and the Caribbean
Basin; SurFin Ltd. ("SurFin"), a company that provides financing of subscriber
receiver equipment to certain DLA operating companies; Grupo Galaxy Mexicana,
S.R.L. de C.V. ("GGM"), the exclusive distributor of DIRECTV in Mexico; Galaxy
Brasil, Ltda. ("GLB"), the exclusive distributor of DIRECTV in Brazil; Galaxy
Entretenimiento de Colombia ("GEC"), the exclusive distributor of DIRECTV in
Colombia, which was acquired by DLA in January 2001; and Galaxy Entertainment
Argentina S.A. ("GEA"), the exclusive distributor of DIRECTV in Argentina, which
was acquired by DLA in May 2001. The results of operations for GEC and GEA have
been included in Hughes' financial information since their respective dates of
acquisition. See Note 8 to the consolidated financial statements and "Liquidity
and Capital Resources--Acquisitions, Investments and Divestitures," below, for
further discussion.
Also included as part of the 2000 non-operating results of the Direct-To-
Home Broadcast segment is DIRECTV Japan Management, Inc., DIRECTV Japan, Inc.,
and certain related companies (collectively "DIRECTV Japan"), Hughes affiliates
that provided DIRECTV services in Japan. DIRECTV Japan's operations were
discontinued and ceased broadcasting on September 30, 2000. See Note 8 to the
consolidated financial statements and "Liquidity and Capital Resources--
Acquisitions, Investments and Divestitures," below, for further discussion.
The Satellite Services segment consists of PanAmSat, Hughes' 81% owned
subsidiary. PanAmSat is a leading provider of global video and data broadcasting
services via satellite. PanAmSat builds, owns and operates satellite-based
networks that deliver entertainment and information to cable television systems,
television broadcast affiliates, direct-to-home satellite television operators,
Internet Service Providers, telecommunications companies and other corporations.
PanAmSat provides satellite services to its customers primarily through
long-term operating lease contracts for the full or partial use of satellite
transponder capacity.
The Network Systems segment consists of Hughes Network Systems ("HNS"), which
is a provider of satellite-based private business networks and broadband
Internet access to consumers, and a supplier of DIRECTV(TM) receiving equipment
(set-top boxes and dishes).
- 39 -
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Satellite Fleet
Hughes has a fleet of 26 satellites, five owned by DIRECTV and 21 owned and
operated by PanAmSat.
PanAmSat expects to add additional satellites as part of its comprehensive
satellite expansion and restoration plan. The additional satellites are intended
to meet the expected demand for additional satellite capacity, replace capacity
affected by satellite anomalies, and provide added backup to existing capacity.
In connection with this plan, six satellites have been successfully launched
since December 1999 and PanAmSat expects to launch four additional satellites,
currently under construction. Three of these satellites are scheduled to be
launched in 2002 and the remaining satellite is scheduled to be launched in late
2002 or early 2003.
DIRECTV U.S.' 4S satellite, a high-power spot-beam satellite, is currently
under construction and is expected to be launched in October 2001. DIRECTV
expects to use DIRECTV 4S to provide additional capacity for new local channel
service or other new services beginning in 2002. Also, the high-power DIRECTV 5
satellite is expected to be launched in late 2001 as a replacement to DIRECTV 6,
which will then serve as a back-up.
Results of Operations
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30,
2000
Revenues. Revenues for the second quarter of 2001 increased 8.1% to $1,985.1
million, compared with $1,837.0 million in the second quarter of 2000. The
increased revenues resulted primarily from $275.5 million of higher revenues at
the Direct-To-Home Broadcast segment over the second quarter of 2000 that
resulted from the addition of 1.7 million net new subscribers in the United
States and Latin America since June 30, 2000. The increased revenues from the
Direct-To-Home Broadcast segment were partially offset by a decrease in revenues
of $114.0 million at the Satellite Services segment and $69.6 million at the
Network Systems segment. The decrease in revenues from the Satellite Services
segment was principally due to $123.4 million of new outright sales and
sales-type lease transactions executed during the second quarter of 2000 for
which there were no comparable transactions in the second quarter of 2001. The
decrease in revenues from the Network Systems segment was principally due to
decreased shipments of DIRECTV receiving equipment due primarily to DIRECTV
completing the conversion of the PRIMESTAR By DIRECTV customers to the
high-power DIRECTV(R) service in 2000 and a decrease in manufacturing subsidies.
Operating Costs and Expenses. Operating costs and expenses increased to
$2,208.1 million in the second quarter of 2001 from $1,882.0 million in the
second quarter of 2000. Broadcast programming and other costs increased by $99.9
million in the second quarter of 2001 from the same period in 2000 due to higher
costs at the Direct-To-Home Broadcast segment resulting from the increase in
subscribers and the added costs from DIRECTV Broadband. This increase was
partially offset by decreased costs at the Satellite Services segment associated
with the new outright sales and sales-type lease transactions executed during
the second quarter of 2000 for which there were no comparable transactions in
the second quarter of 2001. Costs of products sold decreased by $56.7 million in
the second quarter of 2001 from the second quarter of 2000 due to the decreased
shipments of DIRECTV receiving equipment. Selling, general and administrative
expenses increased by $202.5 million during the second quarter of 2001 compared
to the same period in 2000 due primarily to higher marketing costs at the
Direct-To-Home Broadcast segment resulting from increased subscriber growth in
both the United States and Latin America, added costs from DIRECTV Broadband and
higher expenses at the Satellite Services segment to support the continued
satellite fleet expansion and costs associated with new service initiatives.
Depreciation and amortization increased by $80.4 million during the second
quarter of 2001 compared to the second quarter of 2000 due to capital
expenditures for property and satellites since June 30, 2000, a change in the
useful life of the Galaxy VIII-i satellite that resulted from the failure of its
primary propulsion system during the third quarter of 2000, and goodwill
amortization and added depreciation that resulted from DIRECTV Broadband.
- 40 -
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
EBITDA. EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flows from operations, as determined in accordance with
accounting principles generally accepted in the United States of America. Hughes
management believes it is a meaningful measure of performance and is commonly
used by other communications, entertainment and media service providers. EBITDA
does not give effect to cash used for debt service requirements and thus does
not reflect funds available for investment in the business of Hughes, dividends
or other discretionary uses. EBITDA margin is calculated by dividing EBITDA by
total revenues. EBITDA and EBITDA margin as presented herein may not be
comparable to similarly titled measures reported by other companies.
EBITDA for the second quarter of 2001 was $82.0 million and EBITDA margin was
4.1%, compared to EBITDA of $179.6 million and EBITDA margin of 9.8% in the
second quarter of 2000. The change in EBITDA resulted from decreased EBITDA at
the Satellite Services segment principally due to the new outright sales and
sales-type lease transactions executed during the second quarter of 2000 for
which there were no comparable transactions in the second quarter of 2001 and
higher direct operating and selling, general and administrative expenses; and
lower EBITDA at the Network Systems segment primarily due to decreased shipments
of DIRECTV receiving equipment and increased costs associated with the rollout
of new DirecPC(R) services. These decreases were partially offset by the
Direct-To-Home Broadcast segment's improved EBITDA in the second quarter of 2001
compared to 2000 that resulted from the increase in revenues discussed above,
partially offset by higher marketing costs and negative EBITDA associated with
DIRECTV Broadband. The change in EBITDA margin resulted primarily from losses at
the Network Systems segment and DIRECTV Broadband.
Operating Loss. The operating loss for the second quarter of 2001 was $223.0
million compared to an operating loss of $45.0 million in 2000. The increased
operating loss resulted from the decrease in EBITDA and the higher depreciation
and amortization expense.
Interest Income and Expense. Interest income increased to $19.0 million for
the second quarter of 2001 compared to interest income of $4.3 million for the
same period of 2000 due to increased cash and cash equivalents that resulted
from the sale of the Satellite Businesses in October 2000. Interest expense
decreased to $42.8 million for the second quarter of 2001 from $57.8 million for
the second quarter of 2000. The lower interest expense resulted primarily from
lower average outstanding borrowings. The changes in cash and cash equivalents
and debt are discussed in more detail below under "Liquidity and Capital
Resources."
Other, Net. Other, net decreased to an expense of $10.9 million for the
second quarter of 2001 from an expense of $43.3 million in the same period of
2000. Other, net expense for the second quarter of 2001 and 2000 resulted
primarily from equity method losses. The higher expense in 2000 resulted
primarily from equity method losses for the DIRECTV Japan business, which ceased
operations in the third quarter of 2000.
Income Taxes. Hughes recognized an income tax benefit of $74.8 million for
the second quarter of 2001, compared to $54.8 million in the second quarter of
2000. The higher tax benefit in the second quarter of 2001 is due to higher
pre-tax losses in 2001, partially offset by favorable tax settlements.
Loss From Continuing Operations. Hughes reported a loss from continuing
operations before cumulative effect of accounting change of $156.5 million for
the 2001 second quarter, compared to $82.5 million for the same period of 2000.
Discontinued Operations. Revenues for the Satellite Businesses for the
second quarter of 2000 were $556.6 million. Revenues, excluding intercompany
transactions, for the second quarter of 2000 were $412.1 million.
The Satellite Businesses reported operating profit of $35.4 million for the
second quarter of 2000. Operating profit, excluding intercompany transactions,
amounted to $21.3 million for the second quarter of 2000.
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Income from discontinued operations, net of taxes was $13.4 million for the
second quarter of 2000.
Direct-To-Home Broadcast Segment
Direct-To-Home Broadcast segment second quarter 2001 revenues increased 22.0%
to $1,527.7 million from $1,252.2 million in the second quarter of 2000. The
Direct-To-Home Broadcast segment had negative EBITDA of $1.3 million in the
second quarter of 2001 compared with negative EBITDA of $14.0 million in the
second quarter of 2000. The operating loss for the segment increased to $182.9
million in the second quarter of 2001 from $134.8 million in the second quarter
of 2000.
United States. The DIRECTV U.S. businesses were the biggest contributors to
the segment's revenue growth with revenues of $1,345 million for the second
quarter of 2001, a 19% increase over second quarter 2000 revenues of $1,129
million. The large increase in revenues resulted primarily from an increased
number of DIRECTV subscribers since June 30, 2000. As of June 30, 2001, DIRECTV
had more than 10 million high-power subscribers compared to about 8.3 million
high-power and 0.4 million PRIMESTAR By DIRECTV medium-power subscribers at June
30, 2000. DIRECTV added 175,000 net new subscribers in the second quarter of
2001, compared to 452,000 net new subscribers in the second quarter of 2000.
Average monthly revenue per subscriber for the high-power business was $59 and
$58 at June 30, 2001 and June 30, 2000, respectively. DIRECTV completed the
conversion of the medium-power subscribers to the high-power service on
September 30, 2000.
EBITDA was $75 million for the second quarter of 2001 compared to EBITDA of
$26 million for the second quarter of 2000. The operating loss for the second
quarter of 2001 for the DIRECTV U.S. businesses was $39 million compared to $67
million in the second quarter of 2000. The increased EBITDA was due to the
increased revenues discussed above, which more than offset higher programming
costs that resulted from the increased number of subscribers, and higher
subscriber acquisition costs. The lower operating loss resulted from the
increase in EBITDA, partially offset by higher depreciation expense that
resulted from an increase in customer leased DIRECTV receiving equipment.
Latin America. Revenues for the Latin America DIRECTV businesses increased
43% to $175 million for the second quarter of 2001 from $122 million for the
second quarter of 2000. The increase in revenues was primarily due to continued
subscriber growth. Subscribers grew to about 1,431,000 at June 30, 2001 compared
to about 1,010,000 at June 30, 2000. Latin America DIRECTV added about 25,000
net subscribers in the second quarter of 2001 compared to about 101,000 net new
subscribers in the second quarter of 2000. Average monthly revenue per
subscriber was $36 and $34 at June 30, 2001 and June 30, 2000, respectively.
EBITDA was a negative $35 million in the second quarter of 2001 compared to
negative EBITDA of $40 million in the second quarter of 2000. The change in
EBITDA was due to the increased revenues discussed above, offset by higher
marketing costs. The Latin America DIRECTV businesses incurred an operating loss
of $87 million for the second quarter of 2001 compared to an operating loss of
$68 million in the second quarter of 2000. The increased operating loss was
primarily due to higher depreciation expense that resulted from an increase in
customer leased DIRECTV receiving equipment.
DIRECTV Broadband. Revenues and EBITDA for DIRECTV Broadband were $7 million
and negative $41 million for the second quarter of 2001, respectively. DIRECTV
Broadband added about 4,000 net subscribers in the second quarter of 2001. Net
subscriber additions were negatively impacted by customer churn that resulted
from the bankruptcy of a wholesale provider of DSL services. At June 30, 2001,
DIRECTV Broadband had more than 68,000 residential subscribers in the United
States.
Satellite Services Segment
Revenues for the Satellite Services segment in the second quarter of 2001
decreased $114.0 million to $208.3 million from $322.3 million in the same
period in the prior year. The decrease was primarily due to new outright sales
and sales-type lease transactions of $123.4 million executed during the second
quarter of 2000 for which there were no comparable transactions in the
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
second quarter of 2001. Revenues associated with outright sales and sales-type
leases of transponders were $5.3 million for the second quarter of 2001 compared
to $129.6 million for the second quarter of 2000. Revenues from operating leases
of transponders, satellite services and other were 97.5% of total revenues for
the second quarter of 2001 and increased by 5.3% to $203.0 million from $192.7
million in the second quarter of 2000.
EBITDA was $134.5 million for the second quarter of 2001, a 39.3% decrease
from the second quarter 2000 EBITDA of $221.4 million. The decrease in EBITDA
was due to the decreased revenues discussed above and higher direct operating
and selling, general and administrative expenses associated with new service
initiatives. EBITDA margin for the second quarter of 2001 was 64.6% compared to
68.7% in the second quarter of 2000. The decrease in EBITDA margin was due to
the higher direct operating and selling, general and administrative expenses,
partially offset by lower margins associated with the new outright sales and
sales-type lease transactions executed in the second quarter of 2000. Excluding
the new outright sales and sales-type lease transaction, EBITDA for the second
quarter of 2000 was $138.5 million or 69.6% of corresponding revenues. Operating
profit was $32.8 million for the second quarter of 2001 compared to $139.8
million for the second quarter of 2000. The decrease in operating profit
resulted from the decrease in EBITDA and higher depreciation expense related to
additional satellites placed into service since June 30, 2000 and increased
depreciation expense that resulted from a change in the useful life of the
Galaxy VIII-i satellite due to the failure of its primary propulsion system
during the third quarter of 2000.
Network Systems Segment
Revenues for the Network Systems segment for the second quarter of 2001
decreased by 18.7% to $302.2 million, compared to $371.8 million in the second
quarter of 2000. The lower revenues resulted from decreased shipments of DIRECTV
receiving equipment due primarily to DIRECTV completing the conversion of
PRIMESTAR By DIRECTV customers to the high-power DIRECTV service in 2000 and a
decrease in manufacturing subsidies.
The Network Systems segment reported negative EBITDA of $36.8 million for the
second quarter of 2001, compared to EBITDA of $0.8 million in second quarter of
2000. The Network Systems segment had an operating loss of $56.5 million in the
second quarter of 2001, compared to an operating loss of $17.1 million in the
second quarter of 2000. The change in EBITDA and operating profit resulted from
the decreased revenues discussed above and increased costs associated with the
rollout of new DirecPC services, including AOL Plus Powered by DirecPC.
Eliminations and Other
The elimination of revenues decreased to $53.1 million in the second quarter
of 2001 from $109.3 million in the second quarter of 2000 due primarily to a
decline in intercompany purchases of DIRECTV receiving equipment and lower
manufacturing subsidies paid by DIRECTV to HNS.
Operating losses for "eliminations and other" decreased to $16.4 million for
the second quarter of 2001 from $32.9 million for the second quarter of 2000.
The change resulted primarily from the decreased elimination of revenues
discussed above, partially offset by one-time severance charges of $22 million.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Revenues. Revenues for the six months ended June 30, 2001 increased 9.5% to
$3,878.1 million compared with $3,540.1 million for the six months ended June
30, 2000. The increase in revenues resulted primarily from $591.6 million of
higher revenues at the Direct-To-Home Broadcast segment over the first six
months of 2000 that resulted from the addition of about 1.7 million net new
subscribers in the United States and Latin America since June 30, 2000. The
increased revenues from the Direct-To-Home Broadcast segment were partially
offset by a decrease in revenues of $207.9 million at the Satellite Services
segment and $185.9 million at the Network Systems segment. The decrease in
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
revenues from the Satellite Services segment was principally due to $217.2
million of new outright sales and sales-type lease transactions executed during
the first six months of 2000 for which there were no comparable transactions in
the first six months of 2001. The decrease in revenues from the Network Systems
segment was principally due to decreased shipments of DIRECTV receiving
equipment that resulted from DIRECTV completing the conversion of PRIMESTAR By
DIRECTV customers to the high-power DIRECTV service in 2000 and a decrease in
manufacturing subsidies.
Operating Costs and Expenses. Operating costs and expenses increased to
$4,253.6 million in the first six months of 2001 from $3,642.6 million in the
first six months of 2000. Broadcast programming and other costs increased by
$170.8 million in the first six months of 2001 from the same period in 2000 due
to higher costs at the Direct-To-Home segment resulting from the increase in
subscribers and the added costs from DIRECTV Broadband. This increase was
partially offset by decreased costs at the Satellite Services segment associated
with the new outright sales and sales-type lease transactions executed during
the first six months of 2000 for which there were no comparable transactions in
the first six months of 2001. Costs of products sold decreased by $90.7 million
for the first six months of 2001 from the first six months of 2000 due to the
decreased shipments of DIRECTV receiving equipment. Selling, general and
administrative expenses increased by $395.0 million during the first six months
of 2001 compared to the same period in 2000 due primarily to higher marketing
costs at the Direct-To-Home Broadcast segment resulting from increased
subscriber growth in both the United States and Latin America, added costs from
DIRECTV Broadband and higher expenses at the Satellite Services segment to
support the continued satellite fleet expansion and costs associated with new
service initiatives. Depreciation and amortization increased by $135.9 million
during the first six months of 2001 compared to the first six months of 2000
primarily due to capital expenditures for property and satellites since June 30,
2000, a change in the useful life of the Galaxy VIII-i satellite due to the
failure of its primary propulsion system during the third quarter of 2000, and
goodwill amortization and added depreciation that resulted from DIRECTV
Broadband.
EBITDA. EBITDA for the first six months of 2001 was $195.2 million and EBITDA
margin was 5.0%, compared to EBITDA of $332.3 million and EBITDA margin of 9.4%
in the same period of 2000. The change in EBITDA resulted from decreased EBITDA
at the Satellite Services segment principally due to the new outright sales and
sales-type lease transactions executed during the first six months of 2000 for
which there were no comparable transactions in the first six months of 2001 and
higher direct operating and selling, general and administrative expenses; and,
lower EBITDA at the Network Systems segment primarily due to decreased shipments
of DIRECTV receiving equipment and increased costs associated with the rollout
of new DirecPC services. These decreases were partially offset by the
Direct-To-Home Broadcast segment's positive EBITDA in the first six months of
2001 compared to negative EBITDA in the first six months of 2000 that resulted
from the increase in revenues discussed above, partially offset by higher
marketing costs and negative EBITDA associated with DIRECTV Broadband. The
change in EBITDA margin resulted primarily from losses at the Network Systems
segment and DIRECTV Broadband.
Operating Loss. The operating loss for the first six months of 2001 was
$375.5 million compared to an operating loss of $102.5 million in 2000. The
increased operating loss resulted from the decrease in EBITDA and the higher
depreciation and amortization expense.
Interest Income and Expense. Interest income increased to $42.8 million for
the first six months of 2001 compared to interest income of $8.2 million for the
same period of 2000 due to increased cash and cash equivalents that resulted
from the sale of the Satellite Businesses in October 2000. Interest expense
decreased to $93.4 million for the first six months of 2001 from $102.7 million
for the first six months of 2000. The lower interest expense resulted primarily
from lower average outstanding borrowings. Changes in cash and cash equivalents
and debt are discussed in more detail below under "Liquidity and Capital
Resources."
Other, Net. Other, net decreased to an expense of $3.7 million for the first
nine months of 2001 from a net expense of $282.5 million in the same period of
2000. Other, net expense for the first six months of 2001 resulted primarily
from equity method losses of $23.0 million, partially offset by gains from the
sale of investments. Other, net expense for the first six months of 2000
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
included $111.9 million of equity method losses and a $170.6 million charge
related to the exit of the DIRECTV Japan business, which is discussed below in
"Liquidity and Capital Resources-Acquisitions, Investments and Divestitures."
Income Taxes. Hughes recognized an income tax benefit of $124.7 million for
the first six months of 2001, compared to $276.6 million in the first six months
of 2000. The lower tax benefit in the first six months of 2001 is due to lower
pre-tax losses in 2001 as well as the additional tax benefit in 2000 associated
with the write-off of Hughes' historical investment in DIRECTV Japan.
Loss from Continuing Operations. Hughes reported a loss from continuing
operations before cumulative effect of accounting change of $254.4 million for
the six months ended June 30, 2001, compared to $190.8 million for the same
period of 2000.
Discontinued Operations. Revenues for the Satellite Businesses for the six
months ended June 30, 2000 were $1,071.6 million. Revenues, excluding
intercompany transactions, for the first six months of 2000 were $801.2 million.
The Satellite Businesses reported operating profit of $78.9 million for the
first six months of 2000. Operating profit, excluding intercompany transactions,
amounted to $63.5 million for the first six months of 2000.
Income from discontinued operations, net of taxes, was $39.8 million for the
first six months of 2000.
Cumulative Effect of Accounting Change. Hughes adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities on January 1, 2001. SFAS No.133 requires Hughes to carry all
derivative financial instruments on the balance sheet at fair value. In
accordance with the transition provisions of SFAS No. 133, Hughes recorded a
one-time after-tax charge of $7.4 million on January 1, 2001 as a cumulative
effect of accounting change in the Consolidated Statements of Operations and
Available Separate Consolidated Net Income (Loss) and an after- tax unrealized
gain of $0.4 million in Other Comprehensive Income (Loss).
Direct-To-Home Broadcast Segment
Direct-To-Home Broadcast segment revenues for the first six months of 2001
increased 24.4% to $3,017.6 million from $2,426.0 million for the first six
months of 2000. The Direct-To-Home Broadcast segment had positive EBITDA of $4.7
million in the first six months of 2001 compared with negative EBITDA of $23.2
million in the first six months of 2000. The operating loss for the segment
increased to $328.4 million in the first six months of 2001 from $260.8 million
in the first six months of 2000.
United States. The DIRECTV U.S. businesses were the biggest contributors to
the segment's revenue growth with revenues of $2,669 million for the first six
months of 2001, a 22% increase over last year's revenues for the same period of
$2,188 million. The large increase in revenues resulted primarily from an
increased number of DIRECTV subscribers since June 30, 2000. As of June 30,
2001, DIRECTV had more than 10 million high-power subscribers compared to about
8.3 million high-power and 0.4 million PRIMESTAR By DIRECTV medium-power
subscribers at June 30, 2000. DIRECTV added 515,000 net new subscribers in the
first six months of 2001, compared to 857,000 net new subscribers in the first
six months of 2000. In addition, 705,000 customers were transitioned from the
PRIMESTAR By DIRECTV medium-power service to the high-power service in the first
six months of 2000. Average monthly revenue per subscriber for the high- power
business was $59 and $58 at June 30, 2001 and June 30, 2000, respectively.
DIRECTV completed the conversion of the medium-power subscribers to the
high-power service on September 30, 2000.
EBITDA was $125 million for the first six months of 2001 compared to EBITDA
of $57 million for the first six months of 2000. The operating loss for the
first six months of 2001 for the DIRECTV U.S. businesses was $92 million
compared to $133 million in the first six months of 2000. The change in EBITDA
and operating loss was due to the increased revenues discussed above,
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
which more than offset higher programming costs, which resulted from the
increased number of subscribers, and higher subscriber acquisition costs.
Latin America. Revenues for the Latin America DIRECTV businesses increased
44% to $340 million in the first six months of 2001 from $236 million in the
first six months of 2000. The increase in revenues was primarily due to
continued subscriber growth. Subscribers grew to about 1,431,000 at June 30,
2001 compared to about 1,010,000 at June 30, 2000. Latin America DIRECTV added
about 126,000 net subscribers in the first six months of 2001 compared to about
206,000 net new subscribers in the first six months of 2000. Average monthly
revenue per subscriber was $36 and $34 at June 30, 2001 and June 30, 2000,
respectively.
EBITDA was a negative $79 million in the first six months of 2001 compared to
negative EBITDA of $78 million in the first six months of 2000. The change in
EBITDA was due to the increased revenues discussed above, offset by higher
marketing costs. The Latin America DIRECTV businesses incurred an operating loss
of $179 million for the first six months of 2001 compared to an operating loss
of $127 million in the first six months of 2000. The increased operating loss
was primarily due to higher depreciation expense that resulted from an increase
in customer leased DIRECTV receiving equipment.
DIRECTV Broadband. Revenues and EBITDA for DIRECTV Broadband were $7 million
and negative $41 million for the first six months of 2001, respectively. DIRECTV
Broadband added about 4,000 net subscribers in the first six months of 2001. Net
subscriber additions were negatively impacted by customer churn that resulted
from the bankruptcy of a wholesale provider of DSL services. At June 30, 2001,
DIRECTV Broadband had more than 68,000 residential broadband subscribers in the
United States.
Satellite Services Segment
Revenues for the Satellite Services segment in the first six months of 2001
decreased $207.9 million to $413.5 million from $621.4 million in the same
period in the prior year. The decrease was primarily due to new outright sales
and sales-type lease transactions of $217.2 million executed during the first
six months of 2000 for which there were no comparable transactions in the first
six months of 2001. Revenues associated with outright sales and sales-type
leases of transponders were $11.0 million for the first six months of 2001
compared to $228.7 million for the first six months of 2000. Revenues from
operating leases of transponders, satellite services and other were 97.3% of
total revenues for the first six months of 2001 and increased by 2.5% to $402.5
million from $392.7 million in the first six months of 2000.
EBITDA was $274.5 million for the first six months of 2001, a 35.0% decrease
over the first six months of 2000 EBITDA of $422.4 million. The decrease in
EBITDA was due to the decreased revenues discussed above and higher direct
operating and selling, general and administrative expenses to support the
continued satellite fleet expansion and costs associated with new service
initiatives. EBITDA margin for the first six months of 2001 was 66.4% compared
to 68.0% in the first six months of 2000. The decrease in EBITDA margin was due
to higher direct operating and selling, general and administrative expenses
associated with new service initiatives, partially offset by lower margins
associated with the new outright sales and sales-type lease transactions
executed in the first six months of 2000. Excluding the new outright sales and
sales-type lease transactions, EBITDA for the first six months of 2000 was
$291.0 million or 72.0% of corresponding revenues. Operating profit was $73.9
million for the first six months of 2001 compared to $267.1 million for the
first six months of 2000. The decrease in operating profit resulted from the
decrease in EBITDA and higher depreciation expense related to additional
satellites placed into service since June 30, 2000 and increased depreciation
expense that resulted from a change in the useful life of the Galaxy VIII-i
satellite due to the failure of its primary propulsion system during the third
quarter of 2000.
Network Systems Segment
Revenues for the Network Systems segment for the first six months of 2001
decreased by 25.2% to $550.4 million from $736.3 million in the first six months
of 2000. The lower revenues resulted from decreased shipments of DIRECTV
receiving equipment due primarily to DIRECTV completing the conversion of
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
PRIMESTAR By DIRECTV customers to the high-power DIRECTV service in 2000 and
decreased manufacturing subsidies.
The Network Systems segment reported negative EBITDA of $75.1 million for the
first six months of 2001, compared to EBITDA of $17.6 million in the first six
months of 2000. The Network Systems segment had an operating loss of $109.1
million in the first six months of 2001, compared to an operating loss of $17.0
million in the first six months of 2000. The change in EBITDA and operating
profit resulted from the decreased revenues discussed above and increased costs
associated with the rollout of new DirecPC services, including AOL Plus Powered
by DirecPC.
Eliminations and Other
The elimination of revenues decreased to $103.4 million in the first six
months of 2001 from $243.6 million in the first six months of 2000 due primarily
to a decline in intercompany purchases of DIRECTV receiving equipment and lower
manufacturing subsidies paid by DIRECTV to HNS.
Operating losses from "eliminations and other" decreased to $11.9 million in
the first six months of 2001 from $91.8 million in the first six months of 2000.
The change in operating loss resulted primarily from the decrease in the
elimination of revenues discussed above and decreased corporate expenditures,
partially offset by one-time severance charges of $22 million.
Liquidity and Capital Resources
Cash and cash equivalents were $1,052.3 million at June 30, 2001 compared to
$1,508.1 million at December 31, 2000.
Cash used in operating activities was $97.5 million in the first six months
of 2001, compared to cash provided by operating activities of $147.3 million in
the first six months of 2000. The decrease in 2001 resulted primarily from the
change in EBITDA and higher cash requirements for the change in operating assets
and liabilities.
Cash used in investing activities was $870.4 million in the six months ended
June 30, 2001, and $798.0 million for the same period in 2000. The higher 2001
use of cash for investing activities resulted primarily from increased
investments in companies and increased expenditures for satellites, partially
offset by $96.2 million of incremental proceeds received from satellite
insurance claims in 2001 compared with 2000.
Cash provided by financing activities was $512.1 million in the first six
months of 2001, compared to $627.0 million in the same period of 2000. The lower
2001 financing activities resulted from decreased net borrowings due to the cash
received from the sale of the Satellite Businesses in the fourth quarter of
2000.
Cash provided by discontinued operations was $63.1 million in the first six
months ended June 30, 2000.
Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of
current assets to current liabilities) at June 30, 2001 and December 31, 2000
was 1.03 and 1.54, respectively. Working capital decreased by $1,338.6 million
to $124.2 million at June 30, 2001 from $1,462.8 million at December 31, 2000.
Common Stock Dividend Policy and Use of Cash. The GM Board has not paid, and
does not currently intend to pay in the foreseeable future, cash dividends on
its Class H common stock. Similarly, Hughes has not paid dividends on its common
stock to GM and does not currently intend to do so in the foreseeable future.
Future Hughes earnings, if any, are expected to be retained for the development
of the businesses of Hughes. Hughes expects to have cash requirements for the
remainder of 2001 of up to about $2 billion primarily due to capital
expenditures for satellites and property, planned increases in subscriber
acquisition costs for the Direct-To-Home businesses, working capital, debt
service and preferred stock dividends. In addition, Hughes expects to increase
its investment in affiliated companies. These cash requirements are expected to
be funded from a combination of existing cash balances, cash provided
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
from operations, amounts available under credit facilities, and additional
borrowings and equity offerings, as needed.
Debt and Credit Facilities. Notes Payable. In July 1999, in connection with
the early buy-out of satellite sale-leasebacks, PanAmSat assumed $124.1 million
of variable rate notes of which $46.5 million was outstanding at June 30, 2001.
The weighted average interest rate on the notes was 4.92% at June 30, 2001. The
notes mature in January 2002.
PanAmSat issued five, seven, ten and thirty-year fixed rate notes totaling
$750.0 million in January 1998. The outstanding principal balances and interest
rates for these notes as of June 30, 2001 were $200 million at 6.0%, $275
million at 6.125%, $150 million at 6.375% and $125 million at $6.875%,
respectively. Principal on the notes is payable at maturity, while interest is
payable semi-annually.
Revolving Credit Facilities. On January 5, 2001, DLA entered into a $450.0
million revolving credit facility. This facility provides for a commitment
through the earlier of July 5, 2002 or the date of receipt of the cash proceeds
from the issuance of any debt or equity security of DLA. Borrowings under the
credit facility bear interest at a rate based on the London Interbank Offer Rate
("LIBOR") plus an indicated spread. As of June 30, 2001, $450.0 million was
outstanding under the revolving credit facility, bearing a weighted average
interest rate of 4.96%.
As of June 30, 2001, Hughes had a $750.0 million multi-year unsecured
revolving credit facility. Borrowings under the facility bear interest based on
a spread to the then-prevailing LIBOR. The multi-year credit facility provides
for a commitment of $750.0 million through December 5, 2002. The facility also
provides backup capacity for Hughes' $1.0 billion commercial paper program.
Commercial paper outstanding under the program bears interest at various rates,
based on market rates prevailing at the time each commercial paper instrument is
placed. No amounts were outstanding under the multi-year credit facility or
commercial paper program at June 30, 2001.
PanAmSat maintains a $500.0 million multi-year revolving credit facility that
provides for short-term and long-term borrowings and a $500.0 million commercial
paper program. Borrowings under the credit facility bear interest at a rate
equal to LIBOR plus a spread based on PanAmSat's credit rating. The multi-year
revolving credit facility provides for a commitment through December 24, 2002.
Borrowings under the credit facility and commercial paper program are limited to
$500.0 million in the aggregate. No amounts were outstanding under either the
multi-year revolving credit facility or the commercial paper program at June 30,
2001.
At June 30, 2001, SurFin had unsecured revolving credit facilities of $400.0
million and $212.5 million that expire in June 2002 and September 2003,
respectively. Borrowings under the credit facilities bear interest at various
rates based on LIBOR plus an indicated spread. $400.0 million was outstanding
under the $400.0 million credit facility at June 30, 2001, with borrowings
bearing a weighted average interest rate of 6.39%. $183.3 million was
outstanding under the $212.5 million credit facility at June 30, 2001. The
weighted average interest rate on these borrowings was 6.57% at June 30, 2001.
Other short-term and long-term debt outstanding at June 30, 2001 included
$23.2 million of notes bearing fixed rates of interest of 9.61% to 12.37% and
$8.6 million of variable rate notes, bearing a weighted average interest rate of
9.36%. Principal on the fixed rate notes is payable in varying amounts at
maturity through April 2007. Principal on the variable rate notes is payable in
varying amounts at maturity in April and May 2002.
Hughes has filed a shelf registration statement with the SEC with respect to
an issuance of up to $2.0 billion of debt securities from time to time. No
amounts have been issued as of June 30, 2001.
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Acquisitions, Investments and Divestitures. Acquisitions and Investments. On
May 1, 2001, DLA acquired from Grupo Clarin S.A. ("Clarin") a 51% ownership
interest in GEA, a local operating company located in Argentina that provides
direct-to-home broadcast services, and other assets, consisting primarily of
programming and advertising rights. The purchase price, valued at $169 million,
consisted of a 3.98% ownership interest in DLA and a put option that will allow
Clarin to sell in November 2003 its 3.98% interest back to DLA for $195 million
in cash. As a result of the transaction, Hughes' interest in DLA decreased from
77.8% to 74.7% and Hughes' ownership in GEA increased from 20% to 58.1%. Hughes'
portion of the purchase price, which amounted to about $130 million, was
recorded as an increase to additional paid in capital with the offset allocated
to the net assets acquired, including goodwill.
On April 3, 2001, Hughes acquired Telocity, a company that provides land-
based DSL services, through the completion of a tender offer and merger.
Telocity is now operating as DIRECTV Broadband. The purchase price, which
totaled $197.8 million in cash, will be allocated to the net assets acquired
(primarily goodwill) prior to year end. See Note 8 to the consolidated financial
statements for further discussion.
On January 1, 2001, DLA acquired from Bavaria S.A. ("Bavaria") an additional
14.2% ownership interest in GEC, a DLA local operating company located in
Colombia. As a result of the transaction, Hughes' ownership interest in GEC
increased from 44.2% to 55.2%. The purchase price consisted of prior capital
contributions of $4.4 million made by DLA during 2000 on behalf of Bavaria.
The above acquisitions were accounted for using the purchase method of
accounting and resulted in their consolidation from their respective dates of
acquisition.
Divestitures. On July 31, 2001, Hughes sold a 3% interest in Thomson
Multimedia S. A. for approximately $132 million in cash, resulting in a pre-tax
gain of approximately $108 million that will be recognized in the third quarter
of 2001.
On October 6, 2000, Hughes completed the sale of its Satellite Businesses for
$3.75 billion in cash, plus the estimated book value of the closing net assets
of the businesses sold in excess of a target amount. The transaction resulted in
the recognition of a pre-tax gain of $2,036.0 million, or $1,132.3 million
after-tax. Included in this gain is a net after-tax curtailment loss of $42
million related to pension and other postretirement benefit plan assets and
liabilities associated with the Satellite Businesses. The purchase price is
subject to adjustment based upon the final closing net assets as discussed in
Note 10 to the consolidated financial statements.
In a separate, but related transaction, Hughes also sold to Boeing its 50%
interest in HRL Laboratories LLC ("HRL") for $38.5 million, which represented
the net book value of HRL at October 6, 2000.
On March 1, 2000, Hughes announced that the operations of DIRECTV Japan
Management, Inc., DIRECTV Japan, Inc., and certain related companies
(collectively "DIRECTV Japan") would be discontinued. Pursuant to an agreement
with Japan Digital Broadcasting Services Inc. (now named Sky Perfect
Communications, Inc. or "Sky Perfect"), qualified subscribers to the DIRECTV
Japan service were offered the opportunity to migrate to the Sky Perfect
service, for which DIRECTV Japan was paid a commission for each subscriber who
actually migrated and Hughes acquired a 6.6% interest in Sky Perfect. As a
result, Hughes wrote-off its net investment in DIRECTV Japan of $164.6 million
and accrued exit costs of $403.7 million and involuntary termination benefits of
$14.5 million. Accrued exit costs consist of claims arising out of contracts
with dealers, manufacturers, programmers and others, satellite transponder and
facility and equipment leases, subscriber migration and termination costs, and
professional service fees and other. The write-off and accrual were partially
offset by the difference between the cost of the Sky Perfect shares acquired and
the estimated fair value of the shares ($428.8 million), as determined by an
independent appraisal, and by $40.2 million for anticipated contributions from
other DIRECTV Japan shareholders. The net effect of the transaction was a charge
to "Other, net" of $170.6 million at March 31, 2000.
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
In the fourth quarter of 2000, $106.6 million of accrued exit costs were
reversed and $0.6 million of involuntary termination benefits were added,
resulting in a net credit adjustment to "Other, net" of $106.0 million. The
adjustments made to the exit cost accrual were primarily attributable to earlier
than anticipated cessation of the DIRECTV Japan broadcasting service, greater
than anticipated commission payments for subscriber migration and favorable
settlements of various contracts and claims. About $22.4 million was paid for
accrued exit costs and no payments were made for involuntary termination
benefits during the second quarter of 2001. The balances remaining at June 30,
2001 for accrued exit costs and involuntary termination benefits were $78.7
million and $0.9 million, respectively.
DIRECTV Japan employed approximately 290 personnel as of March 31, 2000, of
which 244 were terminated during 2000. All remaining personnel were terminated
in the first quarter of 2001.
In the fourth quarter of 2000, Sky Perfect completed an initial public
offering, at which date the fair value of Hughes' interest (diluted by the
public offering to approximately 5.3%) in Sky Perfect was approximately $343
million. In the fourth quarter of 2000, a portion of the decline in the value of
the Sky Perfect investment was determined to be "other than temporary" based on
investment research analysis, resulting in a write-down of the carrying value of
the investment by $86 million from $428.8 million to $342.8 million. At June 30,
2001, the market value of the investment was $123.5 million, or $219.3 million
less than the carrying value at that date. Hughes believes that this decrease
represents a temporary decline in value, and as a result, has recorded this
change as an unrealized loss, net of taxes, as part of OCI. If the market value
of the Sky Perfect Investment does not recover significantly, Hughes may be
required to record an additional adjustment for an "other than temporary"
decline as a charge to earnings prior to year-end.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations initiated after
July 1, 2001 be accounted for using the purchase method. SFAS No. 142 requires
that existing and future goodwill and intangible assets with indefinite lives
not be amortized, but written down, as needed, based upon an impairment analysis
that must occur at least annually. All other intangible assets are amortized
over their estimated useful lives. Hughes will be required to adopt SFAS No. 142
on January 1, 2002 which will require an assessment of goodwill and intangible
assets acquired prior to July 1, 2001. Intangible assets that no longer qualify
for separate accounting, if any, will be combined with goodwill, while certain
intangible assets not previously identified, if any, may be prospectively
accounted for separately from goodwill. Management is currently assessing the
impact of these standards on Hughes' results of operations and financial
position. Goodwill amortization for the six months ended June 30, 2001 was
$101.7 million. These statements will have no impact on Hughes' consolidated
cash flows.
Security Ratings
Hughes' current long-term credit ratings are Baa2 and BBB-, with its short-
term credit and commercial paper ratings at P-2 and A-3, as rated by Moody's
Investor Services ("Moody's") and Standard and Poor's Rating Services ("S&P"),
respectively. On May 2, 2001, subsequent to the announcement that the GM Board
authorized further discussions with The News Corporation Limited regarding a
proposal to combine Hughes with Sky Global Networks, Inc., S&P re-affirmed its
ratings on Hughes and PanAmSat and placed them on credit watch with negative
implications. Moody's most recent action occurred in January 2000, subsequent to
the announced sale of Hughes' Satellite Businesses at which time Moody's
affirmed its debt ratings for Hughes while maintaining its negative outlook but
ending its review for possible downgrade.
Debt ratings by the various rating agencies reflect each agency's opinion of
the ability of issuers to repay debt obligations as they come due. With respect
to Moody's, the Baa2 rating for senior debt indicates adequate likelihood of
interest and principal payment and principal security. The P-2 short-term
rating, the second highest rating available, indicates that the issuer has a
strong ability for repayment relative to other issuers. For S&P, the BBB-
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Concluded)
rating indicates the issuer has adequate capacity to pay interest and repay
principal. In general, lower ratings result in higher borrowing costs. A
security rating is not a recommendation to buy, sell, or hold securities and may
be subject to revision or withdrawal at any time by the assigning rating
organization. Each rating should be evaluated independently of any other rating.
Market Risk Disclosure
Foreign Exchange Risk Management
Hughes generally conducts its business in U.S. dollars with some business
conducted in a variety of foreign currencies and therefore is exposed to
fluctuations in foreign currency exchange rates. Hughes' objective in managing
its exposure to foreign currency changes is to reduce earnings and cash flow
volatility associated with foreign exchange rate fluctuations. Accordingly,
Hughes enters into foreign exchange contracts to mitigate risks associated with
foreign currency denominated assets, liabilities, commitments and anticipated
foreign currency transactions. By policy, Hughes maintains coverage between
minimum and maximum percentages of its anticipated foreign exchange exposures.
The gains and losses on derivative foreign exchange contracts offset changes in
value of the related exposures. Hughes enters into derivative foreign exchange
contracts only to the extent considered necessary to meet its risk management
objectives, and does not enter into foreign currency derivative contracts for
speculative purposes.
Other Derivatives
Hughes holds financial instruments obtained in connection with supplier
contracts, such as stock purchase warrants in public and private companies.
These instruments are deemed derivatives because they contain net-share
settlement provisions, but are not designated as hedging instruments. Hughes
records changes in the fair value of these instruments to current earnings. At
June 30, 2001, the fair value of these instruments was not significant.
* * * * * *
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