EXHIBIT 99
HUGHES ELECTRONICS CORPORATION
FINANCIAL STATEMENTS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS)
(Unaudited)
Three Months Ended
March 31,
--------------------
2002 2001
-------- --------
(Dollars in Millions)
Revenues
Direct broadcast, leasing and other services.......... $1,858.0 $1,698.2
Product sales......................................... 180.2 194.8
-------- --------
Total Revenues.................................... 2,038.2 1,893.0
-------- --------
Operating Costs and Expenses
Broadcast programming and other costs, exclusive
of costs shown below.................................. 903.2 738.7
Cost of products sold, exclusive of costs shown
below................................................. 173.0 154.5
Selling, general and administrative expenses.......... 827.8 886.6
Depreciation and amortization......................... 262.0 265.7
-------- --------
Total Operating Costs and Expenses................ 2,166.0 2,045.5
-------- --------
Operating Loss........................................... (127.8) (152.5)
Interest income.......................................... 4.3 23.8
Interest expense......................................... (76.4) (50.6)
Other, net............................................... (41.6) 7.2
-------- --------
Loss Before Income Taxes, Minority Interests and
Cumulative Effect of Accounting Change................. (241.5) (172.1)
Income tax benefit....................................... 91.8 49.9
Minority interests in net (earnings) losses of
subsidiaries........................................... (6.7) 24.3
-------- --------
Loss before cumulative effect of accounting change....... (156.4) (97.9)
Cumulative effect of accounting change, net of taxes..... -- (7.4)
-------- --------
Net Loss................................................. (156.4) (105.3)
Adjustment to exclude the effect of GM purchase
accounting............................................ -- 0.8
-------- --------
Loss excluding the effect of GM purchase accounting...... (156.4) (104.5)
Preferred stock dividends................................ (24.1) (24.1)
-------- --------
Loss Used for Computation of Available Separate
Consolidated Net Income (Loss)......................... $ (180.5) $ (128.6)
======== ========
Available Separate Consolidated Net Income (Loss)
Average number of shares of General Motors Class H
Common Stock outstanding (in millions) (Numerator)..... 877.6 875.4
Average Class H dividend base (in millions)
(Denominator)........................................... 1,301.2 1,299.1
Available Separate Consolidated Net Income (Loss)........ $ (121.7) $ (86.7)
======== ========
- --------
Reference should be made to the Notes to the Consolidated Financial Statements.
26
HUGHES ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2002 2001
--------- ------------
(Dollars in Millions)
ASSETS
Current Assets
Cash and cash equivalents......................... $ 1,113.8 $ 700.1
Accounts and notes receivable (less allowances)... 1,217.4 1,090.5
Contracts in process.............................. 103.6 153.1
Inventories....................................... 351.3 360.1
Deferred income taxes............................. 110.9 118.9
Prepaid expenses and other........................ 1,093.2 918.4
--------- ---------
Total Current Assets....................... 3,990.2 3,341.1
Satellites, net...................................... 4,737.2 4,806.6
Property, net........................................ 2,200.7 2,197.8
Goodwill, net........................................ 6,735.5 6,500.3
Intangible Assets, net............................... 445.5 656.5
Net Investment in Sales-type Leases.................. 183.6 227.0
Investments and Other Assets......................... 1,447.4 1,480.8
--------- ---------
Total Assets............................... $19,740.1 $19,210.1
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable.................................. $ 1,250.4 $ 1,227.5
Deferred revenues................................. 202.2 178.5
Short-term borrowings and current portion of
long-term debt.................................. 981.0 1,658.5
Accrued liabilities and other..................... 1,368.6 1,342.0
--------- ---------
Total Current Liabilities.................. 3,802.2 4,406.5
Long-Term Debt....................................... 2,406.4 988.8
Other Liabilities and Deferred Credits............... 1,354.5 1,465.1
Deferred Income Taxes................................ 764.1 746.5
Commitments and Contingencies
Minority Interests................................... 538.8 531.3
Stockholder's Equity
Capital stock and additional paid-in capital...... 9,560.8 9,561.2
Preferred stock................................... 1,499.1 1,498.4
Retained earnings (deficit)....................... (266.9) (86.4)
--------- ---------
Subtotal Stockholder's Equity........................ 10,793.0 10,973.2
--------- ---------
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment............ (17.3) (17.3)
Accumulated unrealized gains on securities
and derivatives.............................. 176.4 192.6
Accumulated foreign currency translation
adjustments................................... (78.0) (76.6)
--------- ---------
Accumulated other comprehensive income............ 81.1 98.7
--------- ---------
Total Stockholder's Equity................. 10,874.1 11,071.9
--------- ---------
Total Liabilities and Stockholder's
Equity.................................. $19,740.1 $19,210.1
========= =========
- --------
Reference should be made to the Notes to the Consolidated Financial Statements.
27
HUGHES ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
--------------------
2002 2001
-------- --------
(Dollars in Millions)
Cash Flows from Operating Activities
Net Cash Provided by (Used in) Operating
Activities....................................... $ 72.2 $ (144.6)
-------- --------
Cash Flows from Investing Activities
Investment in companies, net of cash acquired.......... -- (13.5)
Expenditures for property.............................. (155.5) (138.4)
Expenditures for satellites............................ (205.3) (243.3)
Proceeds from sale of investments...................... -- 67.8
Proceeds from insurance claims......................... 173.7 132.4
-------- --------
Net Cash Used in Investing Activities.............. (187.1) (195.0)
-------- --------
Cash Flows from Financing Activities
Net increase (decrease) in short-term borrowings....... (877.5) 311.8
Long-term debt borrowings.............................. 1,800.0 535.9
Repayment of long-term debt............................ (182.4) (468.2)
Debt issuance costs.................................... (54.6) --
Stock options exercised................................ 0.7 3.0
Preferred stock dividends paid to General Motors....... (23.4) (23.4)
Payment of Raytheon settlement......................... (134.2) --
-------- --------
Net Cash Provided by Financing Activities.......... 528.6 359.1
-------- --------
Net increase in cash and cash equivalents................. 413.7 19.5
Cash and cash equivalents at beginning of the period...... 700.1 1,508.1
-------- --------
Cash and cash equivalents at end of the period............ $1,113.8 $1,527.6
======== ========
- --------
Reference should be made to the Notes to the Consolidated Financial
Statements.
28
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
Hughes Electronics Corporation ("Hughes Electronics" or "Hughes") is a
wholly-owned subsidiary of General Motors Corporation ("GM"). The GM Class H
common stock tracks the financial performance of Hughes.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial reporting. In the opinion of
management, all adjustments (consisting only of normal recurring items) which
are necessary for a fair presentation have been included. The results for
interim periods are not necessarily indicative of results that may be expected
for any other interim period or for the full year. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Hughes Annual Report on Form 10-K for the year ended December 31, 2001 filed
with the Securities and Exchange Commission ("SEC") on March 11, 2002 and all
other Hughes filings, including Current Reports on Form 8-K, filed with the SEC
through the date of this report.
The accompanying consolidated financial statements include the applicable
portion of intangible assets, including goodwill, and related amortization
resulting from purchase accounting adjustments associated with GM's purchase of
Hughes in 1985.
Merger Transaction
On October 28, 2001, Hughes and GM, together with EchoStar Communications
Corporation ("EchoStar"), announced the signing of definitive agreements that
provide for the split-off of a company holding all of the capital stock of
Hughes from GM and the combination of the Hughes business with EchoStar by means
of a merger (the "Merger" or "EchoStar Merger"). The surviving entity is
sometimes referred to as New EchoStar. The Merger is subject to a number of
conditions and no assurances can be given that the transactions will be
completed. See further discussion of the Merger in "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Acquisitions,
Investments and Divestitures--Merger Transaction." The financial and other
information regarding Hughes contained in this Quarterly Report do not give any
effect to or make any adjustment for the anticipated completion of the Merger.
The split-off of Hughes from GM would occur by means of a distribution to the
holders of GM Class H common stock of one share of Class C common stock of a
Hughes holding company (that will own all of the stock of Hughes at the time of
the split-off) in exchange for each share of GM Class H common stock held
immediately prior to the split-off. Immediately following the split-off, the
businesses of Hughes and EchoStar would be combined in the EchoStar Merger to
form New EchoStar. Each share of the Hughes holding company Class C common stock
would remain outstanding and become a share of Class C common stock of New
EchoStar. Holders of Class A and Class B common stock of EchoStar would receive
about 1.3699 shares of stock of New Echostar in exchange for each share of
EchoStar Class A or Class B common stock held prior to the EchoStar Merger.
The transactions are structured in a manner that will not result in the
recapitalization of GM Class H common stock into GM $1-/ 2/3 par value common
stock at a 120% exchange ratio, as currently provided for under certain
circumstances in the General Motors Restated Certificate of Incorporation, /
29
HUGHES ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
as amended. The GM $1-/ 2/3 par value common stock would remain outstanding and
would be GM's only class of common stock after the transactions. /
As part of the transactions, GM would receive a dividend from Hughes of up to
$4.2 billion in cash, and its approximately 30% retained economic interest in
Hughes would be reduced by a commensurate amount. Following these transactions,
subject to Internal Revenue Service ("IRS") approval, and based on a number of
assumptions, including the potential issuance or distribution of up to 100
million shares of GM Class H common stock or New EchoStar Class C common stock
in exchange for certain debt of GM, GM may retain an interest in the merged
entity. The $4.2 billion dividend to GM will be financed by Hughes through new
and existing credit facilities or other borrowings.
The transactions are subject to a number of conditions, including approval by
a majority of each class of GM stockholders--GM $1-/ 2/3 and GM Class H--voting
both separately as distinct classes and also voting together as a single class
based on their respective per share voting power. The proposed transactions also
are subject to antitrust clearance and approval by the Federal Communications
Commission. In addition, the transactions are contingent upon the receipt of a
favorable ruling from the IRS that the separation of Hughes from GM will be
tax-free to GM and its stockholders for U.S. federal income tax purposes. The
transactions are currently expected to close in the second half of 2002. /
GM, Hughes, and EchoStar have agreed that, in the event that the transactions
do not occur because certain specified regulatory-related conditions have not
been satisfied, EchoStar will be required to pay Hughes a $600 million
termination fee. In addition, if the merger agreement is terminated for failure
to obtain specified regulatory clearances or financing to complete the merger,
EchoStar is obligated to purchase Hughes' interest in PanAmSat Corporation
("PanAmSat") for an aggregate purchase price of approximately $2.7 billion,
which is payable, depending on the circumstances, solely in cash or in a
combination of cash and either debt or equity securities of EchoStar. Cash
proceeds, net of income taxes, would be retained by Hughes and used to repay
certain outstanding borrowings and fund future operating requirements.
Note 2. Accounting Policies
Accounting Changes
Hughes adopted Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" on January 1,
2002. SFAS No. 144 refines existing impairment accounting guidance and extends
the use of accounting for discontinued operations to both reporting segments
and distinguishable components thereof. SFAS No. 144 also eliminates the
existing exception to consolidation of a subsidiary for which control is likely
to be temporary. The adoption of SFAS No. 144 did not have any impact on
Hughes' consolidated results of operations or financial position.
Hughes also adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on
January 1, 2002. SFAS No. 142 requires that existing and future goodwill and
intangible assets with indefinite lives not be amortized, but written down, as
needed, based upon an impairment analysis that must occur at least annually. All
other intangible assets are amortized over their estimated useful lives.
Intangible assets of $209.8 million that no longer qualify for separate
accounting were combined with goodwill during the first quarter of 2002. The
following represents Hughes' reported net loss on a comparable
30
HUGHES ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
basis excluding the after-tax effect of amortization expense associated with
goodwill and intangible assets with indefinite lives:
Three Months Ended
March 31,
--------------------
2002 2001
------- -------
(Dollars in Millions)
Reported net loss....................................... $(156.4) $(105.3)
Add:
Goodwill and intangible assets with indefinite
lives amortization -- 49.4
------- -------
Adjusted net loss.................................... $(156.4) $ (55.9)
======= =======
Hughes is currently in the process of completing the transitional impairment
test required by SFAS No. 142 to determine whether there was a potential
impairment to recorded goodwill as of January 1, 2002. In accordance with SFAS
No. 142, step one of the two part transitional impairment test requires Hughes
to compare the fair value of each reporting unit with its respective carrying
amount, including goodwill. If the carrying amount of a reporting unit exceeds
its fair value, step two of the transitional impairment test will be performed
to measure the amount of impairment loss, if any. Based on preliminary results
of step one of the transitional impairment test, Hughes has identified PanAmSat,
DIRECTV Broadband, Inc. ("DIRECTV Broadband") and DIRECTV Latin America, LLC
("DLA") as reporting units for which the carrying value may exceed the fair
value as of January 1, 2002. Goodwill associated with these reporting units
totaled $3,448.4 million at January 1, 2002. Step one of the transitional
impairment test must be completed in the second quarter of 2002. Step two of the
transitional impairment test must be completed by the end of 2002 and the
resulting impairment loss, if any, will be recorded as a cumulative effect of
accounting change in the consolidated statements of operations. The amount of
any such impairment loss cannot be determined at this time. The amount of any
such loss, however, could be material to Hughes' consolidated financial results.
In addition to the annual impairment test, SFAS No. 142 also requires Hughes to
perform an impairment test if an event occurs or circumstances change that would
more likely than not result in an impairment loss. Such subsequent impairment
losses, if any, will be reflected in operating income in the consolidated
statement of operations in the period the event occurs.
Hughes had $445.5 million and $656.5 million of intangible assets, net at
March 31, 2002 and December 31, 2001, respectively. As discussed above, $209.8
million of intangible assets that no longer qualify for separate accounting were
combined with goodwill during the first quarter of 2002. At March 31, 2002,
intangible assets primarily consisted of FCC licenses for direct-to-home
broadcasting frequencies ("Orbital Slots"), which have indefinite useful lives.
Orbital Slots at March 31, 2002 were $432.3 million, net of $30.6 million
accumulated amortization. In accordance with SFAS No. 142, Hughes completed the
transitional impairment test related to intangible assets with indefinite lives
during the first quarter of 2002. It was determined that the fair value of the
Orbital Slots exceeded the carrying value at January 1, 2002. In addition, as
required by SFAS No. 142, Hughes will test for impairment its intangible assets
with indefinite lives at least annually, or more frequently if events or changes
in circumstances indicate that the assets may be impaired.
Hughes adopted SFAS No. 141, "Business Combinations," on July 1, 2001. SFAS
No. 141 requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and prohibits the amortization of
goodwill and intangible assets with indefinite lives
31
HUGHES ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
acquired thereafter. The adoption of SFAS No. 141 did not have a significant
impact on Hughes' consolidated results of operations or financial position.
Hughes adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," on January 1, 2001. SFAS No. 133 requires Hughes to carry
all derivative financial instruments on the balance sheet at fair value. In
accordance with the transition provisions of SFAS No. 133, Hughes recorded a
one-time after-tax charge of $7.4 million on January 1, 2001 as a cumulative
effect of accounting change in the Consolidated Statements of Operations and
Available Separate Consolidated Net Income (Loss) and an after-tax unrealized
gain of $0.4 million in accumulated other comprehensive income.
Note 3. Inventories
Major Classes of Inventories
March 31, December 31,
2002 2001
--------- ------------
(Dollars in Millions)
Productive material and supplies.......... $ 55.0 $ 58.3
Work in process........................... 138.9 145.7
Finished goods............................ 189.0 183.2
Provision for excess or obsolete inventory (31.6) (27.1)
------ ------
Total.................................. $351.3 $360.1
====== ======
Note 4. Comprehensive Income (Loss)
Hughes' total comprehensive income (loss) was as follows:
Three Months Ended
March 31,
--------------------
2002 2001
------- -------
(Dollars in Millions)
Net loss................................................ $(156.4) $(105.3)
------- -------
Other comprehensive loss:
Foreign currency translation adjustments............. (1.4) 1.2
Cumulative effect of accounting change............... -- 0.4
Unrealized losses on securities and derivatives:
Unrealized holding losses........................ (16.2) (149.9)
Less: reclassification adjustment for gains
recognized during the period................... -- (22.3)
------- -------
Other comprehensive loss......................... (17.6) (170.6)
------- -------
Total comprehensive loss...................... $(174.0) $(275.9)
======= =======
32
HUGHES ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
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 and the denominator of which is a number equal to the
weighted-average number of shares of GM Class H common stock which, if issued
and outstanding, would represent 100% of the tracking stock interest in the
earnings of Hughes (Average Class H dividend base).
In addition, the denominator used in determining the ASCNI of Hughes may be
adjusted from time to time as deemed appropriate by the GM Board under the GM
restated certificate of incorporation to reflect the following: (i) subdivisions
and combinations of the GM Class H common stock and stock dividends payable in
shares of GM Class H common stock to holders of GM Class H common stock; (ii)
the fair market value of contributions of cash or property by GM to Hughes, or
of cash or property of GM to or for the benefit of employees of Hughes for
employee benefit plans or arrangements of GM, Hughes or other GM subsidiaries;
(iii) the contribution of shares of capital stock of GM to or for the benefit of
employees of Hughes or its subsidiaries for benefit plans or arrangements of GM,
Hughes or other GM subsidiaries; (iv) payments made by Hughes to GM of amounts
applied to the repurchase by GM of shares of GM Class H common stock, so long as
the GM board has approved the repurchase and GM applied the payment to the
repurchase; and (v) the repurchase by Hughes of shares of GM Class H common
stock that are no longer outstanding, so long as the GM board approved the
repurchase.
Shares of Class H common stock delivered by GM in connection with the award
of such shares to and the exercise of stock options by employees of Hughes
increases the numerator and denominator of the fraction referred to above. From
time to time, in anticipation of exercises of stock options, Hughes may purchase
Class H common stock on the open market. Upon purchase, these shares are retired
and therefore decrease the numerator and denominator of the fraction referred to
above.
33
HUGHES ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The following table sets forth comparative information regarding GM Class H
Common Stock and the GM Class H Dividend Base for the quarters ended March 31,
2002 and 2001:
(Shares in Millions)
GM Class H Common Stock Outstanding
Shares at January 1 ..................................... 877.5 875.3
Shares issued for stock options exercised................ 0.3 0.4
------- -------
Shares at March 31....................................... 877.8 875.7
======= =======
Weighted average number of shares of GM Class H
common stock outstanding (Numerator)................... 877.6 875.4
======= =======
GM Class H Dividend Base
GM Class H dividend base at January 1.................... 1,301.1 1,298.8
Increase for stock options exercised..................... 0.3 0.4
------- -------
GM Class H dividend base at March 31..................... 1,301.4 1,299.2
======= =======
Weighted average GM Class H dividend base (Denominator).. 1,301.2 1,299.1
======= =======
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, which would have
resulted in the issuance of about 80 million shares based on the March 31, 2002
GM Class H common stock price. The preferred stock accrues quarterly dividends
at a rate of 6.25% per year and may be converted earlier in certain limited
circumstances. GM immediately invested the $1.5 billion received from AOL in
shares of Hughes Series A Preferred Stock designed to correspond to the
financial terms of the GM Series H preference stock. Dividends on the Hughes
Series A Preferred Stock are payable to GM quarterly at an annual rate of 6.25%.
The underwriting discount on the Hughes Series A Preferred Stock is amortized
over three years. Upon conversion of the GM Series H preference stock into GM
Class H common stock, Hughes will redeem the Hughes Series A Preferred Stock
through a cash payment to GM. Simultaneous with GM's receipt of the cash
redemption proceeds, GM will make a capital contribution to Hughes of the same
amount.
The aggregate liquidation preference of the preferred stock at March 31, 2002
and December 31, 2001 was $1.5 billion plus an amount equal to any accrued and
unpaid dividends thereon prior to the date fixed for distribution.
34
HUGHES ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Note 7. Short-Term Borrowings and Long-Term Debt
Short-Term Borrowings and Current Portion of Long-Term Debt
Interest Rates at March 31, December 31,
March 31, 2002 2002 2001
----------------- --------- ------------
(Dollars in Millions)
Credit facilities...................... 4.84% $764.8 $ 450.0
Other short-term borrowings............ 4.48%--14.50% 16.2 16.4
Current portion of long-term debt...... 6.00% 200.0 1,192.1
------------- ------ --------
Total short-term borrowings and
current portion of long-term debt... $981.0 $1,658.5
====== ========
Long-Term Debt
Interest Rates at March 31, December 31,
March 31, 2002 2002 2001
----------------- --------- ------------
(Dollars in Millions)
Notes payable........ 6.00%--8.50% $1,550.0 $ 796.5
Credit facilities.... 4.85%--5.35% 1,000.0 1,322.6
Other debt........... 2.84%--12.10% 56.4 61.8
-------- --------
Total debt.......... 2,606.4 2,180.9
Less current portion. 200.0 1,192.1
-------- --------
Total long-term debt $2,406.4 $ 988.8
======== ========
Debt and Credit Facilities. Notes Payable. In February 2002, PanAmSat
completed an $800 million private placement note offering. These unsecured
notes bear interest at an annual rate of 8.5%, payable semi-annually and mature
in 2012.
In January 2002, PanAmSat repaid in full the $46.5 million outstanding
balance of variable rate notes assumed in 1999 in connection with the early
buy-out of a satellite sale-leaseback.
PanAmSat issued five, seven, ten and thirty-year fixed rate notes totaling
$750.0 million in January 1998. The outstanding principal balances and interest
rates for these notes as of March 31, 2002 were $200 million at 6.0%, $275
million at 6.125%, $150 million at 6.375% and $125 million at 6.875%,
respectively. Principal on the notes is payable at maturity, while interest is
payable semi-annually. In connection with a new secured bank facility entered
into by PanAmSat in February 2002, described below, these notes were ratably
secured by certain of the operating assets of PanAmSat that were pledged in
connection with the secured bank facility.
Credit Facilities. In February 2002, Hughes amended and increased its
existing $750.0 million multi-year credit facility (the "Amended Credit
Agreement"). The Amended Credit Agreement provides availability of $1,235.2
million in revolving borrowings which bear interest at the London Interbank
Offer Rate ("LIBOR") plus 3.0%. The Amended Credit Agreement commitment
terminates upon the earlier of December 5, 2002 or the effective date of the
EchoStar Merger. The facility is secured by substantially all of Hughes' assets
other than the assets of DLA and PanAmSat. In March 2002, Hughes borrowed an
additional $764.8 million under a term loan tranche that was added to the
Amended Credit
35
HUGHES ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Agreement. The term loan has the same terms as the revolving facility and
increased the total funding available under the Amended Credit Agreement to
$2,000 million. As of March 31, 2002, the revolving component of the Amended
Credit Agreement was undrawn and $764.8 million was outstanding under the term
loan.
Also, in February 2002, PanAmSat obtained a bank facility in the amount of
$1,250 million. The bank facility is comprised of a $250 million revolving
credit facility, which was undrawn as of March 31, 2002, a $300 million Tranche
A Term Loan and a $700 million Tranche B Term Loan, both of which were fully
drawn as of March 31, 2002. This bank facility replaced a previously existing
$500 million unsecured multi-year revolving credit facility. The new revolving
credit facility and the Tranche A Term Loan bear interest at LIBOR plus 3.0%.
The Tranche B Term Loan bears interest at LIBOR plus 3.5%. The revolving credit
facility and Tranche A Term Loan interest rates may be increased or decreased
based upon changes in PanAmSat's total leverage ratio, as defined by the credit
agreement. The revolving credit facility and the Tranche A Term Loan terminate
in 2007 and the Tranche B Term Loan matures in 2008. Principal payments under
the Tranche A Term Loan are due in varying amounts from 2004 to 2007. Principal
payments under the Tranche B Term Loan are due primarily at maturity. The
facilities are secured ratably by substantially all of PanAmSat's operating
assets, including its satellites. PanAmSat repaid a $1,725 million intercompany
loan from Hughes in February 2002, using proceeds from the bank facility and
notes payable described above, as well as existing cash balances.
On October 1, 2001, Hughes entered into a $2.0 billion revolving credit
facility with General Motors Acceptance Corporation ("GMAC"). The facility was
subsequently amended in February 2002. The amended facility provides for a
commitment through December 5, 2002. The facility is split into two loan
tranches: a $1,500 million tranche secured by a February 2002 $1,500 million
Hughes cash deposit and a $500 million tranche that shares security with the
Amended Credit Agreement described above. Borrowings under the $1,500 million
tranche bear interest at GMAC's cost of funds (approximately 2.23% at March 31,
2002) plus 0.125%. Borrowings under the $500 million tranche bear interest at
GMAC's cost of funds plus 1.75%. The $1,500 million cash deposit earns interest
at a rate equivalent to GMAC's cost of funds. Hughes offsets the $1,500 million
GMAC cash deposit against amounts borrowed from GMAC for balance sheet purposes.
The excess over Hughes' $1,500 million cash deposit must be repaid upon the
effective date of the EchoStar Merger. The cash collateralized tranche was fully
drawn and the $500 million tranche was undrawn as of March 31, 2002.
On January 5, 2001, DLA entered into a $450.0 million revolving credit
facility. The DLA facility was repaid and retired in February 2002. In addition,
SurFin Ltd.'s unsecured revolving credit facilities of $400 million and $212.5
million were repaid and retired in February 2002.
Other. $72.6 million in other short-term and long-term debt, related
primarily to DLA and Hughes Network Systems' international subsidiaries, was
outstanding at March 31, 2002, bearing fixed and floating rates of interest of
2.8% to 14.5%. Principal on these borrowings is due in varying amounts through
2007.
36
HUGHES ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Note 8. Acquisitions, Investments and Divestitures
Acquisitions and Investments
On May 1, 2001, DLA, which operates the Latin America DIRECTV business,
acquired from Grupo Clarin S.A. ("Clarin") a 51% ownership interest in Galaxy
Entertainment Argentina S.A. ("GEA"), a local operating company in Argentina
that provides direct-to-home broadcast services, and other assets, consisting
primarily of programming and advertising rights. The purchase price, valued at
$169 million, consisted of a 3.98% ownership interest in DLA and a put option
that under certain circumstances will allow Clarin to sell in November 2003 its
3.98% interest back to DLA for $195 million. As a result of the transaction,
Hughes' interest in DLA decreased from 77.8% to 74.7% and Hughes' ownership in
GEA increased from 20% to 58.1%. Hughes' portion of the purchase price, which
amounted to about $130 million, was recorded as an increase to 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, and is included as part of the Direct-To-Home Broadcast
segment. The purchase price was $197.8 million and was paid in cash. The
following selected unaudited pro forma information is being provided to present
a summary of the combined results of Hughes and Telocity for 2001 as if the
acquisition had occurred as of the beginning of the period, giving effect to
purchase accounting adjustments. The pro forma data is presented for
informational purposes only and may not necessarily reflect the results of
operations of Hughes had Telocity operated as part of Hughes for the period
presented, nor are they necessarily indicative of the results of future
operations. The pro forma information excludes the effect of non-recurring
charges.
Three Months Ended
March 31, 2001
---------------------
(Dollars in Millions)
Total revenues $1,900.9
Loss before cumulative effect of accounting change (144.0)
Net loss (151.4)
Pro forma loss used for computation of available
separate consolidated net income (loss) (174.7)
The financial information included herein reflect the acquisitions discussed
above from their respective dates of acquisition. The acquisitions were
accounted for by the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets acquired and the liabilities
assumed based on their estimated fair values at the date of acquisition.
Divestitures
On March 1, 2000, Hughes announced that the operations of DIRECTV Japan would
be discontinued. As a result, Hughes accrued exit costs and involuntary
termination benefits. 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. About $0.8 million
was paid for accrued exit costs during the
37
HUGHES ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
first quarter of 2002. All involuntary termination benefits were paid in 2000
and 2001. The amount remaining for accrued exit costs was $46.8 million and
$47.6 million at March 31, 2002 and December 31, 2001, respectively.
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(R) receiving equipment (set-top boxes and
dishes). Other includes the corporate office and other entities.
Selected information for Hughes' operating segments are reported as follows:
Direct-
To-Home Satellite Network
Broadcast Services Systems Other Eliminations Total
--------- --------- ------- ------ ------------ --------
(Dollars in Millions)
For the Three
Months Ended:
March 31, 2002
External Revenues... $1,640.1 $ 164.3 $225.4 $ 8.4 -- $2,038.2
Intersegment
Revenues......... 3.7 42.8 17.4 -- $(63.9) --
-------- -------- ------ ------ ------ --------
Total Revenues...... $1,643.8 $ 207.1 $242.8 $ 8.4 $(63.9) $2,038.2
======== ======== ====== ====== ====== ========
Operating Profit
(Loss)........... $ (215.5) $ 57.1 $(51.1) $ 79.4 $ 2.3 $ (127.8)
March 31, 2001
External Revenues... $1,486.0 $ 166.5 $233.3 $ 7.2 -- $1,893.0
Intersegment
Revenues......... 3.9 38.7 14.9 0.1 $(57.6) --
-------- -------- ------ ------ ------ --------
Total Revenues...... $1,489.9 $ 205.2 $248.2 $ 7.3 $(57.6) $1,893.0
======== ======== ====== ====== ====== ========
Operating Profit
(Loss)........... $ (145.5) $ 41.1 $(52.6) $ 1.5 $ 3.0 $ (152.5)
As of:
March 31, 2002
Goodwill, net....... $3,828.7 $2,238.7 $ 18.9 $649.2 $ -- $6,735.5
Intangible Assets,
net.............. 445.5 -- -- -- -- 445.5
December 31, 2001
Goodwill, net....... $3,593.5 $2,238.7 $ 18.9 $649.2 $ -- $6,500.3
Intangible Assets,
net.............. 656.5 -- -- -- -- 656.5
Note 10. Commitments and Contingencies
Litigation
In connection with the 2000 sale by Hughes of its satellite systems
manufacturing businesses to The Boeing Company ("Boeing"), the stock purchase
agreement provides for potential adjustment to
38
HUGHES ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
the purchase price based upon the final closing date financial statements of the
satellite systems manufacturing businesses. The stock purchase agreement also
provides for an arbitration process to resolve any disputes that arise in
determining the purchase price adjustment. Based upon the final closing date
financial statements of the satellite systems manufacturing businesses that were
prepared by Hughes, Boeing is owed a purchase price adjustment of $164 million
plus interest from the date of sale, the total amount of which has been provided
for in Hughes' financial statements. However, Boeing has submitted additional
proposed adjustments, of which about $750 million remain unresolved. Hughes
believes that these additional proposed adjustments are without merit and
intends to vigorously contest the matter in the arbitration process which will
result in a binding decision unless the matter is otherwise settled. Although
Hughes believes it has adequately provided for the disposition of this matter,
the impact of its disposition cannot be determined at this time. It is possible
that the final resolution of this matter could result in Hughes making a cash
payment to Boeing that would be material to Hughes' consolidated financial
statements.
Additionally, as part of the sale of the satellite systems manufacturing
businesses, Hughes retained liability for certain possible fines and penalties
and certain financial consequences of debarment associated with potential
non-criminal violations of U.S. Export control laws related to the business now
owned by Boeing should the State Department impose such sanctions against the
satellite systems manufacturing businesses. Hughes does not expect sanctions
imposed by the State Department, if any, to have a material adverse effect on
its consolidated financial statements.
General Electric Capital Corporation ("GECC") and DIRECTV entered into a
contract on July 31, 1995, in which GECC agreed to establish and manage a
private label consumer credit program for consumer purchases of hardware and
related DIRECTV(R)/ programming. Under the contract, GECC also agreed to provide
certain related services to DIRECTV, including credit risk scoring, billing and
collections services. DIRECTV agreed to act as a surety for loans complying with
the terms of the contract. Hughes guaranteed DIRECTV's performance under the
contract. A complaint and counterclaim were filed by the parties in the U.S.
District Court for the District of Connecticut concerning GECC's performance and
DIRECTV's obligation to act as a surety. A trial commenced on June 12, 2000 with
GECC presenting evidence to the jury for damages of $157 million. DIRECTV sought
damages from GECC of $45 million. On July 21, 2000, the jury returned a verdict
in favor of GECC and awarded contract damages in the amount of $133.0 million.
The trial judge issued an order granting GECC $48.5 million in interest under
Connecticut's offer-of-judgment statute. With this order, the total judgment
entered in GECC's favor was $181.5 million. Hughes and DIRECTV filed a notice of
appeal on December 29, 2000. Oral argument on the appeal was heard on October
15, 2001 by the Second Circuit Court of Appeals. While the appeal is pending,
post-judgment interest on the total judgment is accruing at a rate of 6.241% per
year, compounded annually, from the date judgment was entered in October 2000.
Although Hughes and DIRECTV believe that it is reasonably possible that the jury
verdict will be overturned and a new trial granted, Hughes has increased its
provision for loss related to this matter by $83 million in the first quarter of
2002, of which $56 million was recorded as a charge to "Selling, general and
administrative expenses" and $27 million was recorded as a charge to "Interest
expense," based on the status of settlement negotiations between the parties.
Hughes believes it has adequately provided for the disposition of
this matter, however, its ultimate resolution could result in an additional
charge to Hughes' results of operations. /
DIRECTV filed suit in California State Court, Los Angeles County, on June 22,
2001 against Pegasus Satellite Television Inc. and Golden Sky Systems, Inc.
(referred to together as "Defendants") to recover monies (currently
approximately $63 million) that Defendants owe DIRECTV under the parties'
Seamless Marketing Agreement, which provides for reimbursement to DIRECTV of
certain
39
HUGHES ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
subscriber acquisition costs incurred by DIRECTV on account of new subscriber
activations in Defendants' territory. Defendants had ceased making payments
altogether, and indicated that they did not intend to make any further payments
due under the Agreement. On July 13, 2001, Defendants sent notice of termination
of the Agreement and on July 16, 2001, Defendants answered DIRECTV's complaint
and filed a cross complaint alleging counts of fraud in the inducement, breach
of contract, breach of the covenant of good faith and fair dealing, intentional
interference with contractual relations, intentional interference with
prospective economic advantage and violation of California Bus. and Prof. Code
17200. Defendants seek an unstated amount of damages and punitive damages.
DIRECTV denies any liability to Defendants, and intends to vigorously pursue its
damages claim against Defendants and defend against Defendants' cross claims.
Defendants removed the action to federal district court, Central District of Los
Angeles.
Hughes Communications Galaxy, Inc. ("HCGI") filed a lawsuit on March 22, 1991
against the U.S. Government based upon the National Aeronautics and Space
Administration's breach of contract to launch ten satellites on the Space
Shuttle. On June 30, 2000, a final judgment was entered in favor of HCGI in the
amount of $103 million. On November 13, 2001, the U.S. Court of Appeals for the
Federal Circuit affirmed the lower court decision. On December 26, 2001, Hughes
filed a Combined Petition for Panel Rehearing and Rehearing en Banc, seeking to
increase the award, which was denied in January 2002. In March 2002, Hughes was
advised that no further judicial review would be sought by the U.S. Government
and the payment was in process. In April 2002, Hughes received payment for the
full amount of the judgment. As a result, Hughes recorded a $95 million gain,
net of legal costs, as an offset to "Selling, general and administrative
expenses" in the first quarter of 2002.
Litigation is subject to uncertainties and the outcome of individual
litigated matters is not predictable with assurance. In addition to the above
items, various legal actions, claims, and proceedings are pending against Hughes
arising in the ordinary course of business. Hughes has established loss
provisions for matters in which losses are probable and can be reasonably
estimated. Some of the matters may involve compensatory, punitive, or treble
damage claims, or sanctions, that if granted, could require Hughes to pay
damages or make other expenditures in amounts that could not be estimated at
March 31, 2002. After discussion with counsel, it is the opinion of management
that such liability is not expected to have a material adverse effect on Hughes'
consolidated financial statements.
Other
Hughes uses in-orbit and launch insurance to mitigate the potential financial
impact of satellite fleet in-orbit and launch failures unless the premium costs
are considered uneconomic relative to the risk of satellite failure. The
insurance generally covers the unamortized book value of covered satellites and
does not compensate for business interruption or loss of future revenues or
customers. Hughes relies on in-orbit spare satellites and excess transponder
capacity at key orbital slots to mitigate the effects of satellite failure on
its' ability to provide service. Where insurance costs related to known
satellite anomalies are prohibitive, Hughes' insurance policies contain coverage
exclusions and Hughes is not insured for certain other satellites. The book
value of satellites that were insured with coverage exclusions amounted to
$686.4 million and the book value of the satellites that were not insured was
$635.6 million at March 31, 2002.
Hughes is contingently liable under standby letters of credit and bonds in
the aggregate amount of $64.2 million which were undrawn at March 31, 2002 and
has guaranteed $3.0 million of bank debt
40
HUGHES ELECTRONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (concluded)
related to non-consolidated DLA local operating companies, which is due in
variable amounts over the next five years. Additionally, as described in Note 8,
DLA may be required to repurchase Clarin's 3.98% interest in DLA for $195
million in 2003.
In the first quarter of 2002, Hughes recorded a $29.0 million charge to
"Other, net" related to an expected requirement to perform on a guarantee
obligation of up to $55.4 million for bank debt owed by an investor in Hughes
Tele.com (India) Limited. Hughes has accrued a current liability to the lender
and an account receivable from the investor for the guarantee amount. The $29.0
million charge represents a provision for the portion of the receivable from the
investor deemed uncollectible. A payment by Hughes pursuant to the guarantee may
be required in the second or third quarter of 2002.
The Hughes Board of Directors has approved several benefit plans designed to
provide benefits for the retention of about 240 key employees and also provide
benefits in the event of employee lay-offs. Generally, these benefits are only
available if a qualified change-in-control of Hughes occurs. Upon a
change-in-control, the retention benefits will be accrued and expensed when
earned and the severance benefits will be accrued and expensed if an employee is
identified for termination. A total of up to about $110 million for retention
benefits will be paid, with approximately 50% paid at the time of a
change-in-control and 50% paid up to 12 months following the date of a
change-in-control. The amount of severance benefits to be paid will be based
upon decisions that will be made relating to employee layoffs, if any, following
the date of a change-in-control. In addition, approximately 33.5 million
employee stock options will vest upon a qualifying change-in-control and up to
an additional 8.5 million employee stock options could vest if employees are
laid off within one year of a change-in-control. For purposes of the above
benefits and stock options, a successful completion of the EchoStar Merger would
qualify as a change-in-control.
At March 31, 2002, minimum future commitments under noncancelable operating
leases having lease terms in excess of one year were primarily for real property
and aggregated $349.9 million, payable as follows: $76.1 million in the
remainder of 2002, $80.1 million in 2003, $51.9 million in 2004, $37.5 million
in 2005, $31.0 million in 2006 and $73.3 million thereafter. Certain of these
leases contain escalation clauses and renewal or purchase options.
At March 31, 2002, the minimum commitments under noncancelable satellite
construction and launch contracts totaled $870.9 million.
In connection with the direct-to-home broadcast businesses, Hughes has
commitments related to certain programming agreements which are variable based
upon the number of underlying subscribers and market penetration rates. Minimum
payments over the terms of applicable contracts are anticipated to be
approximately $1.5 billion, payable as follows: $418.7 million in 2002, $260.2
million in 2003, $159.4 million in 2004, $158.0 million in 2005, $165.7 million
in 2006 and $366.8 million thereafter.
As part of a series of agreements entered into with America Online, Inc.
("AOL") on June 21, 1999, Hughes committed to spend up to approximately $1.5
billion in sales, marketing, development and promotion efforts in support of
DirecPC(R)/AOL-Plus, DIRECTV(R), DIRECTV(TM)/AOL TV and DirecDuo(TM) products
and services. At March 31, 2002, Hughes had spent approximately $500 million in
support of these efforts. Consistent with the requirements of the agreements
with AOL, additional funds will continue to be spent until the contractual
spending limits have been satisfied or until applicable timeframes expire, which
in some cases can be for periods of ten years or more.
***
41
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY DATA
Three Months Ended March 31,
---------------------------
2002 2001
-------------- ------------
(Dollars in Millions)
(Unaudited)
Consolidated Statements of Operations Data:
Total revenues................................. $ 2,038.2 $ 1,893.0
Total operating costs and expenses............. 2,166.0 2,045.5
--------- ---------
Operating loss................................. (127.8) (152.5)
Other expenses, net............................ (113.7) (19.6)
Income tax benefit............................. 91.8 49.9
Minority interests in net (earnings) losses
of subsidiaries.............................. (6.7) 24.3
--------- ---------
Loss before cumulative effect of accounting
change....................................... (156.4) (97.9)
Cumulative effect of accounting change,
net of taxes................................. -- (7.4)
--------- ---------
Net loss....................................... (156.4) (105.3)
Adjustment to exclude the effect of GM
purchase accounting.......................... -- 0.8
Preferred stock dividends...................... (24.1) (24.1)
--------- ---------
Loss Used for Computation of Available
Separate Consolidated Net Income (Loss)...... $ (180.5) $ (128.6)
========= =========
Other Data:
EBITDA(1)...................................... $ 134.2 $ 113.2
EBITDA Margin(1)............................... 6.6% 6.0%
Depreciation and amortization.................. $ 262.0 $ 265.7
Capital expenditures........................... 360.8 351.2
Cash flows from operating activities........... 72.2 (144.6)
Cash flows from investing activities........... (187.1) (195.0)
Cash flows from financing activities........... 528.6 359.1
March 31, 2002 December 31,
(Unaudited) 2001
-------------- ------------
(Dollars in Millions)
Consolidated Balance Sheet Data:
Cash and cash equivalents...................... $ 1,113.8 $ 700.1
Total current assets........................... 3,990.2 3,341.1
Total assets................................... 19,740.1 19,210.1
Total current liabilities...................... 3,802.2 4,406.5
Long-term debt................................. 2,406.4 988.8
Minority interests............................. 538.8 531.3
Total stockholder's equity..................... 10,874.1 11,071.9
- --------
(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.
42
HUGHES ELECTRONICS CORPORATION
SUMMARY DATA--Concluded
Selected Segment Data
Direct-To-
Home Satellite Network Eliminations
Broadcast Services Systems and Other Total
---------- --------- ------- ------------ --------
(Dollars in Millions)
(Unaudited)
For the Three Months Ended:
March 31, 2002
Total Revenues............. $1,643.8 $207.1 $242.8 $(55.5) $2,038.2
-------- ------ ------ ------ --------
% of Total Revenue......... 80.6% 10.2% 11.9% (2.7%) 100.0%
Operating Profit (Loss).... $ (215.5) $ 57.1 $(51.1) $ 81.7 $ (127.8)
Operating Profit Margin.... N/A 27.6% N/A N/A N/A
EBITDA..................... $ (62.6) $151.1 $(33.1) $ 78.8 $ 134.2
EBITDA Margin.............. N/A 73.0% N/A N/A 6.6%
Depreciation and
Amortization............. $ 152.9 $ 94.0 $ 18.0 $ (2.9) $ 262.0
Capital Expenditures....... 139.5 74.0 128.3 19.0 360.8
-------- ------ ------ ------ --------
March 31, 2001
Total Revenues............. $1,489.9 $205.2 $248.2 $(50.3) $1,893.0
-------- ------ ------ ------ --------
% of Total Revenue......... 78.7% 10.8% 13.1% (2.6%) 100.0%
Operating Profit (Loss).... $ (145.5) $ 41.1 $(52.6) $ 4.5 $ (152.5)
Operating Profit Margin.... N/A 20.0% N/A N/A N/A
EBITDA..................... $ 6.0 $140.0 $(38.3) $ 5.5 $ 113.2
EBITDA Margin.............. 0.4% 68.2% N/A N/A 6.0%
Depreciation and
Amortization............. $ 151.5 $ 98.9 $ 14.3 $ 1.0 $ 265.7
Capital Expenditures....... 127.6 67.2 178.2 (21.8) 351.2
-------- ------ ------ ------ --------
43
HUGHES ELECTRONICS CORPORATION
The following management's discussion and analysis should be read in
conjunction with the Hughes Electronics Corporation ("Hughes") management's
discussion and analysis included in the Hughes Electronics Corporation Annual
Report on Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission ("SEC") on March 11, 2002 and all other
Hughes filings, including Current Reports on Form 8-K, filed with the SEC
through the date of this report. In addition, the following discussion excludes
purchase accounting adjustments related to General Motors' acquisition of
Hughes.
This Quarterly Report may contain certain statements that Hughes believes
are, or may be considered to be, "forward-looking statements," within the
meaning of various provisions of the Securities Act of 1933 and of the
Securities Exchange Act of 1934. These forward-looking statements generally can
be identified by use of statements that include phrases such as we "believe,"
"expect," "anticipate," "intend," "plan," "foresee" or other similar words or
phrases. Similarly, statements that describe our objectives, plans or goals also
are forward-looking statements. All of these forward-looking statements are
subject to certain risks and uncertainties that could cause Hughes' actual
results to differ materially from historical results or from those expressed or
implied by the relevant forward-looking statement. Risk factors which could
cause actual performance and future actions to differ materially from
forward-looking statements made herein include, but are not limited to, economic
conditions, product demand and market acceptance, government action, local
political or economic developments in or affecting countries where Hughes has
operations, foreign currency exchange rates, ability to obtain export licenses,
competition, the outcome of legal proceedings, ability to achieve cost
reductions, ability to timely perform material contracts, technological risk,
limitations on access to distribution channels, the success and timeliness of
satellite launches, in-orbit performance of satellites, loss of uninsured
satellites, ability of customers to obtain financing, Hughes' ability to access
capital to maintain its financial flexibility and the effects of the strategic
transactions that General Motors Corporation ("GM") and Hughes have entered into
as noted below.
Additionally, the in-orbit satellites of Hughes and its approximately 81%
owned subsidiary, PanAmSat Corporation ("PanAmSat"), are subject to the risk of
failing prematurely due to, among other things, mechanical failure, collision
with objects in space or an inability to maintain proper orbit. Satellites are
subject to the risk of launch delay and failure, destruction and damage while on
the ground or during launch and failure to become fully operational once
launched. Delays in the production or launch of a satellite or the complete or
partial loss of a satellite, in-orbit or during launch, could have a material
adverse impact on the operations of Hughes' businesses. With respect to both
in-orbit and launch problems, insurance carried by Hughes and PanAmSat, if any,
generally does not compensate for business interruption or loss of future
revenues or customers. Hughes has, in the past, experienced technical anomalies
on some of its satellites. Service interruptions caused by these anomalies,
depending on their severity, could result in claims by affected customers for
termination of their transponder agreements, cancellation of other service
contracts or the loss of other customers. For further information regarding
PanAmSat's satellites, refer to PanAmSat's Annual Report on Form 10-K for the
year ended December 31, 2001, filed with the SEC on March 11, 2002.
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.
Proposed Merger Transaction
On October 28, 2001, Hughes and GM, together with EchoStar Communications
Corporation ("EchoStar"), announced the signing of definitive agreements that
provide for the split-off of
44
HUGHES ELECTRONICS CORPORATION
a company holding all of the capital stock of Hughes from GM and the combination
of the Hughes business with EchoStar by means of a merger (the "Merger" or
"EchoStar Merger"). The surviving entity is sometimes referred to as New
EchoStar. The Merger is subject to a number of conditions and no assurances can
be given that the transactions will be completed. See further discussion of the
Merger below in "Acquisitions, Investments and Divestitures - Merger
Transaction." The financial and other information regarding Hughes contained in
this Quarterly Report do not give any effect to or make any adjustment for the
anticipated completion of the Merger.
Use of Estimates in the Preparation of the Consolidated Financial Statements
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect amounts
reported therein, including the financial information reported in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Management bases its estimates and judgements on historical experience and on
various other factors that are believed to be reasonable under the
circumstances. Due to the inherent uncertainty involved in making estimates,
actual results reported in future periods may be based upon amounts which differ
from those estimates. The following represent what Hughes believes are the
critical accounting policies most affected by significant management estimates
and judgements:
Valuation of Long-Lived Assets. Hughes evaluates the carrying value of
long-lived assets to be held and used, other than goodwill and intangible assets
with indefinite lives, when events and circumstances warrant such a review. The
carrying value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately identifiable and is less
than its carrying value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair value of the long-lived asset. Fair
value is determined primarily using the anticipated cash flows discounted at a
rate commensurate with the risk involved. Losses on long-lived assets to be
disposed of are determined in a similar manner, except that fair values are
reduced for the cost of disposal. The cash flows used in such analyses are
typically derived from the expected cash flows associated with the asset under
review, which is determined from management estimates and judgments of expected
future results. Should the actual cash flows vary from the estimated amount, a
write-down of the asset may be warranted in a future period.
Financial Instruments and Investments. Hughes maintains investments in equity
securities of unaffiliated companies. Marketable equity securities are
considered available-for-sale and carried at current fair value based on quoted
market prices with unrealized gains or losses (excluding other-than-temporary
losses), net of taxes, reported as part of accumulated other comprehensive
income (loss) ("OCI"), a separate component of stockholder's equity. Hughes
continually reviews its investments to determine whether a decline in fair value
below the cost basis is "other-than-temporary." Hughes considers, among other
factors: the magnitude and duration of the decline; the financial health of and
business outlook of the investee, including industry and sector performance,
changes in technology, and operational and financing cash flow factors; and
Hughes' intent and ability to hold the investment. If the decline in fair value
is judged to be other-than-temporary, the cost basis of the security is
written-down to fair value and the amount recognized in the statement of
operations as part of "Other, net." Future adverse changes in market conditions
or poor operating results of underlying investments could result in losses or an
inability to recover an investment's carrying value, thereby possibly requiring
a charge in a future period.
45
HUGHES ELECTRONICS CORPORATION
Contingent Matters. A significant amount of management estimate and judgement
is required in determining when, or if, an accrual should be recorded for a
contingent matter, particularly for those contingent matters described in
"Commitments and Contingencies" below and in Note 10 to the consolidated
financial statements, and the amount of such accrual, if any. Due to the
uncertainty of determining the likelihood of a future event occurring and the
potential financial statement impact of such an event, it is possible that upon
further development or resolution of a contingent matter, a charge could be
recorded in a future period that would be material to Hughes' continuing
operations and financial position.
General
Business Overview
The continuing operations of Hughes are comprised of the following segments:
Direct-To-Home Broadcast, Satellite Services and Network Systems.
The Direct-To-Home Broadcast segment consists primarily of the DIRECTV
digital multi-channel entertainment businesses located in the United States and
Latin America and DIRECTV Broadband, Inc. ("DIRECTV Broadband"), formerly known
as Telocity Delaware, Inc. ("Telocity"), which was acquired in April 2001.
DIRECTV Broadband is a provider of digital subscriber line ("DSL") services
purchased from wholesale providers. The results of operations for DIRECTV
Broadband have been included in Hughes' financial information since the date of
acquisition. See Note 8 to the consolidated financial statements and "Liquidity
and Capital Resources--Acquisitions, Investments and Divestitures" below, for
further discussion of this transaction.
During the first quarter of 2002, based on the status of settlement
negotiations between the parties, DIRECTV recognized an $83 million charge to
provide for losses associated with a dispute with General Electric Capital
Corporation ("GECC") arising from a contractual arrangement whereby GECC managed
a credit program for consumers who purchased DIRECTV(R)/ programming and related
hardware. Of this amount, $56 million was recorded as a charge to "Selling,
general and administrative expenses" and $27 million was recorded as a charge to
"Interest expense." See Note 10 to the consolidated financial statements and
Part II - Item 1. "Legal Proceedings" for additional information. /
During the fourth quarter of 2001, DIRECTV successfully launched and
commenced service of the DIRECTV 4S spot beam satellite at 101 degrees west
longitude. DIRECTV 4S enabled DIRECTV to increase its capacity to about 750
channels, and provides the capacity to transmit more than 300 local channels and
to comply with the federal "must carry" provisions of the Satellite Home Viewer
Improvement Act of 1999 in the 41 U.S. markets where DIRECTV offers local
programming. The "must carry" provisions obligate DIRECTV and other
direct-to-home operators to carry all local channels in any market where the
direct-to-home operator broadcasts any local channels. During the first quarter
of 2002, DIRECTV announced that with the expected launch of the DIRECTV 5
satellite in May 2002 it would expand its local channel offerings to an
additional 10 markets by the end of 2002. This will bring the total number of
markets capable of receiving local channels to 51, reaching approximately 62% of
all television households in the United States.
Beginning with the first quarter of 2002, DIRECTV changed its policy to no
longer include pending subscribers in its cumulative subscriber base. Pending
subscribers are customers who have purchased equipment and have had all of the
required customer information entered into DIRECTV's billing system, but have
not yet activated service. This new policy reflects a more simplified approach
to counting customers and is consistent with the rest of the multi-channel
television industry. As a result,
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DIRECTV reduced its cumulative subscriber base by approximately 360,000
subscribers that had been previously identified as pending subscribers. This
change has no impact on past or future revenues, EBITDA or cash flows. The
amounts reported herein for DIRECTV's cumulative subscriber base, subscriber
additions and average monthly revenue per subscriber ("ARPU"), have been
calculated on a comparative basis excluding pending subscribers.
The operating results for the Latin America DIRECTV businesses are comprised
of DIRECTV Latin America, LLC ("DLA"), Hughes' 74.7% owned subsidiary that
provides DIRECTV(R)/ programming to local operating companies located in Latin
America and the Caribbean Basin; the exclusive distributors of DIRECTV located
in Mexico, Brazil, Argentina, Colombia, Trinidad and Tobago and Uruguay; and
SurFin Ltd. ("SurFin"), a company that provides financing of subscriber receiver
equipment to certain DLA local operating companies. The non-operating results of
the Latin America DIRECTV businesses include Hughes' share of the results of
unconsolidated local operating companies that are the exclusive distributors of
DIRECTV in Venezuela and Puerto Rico and are included in "Other, net." During
2001, Hughes began recording 100% of the losses incurred by DLA and certain
other affiliated local operating companies due to the accumulation of operating
losses in excess of the minority investors investment and Hughes' continued
funding of those businesses. /
In May 2001, due to the acquisition of a majority interest of Galaxy
Entertainment Argentina S.A. ("GEA"), DLA began to consolidate the results of
GEA. Previously, DLA's interest in GEA was accounted for under the equity
method. See Note 8 to the consolidated financial statements and "Liquidity and
Capital Resources--Acquisitions, Investments and Divestitures" below, for
further discussion of this transaction. In the first quarter of 2002, DLA's
reported loss was negatively impacted by $32.0 million as a result of the
devaluation of the Argentinean peso. A further decline in value of the
Argentinean peso against the U.S. dollar would result in additional losses in
the future.
Also in 2001, DLA secured the exclusive rights to broadcast and re-sell the
FIFA World Cup soccer competitions, occurring in 2002 and 2006, in Argentina,
Chile, Colombia, Mexico, Uruguay and Venezuela. Because of the World Cup's
popularity across Latin America, DLA expects World Cup soccer to be an important
differentiator of its service and a key subscriber acquisition tool. The costs
of the live sporting events are recorded in the period the events are broadcast.
As a result, the cost of the events of $145 million and $267 million will be
charged to operations in the second quarters of 2002 and 2006, respectively.
Because of weak economic conditions in several of its largest markets, there is
a significant risk that DLA will be unable to recover the costs of the events
from incremental revenues from pay-per-view sales to subscribers, advertising
and the re-sale of broadcast rights to third parties for the 2002 competition.
As a result of any such shortfall, DLA's expected second quarter of 2002
operating loss could increase.
The Satellite Services segment represents the results of PanAmSat, Hughes'
approximately 81% owned subsidiary. PanAmSat is a leading provider of video,
broadcasting and network services via satellite. PanAmSat leases capacity on its
satellites, which it owns and operates, to its customers and delivers
entertainment and information to cable television systems, television broadcast
affiliates, direct-to-home television operators, Internet service providers,
telecommunications companies and other corporations. PanAmSat provides satellite
services to its customers primarily through long-term operating lease contracts
for the full or partial use of satellite transponder capacity.
The Network Systems segment represents the results of Hughes Network Systems
("HNS"), which is a leading supplier of broadband satellite services and
products. HNS designs, manufactures and installs advanced networking solutions
for businesses and governments worldwide using very small aperture terminals.
HNS is a premier broadband products and services company with particular
emphasis on providing broadband access. HNS is also a leading supplier of
DIRECTV(R) receiving equipment (set-top boxes and antennas).
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HUGHES ELECTRONICS CORPORATION
During the first quarter of 2002, HNS recorded a $29.0 million charge in
"Other, net" for a loan guarantee obligation related to a Hughes affiliate in
India. See Note 10 to the consolidated financial statements for additional
information.
During the first quarter of 2002, Hughes recorded a $95 million gain, net of
legal costs, as an offset to "Selling, general and administrative expenses" as a
result of the favorable resolution of a lawsuit filed against the U.S.
Government on March 22, 1991. The lawsuit was based upon the National
Aeronautics and Space Administration's ("NASA") breach of contract to launch ten
satellites on the Space Shuttle. See Note 10 to the consolidated financial
statements and "Part II--Item 1. Legal Proceedings" for additional information.
Hughes adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" on January 1, 2002. The adoption of this
standard resulted in the discontinuation of amortization on goodwill and
intangible assets with indefinite lives and is discussed in more detail below
under "Accounting Changes" and in Note 2 to the consolidated financial
statements. Hughes recognized amortization expense of $63.5 million in the first
quarter of 2001, for which there is no comparable amount in 2002.
During the second and third quarters of 2001, Hughes announced a nearly 10%
reduction of its approximately 7,900 employees, excluding DIRECTV customer
service representatives, located in the United States. As a result 750
employees, across all business disciplines, were given notification of
termination that resulted in a charge to operations of $87.5 million. Of that
charge, $80.0 million were related to employee severance benefits and $7.5
million was for other costs primarily related to a remaining lease obligation
associated with excess office space and employee equipment. As of March 31,
2002, substantially all employees had been terminated. The remaining accrual for
employee severance benefits and other costs amounted to $28.0 million and $3.1
million, respectively, at March 31, 2002.
In October 2001, Hughes reached a settlement with Raytheon Company
("Raytheon") on a purchase price adjustment related to the 1997 spin-off of
Hughes' defense electronics business and the subsequent merger of that business
with Raytheon. Under the terms of the settlement, Hughes agreed to reimburse
Raytheon for a portion of the original $9.5 billion purchase price. Hughes paid
$500 million of the settlement amount in October 2001 and the remainder, $134.2
million, was paid during February 2002.
Satellite Fleet
Hughes has a fleet of 27 satellites, six owned by DIRECTV and 21 owned and
operated by PanAmSat.
PanAmSat expects to launch and place in service new satellites as part of its
construction and launch strategy. The new satellites are intended to meet the
expected demand for additional satellite capacity, replace capacity affected by
satellite anomalies or replace satellites reaching their expected end of life,
and provide added backup to existing capacity. In connection with this strategy,
six satellites have been successfully launched since December 1999. PanAmSat is
currently constructing and expects to launch up to six satellites by 2006. Two
of these satellites will be ready for launch in 2002, two in early 2003, and one
is scheduled to replace Galaxy IR prior to the end of its useful life in 2006.
The sixth satellite will be available as a replacement or in-orbit spare.
DIRECTV U.S. currently has one satellite under construction, the DIRECTV 7S
satellite, a high-powered spot-beam satellite, which is expected to be launched
in the second half of 2003. DIRECTV
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7S will be positioned at 119 degrees west longitude and will provide additional
capacity enabling DIRECTV to further expand its services, including local
channel coverage. Also, the already constructed high-power DIRECTV 5 satellite
is expected to be launched in May 2002 to replace DIRECTV 6 at 119 degrees west
longitude. DIRECTV 6 will then serve as a back-up at 119 degrees west longitude.
Results of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Revenues. Revenues for the first quarter of 2002 increased 7.7% to $2,038.2
million, compared with $1,893.0 million in the first quarter of 2001. The
increased revenues resulted primarily from the Direct-To-Home Broadcast segment,
which reported $153.9 million increase in revenues over the first quarter of
2001 that resulted primarily from the addition of about 1.3 million net new
subscribers in the United States and Latin America since March 31, 2001.
Operating Costs and Expenses. Operating costs and expenses increased to
$2,166.0 million in the first quarter of 2002 from $2,045.5 million in the first
quarter of 2001. Broadcast programming and other costs increased by $164.5
million in the first quarter of 2002 from the same period in 2001 due to higher
costs at the Direct-To-Home Broadcast segment resulting from the increase in
subscribers. Costs of products sold increased by $18.5 million in the first
quarter of 2002 from the first quarter of 2001. Selling, general and
administrative expenses decreased by $58.8 million during the first quarter of
2002 compared to the same period in 2001 due primarily to the $95 million net
gain recorded from the NASA claim and lower expenses resulting from cost saving
initiatives, partially offset by a $56 million loss recorded for the GECC
dispute. Depreciation and amortization decreased by $3.7 million during the
first quarter of 2002 compared to the first quarter of 2001 due to the
discontinuation of amortization expense related to goodwill and intangible
assets with indefinite lives in accordance with SFAS No. 142, which amounted to
$63.5 million in the first quarter of 2001, partially offset by added
depreciation expense related to capital expenditures for property and satellites
since the first quarter of 2001, the consolidation of GEA in May 2001 and the
acquisition of Telocity in April 2001.
EBITDA. EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with
accounting principles generally accepted in the United States of America. Hughes
management 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 first quarter of 2002 was $134.2 million and EBITDA margin was
6.6%, compared to EBITDA of $113.2 million and EBITDA margin of 6.0% in the
first quarter of 2001. The increase in EBITDA resulted from $11.1 million in
increased EBITDA at the Satellite Services segment and an increase of $73.3
million in Eliminations and Other, principally due to the $95 million gain
recorded for the NASA claim. These increases were partially offset by $68.6
million of lower EBITDA at the Direct-To-Home Broadcast segment in the first
quarter of 2002 compared to the first quarter of 2001 that resulted primarily
from the $56 million loss recorded for the GECC dispute.
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Operating Loss. The operating loss for the first quarter of 2002 was $127.8
million compared to an operating loss of $152.5 million in the first quarter of
2001. The decreased operating loss resulted primarily from the increase in
EBITDA.
Interest Income and Expense. Interest income decreased to $4.3 million for
the first quarter of 2002 compared to interest income of $23.8 million for the
same period of 2001 due to a decrease in average outstanding cash balances.
Interest expense increased to $76.4 million for the first quarter of 2002 from
$50.6 million for the first quarter of 2001. The higher interest expense
resulted primarily from the $27 million of interest recorded in connection with
the GECC dispute. Changes in cash and cash equivalents and debt are discussed in
more detail below under "Liquidity and Capital Resources."
Other, Net. Other, net decreased to a net expense of $41.6 million for the
first quarter of 2002 from a net income of $7.2 million in the same period of
2001. The net expense for the first quarter of 2002 resulted primarily from a
$29.0 million charge recorded for a loan guarantee obligation related to a
Hughes affiliate in India and $10.2 million of equity method losses. Other, net
income for the first quarter of 2001 resulted primarily from net gains from the
sale of investments of $20.0 million, partially offset by equity method losses
of $12.8 million.
Income Taxes. Hughes recognized an income tax benefit of $91.8 million for
the first quarter of 2002, compared to $49.9 million in the first quarter of
2001. The higher tax benefit in the first quarter of 2002 was due to higher
pre-tax losses and the favorable resolution of certain tax contingencies in
2002.
Loss Before Cumulative Effect of Accounting Change. Hughes reported a loss
before cumulative effect of accounting change of $156.4 million for the 2002
first quarter, compared to $97.9 million for the same period of 2001.
Cumulative Effect of Accounting Change. Hughes adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" on January 1,
2001. In accordance with the transition provisions of SFAS No. 133, Hughes
recorded a one time after-tax charge of $7.4 million during the quarter ended
March 31, 2001, as a cumulative effect of accounting change in the Consolidated
Statements of Operations and Available Separate Consolidated Net Income (Loss).
See Note 2 to the consolidated financial statements and "Accounting Changes"
below for additional information.
Direct-To-Home Broadcast Segment
Direct-To-Home Broadcast segment first quarter 2002 revenues increased 10.3%
to $1,643.8 million from $1,489.9 million in the first quarter of 2001. The
Direct-To-Home Broadcast segment had negative EBITDA of $62.6 million in the
first quarter of 2002 compared with positive EBITDA of $6.0 million in the first
quarter of 2001. The operating loss for the segment increased to $215.5 million
in the first quarter of 2002 from $145.5 million in the first quarter of 2001.
United States. DIRECTV U.S. was the biggest contributor to the segment's
revenue growth with revenues of $1,466 million in the first quarter of 2002, an
11% increase over first quarter 2001 revenues of $1,324 million. The increase in
revenues resulted primarily from a larger subscriber base in 2002, partially
offset by lower ARPU. As of March 31, 2002, DIRECTV had approximately 10.6
million subscribers compared to about 9.5 million subscribers at March 31, 2001.
Excluding subscribers in NRTC territories, DIRECTV owned and operated
subscribers totaled 8.8 million at March 31, 2002. DIRECTV added 350,000 net new
owned and operated subscribers in the first quarter of 2002, compared to 251,000
net subscribers in the first quarter of 2001. ARPU for DIRECTV U.S. was $56.70
and $58.50 at March 31, 2002 and March 31, 2001, respectively. The reduced ARPU
in
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HUGHES ELECTRONICS CORPORATION
2002 is due to lower premium package revenue and fewer pay-per-view purchases
than in 2001. As mentioned above, amounts reflected herein for DIRECTV's
cumulative subscriber base, subscriber additions and ARPU have been calculated
on a comparative basis excluding pending subscribers.
EBITDA was $29 million for the first quarter of 2002 compared to EBITDA of
$50 million for the first quarter of 2001. The operating loss in the first
quarter of 2002 was $56 million compared to a loss of $53 million in the first
quarter of 2001. The decrease in EBITDA was due to the $56 million loss recorded
for the GECC dispute and increased subscriber marketing costs associated with a
higher number of gross subscriber additions, which were partially offset by
higher gross profits resulting from the increase in revenues discussed above and
lower expenses resulting from cost saving initiatives. The change in operating
loss was due to the decrease in EBITDA and an $18 million increase in
depreciation expense associated with capital expenditures since March 31, 2001,
which were more than offset by a $36 million decrease in amortization expense
resulting from the discontinuation of amortization expense related to goodwill
and intangible assets with indefinite lives in accordance with SFAS No. 142.
Latin America. Revenues for the Latin America DIRECTV businesses were
unchanged at $165 million for the first quarter of 2002 from the first quarter
of 2001. The increased revenues generated from a larger subscriber base were
offset by the negative effect resulting from the devaluation of the Argentinean
and Brazilian currencies. Subscribers grew to about 1.6 million at March 31,
2002 compared to 1.4 million at March 31, 2001. Latin America DIRECTV added
32,000 net new subscribers in the first quarter of 2002 compared to 101,000 net
new subscribers in the first quarter of 2001. ARPU was $30 and $36 at March 31,
2002 and March 31, 2001, respectively. The decrease in ARPU was largely due to
the effects resulting from the devaluation of the Argentinean and Brazilian
currencies.
EBITDA was a negative $61 million in the first quarter of 2002 compared to
negative EBITDA of $44 million in the first quarter of 2001. The change in
EBITDA was primarily due to the $32 million loss related to currency devaluation
and the consolidation of GEA, partially offset by lower expenses resulting from
cost saving initiatives. The Latin America DIRECTV businesses incurred an
operating loss of $119 million in the first quarter of 2002 compared to an
operating loss of $92 million in the first quarter of 2001. The increased
operating loss resulted from the decline in EBITDA and higher depreciation of
fixed assets related primarily to the increased number of subscribers leasing
DIRECTV receiver equipment and the consolidation of GEA, partially offset by the
discontinuation of goodwill amortization.
DIRECTV Broadband. Revenues and EBITDA for DIRECTV Broadband were $14 million
and negative $30 million, respectively, for the first quarter of 2002. The
operating loss for the first quarter of 2002 was $40 million. DIRECTV Broadband
added approximately 22,000 net new subscribers during the first quarter of 2002.
At March 31, 2002, DIRECTV Broadband had more than 113,000 residential broadband
subscribers in the United States.
Satellite Services Segment
Revenues for the Satellite Services segment in the first quarter of 2002
increased $1.9 million to $207.1 million from $205.2 million in the same period
in the prior year. This increase was primarily due to a termination fee of
approximately $6 million received from one of the company's video customers,
partially offset by reduced operating lease revenues.
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EBITDA was $151.1 million for the first quarter of 2002, a 7.9% increase over
the first quarter 2001 EBITDA of $140.0 million. EBITDA margin for the first
quarter of 2002 was 73.0% compared to 68.2% in the first quarter of 2001.The
increase in EBITDA and EBITDA margin was principally due to increased
operational efficiencies, a $40 million gain related to the settlement of the
PAS 7 insurance claim and the $6 million termination fee discussed above. These
gains were partially offset by a $19 million charge to operating income for the
write-off of receivables due to the conversion of several sales-type leases to
operating leases by one of PanAmSat's customers, an $11 million provision for
idle facilities, and $10 million of additional bad debt expense. Operating
profit was $57.1 million for the first quarter of 2002 compared to $41.1 million
in the first quarter of 2001. The increase in operating profit resulted from the
increase in EBITDA and lower amortization expense in the first quarter of 2002
resulting from the discontinuation of goodwill amortization.
Network Systems Segment
The Network Systems segment's first quarter 2002 revenues were $242.8
million, compared to $248.2 million in the first quarter of 2001. The lower
revenues resulted from decreased sales related primarily to the substantial
completion in late 2001 of two significant customer contracts for the sale of
phones and systems for mobile satellite programs, offset principally by
increased sales of DIRECWAY systems and DIRECTV receivers.
The Network Systems segment reported negative EBITDA of $33.1 million for the
first quarter of 2002, compared to negative EBITDA of $38.3 million in the first
quarter of 2001. The Network Systems segment had an operating loss of $51.1
million in the first quarter of 2002, compared to an operating loss of $52.6
million in the first quarter of 2001. The improvement in EBITDA and operating
loss resulted from higher gross margins on increased DIRECTV receiver shipments
and lower selling, general and administrative expenses, partially offset by
lower gross margins on mobile satellite programs and a $6 million charge related
to severance benefits in the first quarter of 2002.
Eliminations and Other
The elimination of revenues increased to $55.5 million in the first quarter
of 2002 from $50.3 million in the first quarter of 2001 due primarily to
increased shipments of DIRECTV receiver equipment from the Network Systems
Segment to the Direct-To-Home broadcast segment, and an increase in intercompany
transponder leasing revenues at the Satellite Services segment.
Operating profit from "eliminations and other" increased to $81.7 million in
the first quarter of 2002 from $4.5 million in the first quarter of 2001. The
increase in operating profit resulted primarily from the $95 million net gain
recorded from the NASA claim, partially offset by higher corporate expenditures
related to employee benefit and compensation costs in the first quarter of 2002.
Liquidity and Capital Resources
In the first quarter of 2002, Hughes had sources of cash of $986.0 million,
resulting from additional net borrowings of $740.1 million, insurance proceeds
of $173.7 million and cash provided by operations of $72.2 million. These
sources of cash were offset by cash used during the first quarter of about
$573.0 million, primarily for expenditures for satellites and property of $360.8
million, the final settlement payment to Raytheon of $134.2 million and debt
issuance costs of $54.6 million.
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As a measure of liquidity, the current ratio (ratio of current assets to
current liabilities) at March 31, 2002 and December 31, 2001 was 1.05 and 0.76,
respectively. Working capital increased by $1,253.4 million to $188.0 million at
March 31, 2002 from a working capital deficit of $1,065.4 million at December
31, 2001. The change was principally due to the repayment of current debt
obligations and an increase in cash balances, both of which were funded by the
proceeds received from long term borrowings that resulted from the refinancing
transactions described in more detail below.
Hughes expects to have cash requirements for the remainder of 2002 of
approximately $1.2 billion to $1.4 billion primarily due to capital expenditures
for satellites and property and increased investments in affiliated companies.
These cash requirements are expected to be funded from a combination of existing
cash balances, cash provided from operations, amounts available under credit
facilities, and additional borrowings, as needed. See "Security Ratings" below
for further discussion of Hughes' credit rating.
In February 2002, Hughes completed a series of financing activities. PanAmSat
borrowed $1,800 million, a portion of which was used to repay $1,725 million
owed to Hughes; Hughes deposited $1,500 million of the proceeds received from
PanAmSat with General Motors Acceptance Corporation ("GMAC") as collateral, with
Hughes then borrowing $1,875 million under a GMAC revolving credit facility.
Hughes used $1,682.5 million of the proceeds to repay all amounts outstanding
under Hughes' $750 million unsecured revolving credit facility, DLA's $450
million revolving credit facility, and SurFin's $400 million and $212.5 million
revolving credit facilities. The DLA and SurFin facilities were retired, while
the Hughes facility was amended and expanded (the "Amended Credit Agreement").
In March 2002, Hughes borrowed an additional $764.8 million under a term loan
tranche that was added to the Amended Credit Agreement and repaid $375.0 million
of the GMAC facility. Hughes' and PanAmSat's debt is more fully described below
in "Debt and Credit Facilities."
Hughes' and PanAmSat's ability to borrow under the credit facilities is
contingent upon meeting financial and other covenants. The agreements also
include certain operational restrictions. These covenants limit Hughes' and
PanAmSat's ability to, among other things: incur or guarantee additional
indebtedness; make restricted payments, including dividends; create or permit to
exist certain liens; enter into business combinations and asset sale
transactions; make investments; enter into transactions with affiliates; and
enter into new businesses.
Certain of Hughes' borrowings are required to be repaid upon the earlier of
the effective date of the EchoStar Merger or December 2002. If the Merger is not
completed by December 2002, Hughes will be required to either extend or
refinance the debt or obtain cash from asset sales, or equity transactions, as
necessary, to repay the borrowings. There can be no assurance, however, that
Hughes will be able to refinance the debt, obtain new borrowings or complete
asset sales or equity transactions. Hughes' failure to extend or refinance its
debt could cause a material adverse effect on Hughes' financial condition. Upon
a failure of the Merger that results in the sale of Hughes' interest in PanAmSat
to EchoStar, Hughes will utilize the cash proceeds received, as well as
termination fees that may be paid to Hughes by EchoStar, to repay its debt
obligations. See "Acquisitions, Investments and Divestitures--Merger
Transaction" below regarding the funding of the proposed EchoStar Merger.
Common Stock Dividend Policy Dividends may be paid on the GM Class H common
stock only when, as, and if declared by GM's Board of Directors in its sole
discretion. The GM Board has not paid, and does not currently intend to pay in
the foreseeable future, cash dividends on its Class H common stock. Similarly,
Hughes has not paid dividends on its common stock to GM and does not currently
intend to do so in the foreseeable future. Future Hughes earnings, if any, are
expected to be retained for the development of the businesses of Hughes.
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HUGHES ELECTRONICS CORPORATION
Cash and Cash Equivalents. Cash and cash equivalents were $1,113.8 million at
March 31, 2002 compared to $700.1 million at December 31, 2001. The increase in
cash resulted primarily from additional net borrowings of $740.1 million and
insurance proceeds of $173.7 million, partially offset by expenditures for
satellites and property of $360.8 million and the final settlement payment to
Raytheon of $134.2 million.
Cash provided by operating activities was $72.2 million for the first quarter
of 2002, compared to cash used in operating activities of $144.6 million for the
first quarter of 2001. The increase in 2002 resulted primarily from decreased
working capital requirements.
Cash used in investing activities was $187.1 million in the three months
ended March 31, 2002, and $195.0 million for the same period in 2001. The
reduction in cash flows used in investing activities in 2002 primarily resulted
from reduced expenditures for satellites and property and a $41.3 million
increase in 2002 proceeds from insurance claims, partially offset by reduced
proceeds from the sale of investments of $67.8 million from 2001.
Cash provided by financing activities was $528.6 million in the first quarter
of 2002, compared to $359.1 million in the first quarter of 2001. The increase
in cash flows provided by financing activities in 2002 is primarily due to
additional net borrowings of $740.1 million, partially offset by cash used for
debt issuance costs of $54.6 million and the final payment of the Raytheon
settlement of $134.2 million.
Debt and Credit Facilities. Notes Payable. In February 2002, PanAmSat
completed an $800 million private placement note offering. These unsecured
notes bear interest at an annual rate of 8.5%, payable semi-annually and mature
in 2012.
In January 2002, PanAmSat repaid in full the $46.5 million outstanding
balance of variable rate notes assumed in 1999 in connection with the early
buy-out of a satellite sale-leaseback.
PanAmSat issued five, seven, ten and thirty-year fixed rate notes totaling
$750.0 million in January 1998. The outstanding principal balances and interest
rates for these notes as of March 31, 2002 were $200 million at 6.0%, $275
million at 6.125%, $150 million at 6.375% and $125 million at 6.875%,
respectively. Principal on the notes is payable at maturity, while interest is
payable semi-annually. In connection with a new secured bank facility entered
into by PanAmSat in February 2002, described below, these notes were ratably
secured by certain of the operating assets of PanAmSat that were pledged in
connection with the secured bank facility.
Credit Facilities. In February 2002, Hughes amended and increased its
existing $750.0 million multi-year credit facility. The Amended Credit Agreement
provides availability of $1,235.2 million in revolving borrowings which bear
interest at the London Interbank Offer Rate ("LIBOR") plus 3%. The Amended
Credit Agreement commitment terminates upon the earlier of December 5, 2002 or
the effective date of the EchoStar Merger. The facility is secured by
substantially all of Hughes' assets other than the assets of DLA and PanAmSat.
In March 2002, Hughes borrowed $764.8 million under a term loan tranche that was
added to the Amended Credit Agreement. The term loan has the same terms as the
revolving facility and increased the total funding available under the Amended
Credit Agreement to $2,000 million. As of March 31, 2002, the revolving
component of the Amended Credit Agreement was undrawn and $764.8 million was
outstanding under the term loan.
Also, in February 2002, PanAmSat obtained a bank facility in the amount of
$1,250 million. The bank facility is comprised of a $250 million revolving
credit facility, which was undrawn as of March 31,
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HUGHES ELECTRONICS CORPORATION
2002, a $300 million Tranche A Term Loan and a $700 million Tranche B Term Loan,
both of which were fully drawn as of March 31, 2002. This bank facility replaced
a previously existing $500 million unsecured multiyear revolving credit
facility. The new revolving credit facility and the Tranche A Term Loan bear
interest at LIBOR plus 3.0%. The Tranche B Term Loan bears interest at LIBOR
plus 3.5%. The revolving credit facility and Tranche A Term Loan interest rates
may be increased or decreased based upon changes in PanAmSat's total leverage
ratio, as defined by the credit agreement. The revolving credit facility and the
Tranche A Term Loan terminate in 2007 and the Tranche B Term Loan matures in
2008. Principal payments under the Tranche A Term Loan are due in varying
amounts from 2004 to 2007. Principal payments under the Tranche B Term Loan are
due primarily at maturity. The facilities are secured ratably by substantially
all of PanAmSat's operating assets, including its satellites. PanAmSat repaid a
$1,725 million intercompany loan from Hughes in February 2002, using proceeds
from the bank facility and notes payable described above, as well as existing
cash balances.
On October 1, 2001, Hughes entered into a $2.0 billion revolving credit
facility with GMAC. The facility was subsequently amended in February 2002. The
amended facility provides for a commitment through December 5, 2002. The
facility is split into two loan tranches: a $1,500 million tranche secured by a
February 2002 $1,500 million Hughes cash deposit and a $500 million tranche that
shares security with the Amended Credit Agreement described above. Borrowings
under the $1,500 million tranche bear interest at GMAC's cost of funds
(approximately 2.23% at March 31, 2002) plus 0.125%. Borrowings under the $500
million tranche bear interest at GMAC's cost of funds plus 1.75%. The $1,500
million cash deposit earns interest at a rate equivalent to GMAC's cost of
funds. Hughes offsets the $1,500 million GMAC cash deposit against amounts
borrowed from GMAC for balance sheet purposes. The excess over Hughes' $1,500
million cash deposit must be repaid upon the effective date of the EchoStar
Merger. The cash collateralized tranche was fully drawn and the $500 million
tranche was undrawn as of March 31, 2002.
On January 5, 2001, DLA entered into a $450.0 million revolving credit
facility. The DLA facility was repaid and retired in February 2002. In addition,
SurFin's unsecured revolving credit facilities of $400 million and $212.5
million were repaid and retired in February 2002.
Other. $72.6 million in other short-term and long-term debt, related
primarily to DLA and HNS' international subsidiaries, was outstanding at March
31, 2002, bearing fixed and floating rates of interest of 2.8% to 14.5%.
Principal on these borrowings is due in varying amounts through 2007.
Acquisitions, Investments and Divestitures. Merger Transaction. On October
28, 2001, Hughes and GM, together with EchoStar, announced the signing of
definitive agreements that, subject to stockholder approval, regulatory
clearance, and certain other conditions, provide for the split-off of
a company holding all of the capital stock of Hughes from GM and the
combination of the Hughes business with EchoStar by means of a merger.
The split-off of Hughes from GM would occur by means of a distribution to the
holders of GM Class H common stock of one share of Class C common stock of a
Hughes holding company (that will own all of the stock of Hughes at the time of
the split-off) in exchange for each share of GM Class H common stock held
immediately prior to the split-off. Immediately following the split-off, the
businesses of Hughes and EchoStar would be combined in the EchoStar Merger to
form New EchoStar. Each share of the Hughes holding company Class C common stock
would remain outstanding and become a share of Class C common stock of New
EchoStar. Holders of Class A and Class B common stock of EchoStar would receive
about 1.3699 shares of stock of the merged entity in exchange for each share of
EchoStar Class A or Class B common stock held prior to the EchoStar Merger.
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HUGHES ELECTRONICS CORPORATION
The transactions are structured in a manner that will not result in the
recapitalization of GM Class H common stock into GM $1-/ 2/3 par value common
stock at a 120% exchange ratio, as currently provided for under certain
circumstances in the General Motors Restated Certificate of Incorporation, as
amended. The GM $1- 2/3 par value common stock would remain outstanding and
would be GM's only class of common stock after the transactions. /
As part of the transactions, GM would receive a dividend from Hughes of up to
$4.2 billion in cash, and its approximately 30% retained economic interest in
Hughes would be reduced by a commensurate amount. Following these transactions,
subject to Internal Revenue Service approval, and based on a number of
assumptions, including the potential issuance or distribution of up to 100
million shares of GM Class H common stock or New EchoStar Class C common stock
in exchange for certain debt of GM, GM may retain an interest in the merged
entity. The $4.2 billion dividend to GM will be financed by Hughes through new
and existing credit facilities or other borrowings.
The transactions are subject to a number of conditions, including approval by
a majority of each class of GM stockholders--GM $1-/ 2/3 and GM Class H--voting
both separately as distinct classes and also voting together as a single class
based on their respective per share voting power. The proposed transactions also
are subject to antitrust clearance and approval by the Federal Communications
Commission. In addition, the transactions are contingent upon the receipt of a
favorable ruling from the IRS that the separation of Hughes from GM will be
tax-free to GM and its stockholders for U.S. federal income tax purposes. The
transactions are currently expected to close in the second half of 2002. /
GM, Hughes, and EchoStar have agreed that, in the event that the transactions
do not occur because certain specified regulatory-related conditions have not
been satisfied, EchoStar will be required to pay Hughes a $600 million
termination fee. In addition, if the merger agreement is terminated for failure
to obtain specified regulatory clearances or financing to complete the merger,
EchoStar is obligated to purchase Hughes' interest in PanAmSat for an aggregate
purchase price of approximately $2.7 billion, which is payable, depending on the
circumstances, solely in cash or in a combination of cash and either debt or
equity securities of EchoStar. Cash proceeds, net of income taxes, would be
retained by Hughes and used to repay certain outstanding borrowings and fund
future operating requirements.
The sale of Hughes' PanAmSat interest is subject to a number of conditions
beyond the control of Hughes which must be satisfied before any sale could be
completed, including, among other things, the expiration or termination of the
waiting period applicable to the PanAmSat stock sale under the Hart-Scott-Rodino
Act, the absence of any effective injunction or order which prevents the
completion of the PanAmSat stock sale and the receipt of FCC approval for the
transfer of licenses in connection with the PanAmSat stock sale. If these
conditions were not fulfilled, EchoStar would not be obligated to complete the
purchase, even though the EchoStar Merger was not completed for the specific
reasons identified above. If this were to happen, Hughes would remain a wholly
owned subsidiary of GM, and Hughes would not have the benefit of the liquidity
represented by the sale of Hughes' interest in PanAmSat.
GM, Hughes and EchoStar have also agreed that, if the EchoStar Merger is not
completed for certain limited reasons involving a competing transaction or a
withdrawal by GM's Board of Directors of their recommendation of the EchoStar
transaction, then Hughes will pay a termination fee of $600 million to EchoStar.
The financial burden that such a payment would have on Hughes could affect
Hughes' ability to raise new capital, or otherwise have an adverse effect on its
financial condition, and Hughes will have incurred substantial
transaction-related expenses and devoted substantial management resources to the
proposed merger without realizing the anticipated benefits.
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HUGHES ELECTRONICS CORPORATION
In connection with the pending EchoStar Merger, some customers and strategic
partners of Hughes may delay or defer decisions, which could have a material
adverse effect on Hughes' businesses, regardless of whether the EchoStar Merger
is ultimately completed. Similarly, current and prospective employees of Hughes
may experience uncertainty about their future roles with the combined company,
which may materially adversely affect Hughes' ability to attract and retain key
management, sales, marketing and technical personnel.
Acquisitions and Investments. On May 1, 2001, 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 located in Argentina that
provides direct-to-home broadcast services, and other assets, consisting
primarily of programming and advertising rights. The purchase price, valued at
$169 million, consisted of a 3.98% ownership interest in DLA and a put option
that under certain circumstances will allow Clarin to sell in November 2003 its
3.98% interest back to DLA for $195 million. As a result of the transaction,
Hughes' interest in DLA decreased from 77.8% to 74.7% and Hughes' ownership in
GEA increased from 20% to 58.1%. Hughes' portion of the purchase price, which
amounted to about $130 million, was recorded as an increase to additional
paid-in capital with the offset allocated to the net assets acquired, including
goodwill.
On April 3, 2001, Hughes acquired Telocity, a company that provides
land-based DSL services, through the completion of a tender offer and merger.
Telocity is now operating as DIRECTV Broadband, Inc., and is included as part of
the Direct-To-Home Broadcast segment. The purchase price was $197.8 million and
was paid in cash.
The financial information included herein reflects the acquisitions discussed
above from their respective dates of acquisition. The acquisitions were
accounted for by the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets acquired and the liabilities
assumed based on their estimated fair values at the date of acquisition.
Divestitures. On March 1, 2000, Hughes announced that the operations of
DIRECTV Japan would be discontinued. As a result, Hughes accrued exit costs and
involuntary termination benefits. 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. About $0.8 million
was paid for accrued exit costs during the first quarter of 2002. All
involuntary termination benefits were paid in 2000 and 2001. The amount
remaining for accrued exit costs was $46.8 million and $47.6 million at March
31, 2002 and December 31, 2001, respectively.
Commitments and Contingencies
Litigation
In connection with the 2000 sale by Hughes of its satellite systems
manufacturing businesses to The Boeing Company ("Boeing"), the stock purchase
agreement provides for potential adjustment to the purchase price based upon the
final closing date financial statements of the satellite systems manufacturing
businesses. The stock purchase agreement also provides for an arbitration
process to resolve any disputes that arise in determining the purchase price
adjustment. Based upon the final closing date financial statements of the
satellite systems manufacturing businesses that were prepared by Hughes, Boeing
is owed a purchase price adjustment of $164 million plus interest from the date
of sale, the total amount of which has been provided for in Hughes' financial
statements. However, Boeing has submitted additional proposed adjustments, of
which about $750 million remain
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HUGHES ELECTRONICS CORPORATION
unresolved. Hughes believes that these additional proposed adjustments are
without merit and intends to vigorously contest the matter in the arbitration
process which will result in a binding decision unless the matter is otherwise
settled. Although Hughes believes it has adequately provided for the disposition
of this matter, the impact of its disposition cannot be determined at this time.
It is possible that the final resolution of this matter could result in Hughes
making a cash payment to Boeing that would be material to Hughes' consolidated
financial statements.
Additionally, as part of the sale of the satellite systems manufacturing
businesses, Hughes retained liability for certain possible fines and penalties
and certain financial consequences of debarment associated with potential
non-criminal violations of U.S. Export control laws related to the business now
owned by Boeing should the State Department impose such sanctions against the
satellite systems manufacturing businesses. Hughes does not expect sanctions
imposed by the State Department, if any, to have a material adverse effect on
its consolidated financial statements.
General Electric Capital Corporation ("GECC") and DIRECTV entered into a
contract on July 31, 1995, in which GECC agreed to establish and manage a
private label consumer credit program for consumer purchases of hardware and
related DIRECTV(R)/ programming. Under the contract, GECC also agreed to provide
certain related services to DIRECTV, including credit risk scoring, billing and
collections services. DIRECTV agreed to act as a surety for loans complying with
the terms of the contract. Hughes guaranteed DIRECTV's performance under the
contract. A complaint and counterclaim were filed by the parties in the U.S.
District Court for the District of Connecticut concerning GECC's performance and
DIRECTV's obligation to act as a surety. A trial commenced on June 12, 2000 with
GECC presenting evidence to the jury for damages of $157 million. DIRECTV sought
damages from GECC of $45 million. On July 21, 2000, the jury returned a verdict
in favor of GECC and awarded contract damages in the amount of $133.0 million.
The trial judge issued an order granting GECC $48.5 million in interest under
Connecticut's offer-of-judgment statute. With this order, the total judgment
entered in GECC's favor was $181.5 million. Hughes and DIRECTV filed a notice of
appeal on December 29, 2000. Oral argument on the appeal was heard on October
15, 2001 by the Second Circuit Court of Appeals. While the appeal is pending,
post-judgment interest on the total judgment is accruing at a rate of 6.241% per
year, compounded annually, from the date judgment was entered in October 2000.
Although Hughes and DIRECTV believe that it is reasonably possible that the jury
verdict will be overturned and a new trial granted, Hughes has increased its
provision for loss related to this matter by $83 million in the first quarter of
2002, of which $56 million was recorded as a charge to "Selling, general and
administrative expenses" and $27 million was recorded as a charge to "Interest
expense," based on the status of settlement negotiations between the parties.
Hughes believes it has adequately provided for the disposition of this matter,
however, its ultimate resolution could result in an additional charge to Hughes'
results of operations. /
DIRECTV filed suit in California State Court, Los Angeles County, on June 22,
2001 against Pegasus Satellite Television Inc. and Golden Sky Systems, Inc.
(referred to together as "Defendants") to recover monies (currently
approximately $63 million) that Defendants owe DIRECTV under the parties'
Seamless Marketing Agreement, which provides for reimbursement to DIRECTV of
certain subscriber acquisition costs incurred by DIRECTV on account of new
subscriber activations in Defendants' territory. Defendants had ceased making
payments altogether, and indicated that they did not intend to make any further
payments due under the Agreement. On July 13, 2001, Defendants sent notice of
termination of the Agreement and on July 16, 2001, Defendants answered DIRECTV's
complaint and filed a cross complaint alleging counts of fraud in the
inducement, breach of contract, breach of the covenant of good faith and fair
dealing, intentional interference with contractual relations, intentional
interference with prospective economic advantage and violation of California
Bus. and Prof. Code 17200. Defendants seek an unstated amount of damages and
punitive damages. DIRECTV
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HUGHES ELECTRONICS CORPORATION
denies any liability to Defendants, and intends to vigorously pursue its damages
claim against Defendants and defend against Defendants' cross claims. Defendants
removed the action to federal district court, Central District of Los Angeles.
Hughes Communications Galaxy, Inc. ("HCGI") filed a lawsuit on March 22, 1991
against the U.S. Government based upon the National Aeronautics and Space
Administration's breach of contract to launch ten satellites on the Space
Shuttle. On June 30, 2000, a final judgment was entered in favor of HCGI in the
amount of $103 million. On November 13, 2001, the U.S. Court of Appeals for the
Federal Circuit affirmed the lower court decision. On December 26, 2001, Hughes
filed a Combined Petition for Panel Rehearing and Rehearing en Banc, seeking to
increase the award, which was denied in January 2002. In March 2002, Hughes was
advised that no further judicial review would be sought by the U.S. Government
and the payment was in process. In April 2002, Hughes received payment for the
full amount of the judgment. As a result, Hughes recorded a $95 million gain,
net of legal costs, as an offset to "Selling, general and administrative
expenses" in the first quarter of 2002.
Litigation is subject to uncertainties and the outcome of individual
litigated matters is not predictable with assurance. In addition to the above
items, various legal actions, claims, and proceedings are pending against Hughes
arising in the ordinary course of business. Hughes has established loss
provisions for matters in which losses are probable and can be reasonably
estimated. Some of the matters may involve compensatory, punitive, or treble
damage claims, or sanctions, that if granted, could require Hughes to pay
damages or make other expenditures in amounts that could not be estimated at
March 31, 2002. After discussion with counsel, it is the opinion of management
that such liability is not expected to have a material adverse effect on Hughes'
consolidated financial statements.
Other
Hughes uses in-orbit and launch insurance to mitigate the potential financial
impact of satellite fleet in-orbit and launch failures unless the premium costs
are considered uneconomic relative to the risk of satellite failure. The
insurance generally covers the unamortized book value of covered satellites and
does not compensate for business interruption or loss of future revenues or
customers. Hughes relies on in-orbit spare satellites and excess transponder
capacity at key orbital slots to mitigate the effects of satellite failure on
its' ability to provide service. Where insurance costs related to known
satellite anomalies are prohibitive, Hughes' insurance policies contain coverage
exclusions and Hughes is not insured for certain other satellites. The book
value of satellites that were insured with coverage exclusions amounted to
$686.4 million and the book value of the satellites that were not insured was
$635.6 million at March 31, 2002.
Hughes is contingently liable under standby letters of credit and bonds in
the aggregate amount of $64.2 million which were undrawn at March 31, 2002 and
has guaranteed $3.0 million of bank debt related to non-consolidated DLA local
operating companies, which is due in variable amounts over the next five years.
Additionally, as described in Note 8 to the consolidated financial statements,
DLA may be required to repurchase Clarin's 3.98% interest in DLA for $195
million in 2003.
In the first quarter of 2002, Hughes recorded a $29.0 million charge to
"Other, Net" related to an expected requirement to perform on a guarantee
obligation of up to $55.4 million for bank debt owed by an investor in Hughes
Tele.com (India) Limited. Hughes has accrued a current liability to the lendor
and an account receivable from the investor for the guarantee amount. The $29.0
million charge represents a provision for the portion of the receivable from the
investor deemed uncollectible. A payment by Hughes pursuant to the guarantee may
be required in the second or third quarter of 2002.
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The Hughes Board of Directors has approved several benefit plans designed to
provide benefits for the retention of about 240 key employees and also provide
benefits in the event of employee lay-offs. Generally, these benefits are only
available if a qualified change-in-control of Hughes occurs. Upon a change-in-
control, the retention benefits will be accrued and expensed when earned and the
severance benefits will be accrued and expensed if an employee is identified for
termination. A total of up to about $110 million for retention benefits will be
paid, with approximately 50% paid at the time of a change-in-control and 50%
paid up to 12 months following the date of a change-in-control. The amount of
severance benefits to be paid will be based upon decisions that will be made
relating to employee layoffs, if any, following the date of a change-in-control.
In addition, approximately 33.5 million employee stock options will vest upon a
qualifying change-in- control and up to an additional 8.5 million employee stock
options could vest if employees are laid off within one year of a
change-in-control. For purposes of the above benefits and stock options, a
successful completion of the EchoStar Merger would qualify as a
change-in-control.
At March 31, 2002, minimum future commitments under noncancelable operating
leases having lease terms in excess of one year were primarily for real property
and aggregated $349.9 million, payable as follows: $76.1 million in the
remainder of 2002, $80.1 million in 2003, $51.9 million in 2004, $37.5 million
in 2005, $31.0 million in 2006 and $73.3 million thereafter. Certain of these
leases contain escalation clauses and renewal or purchase options.
At March 31, 2002, the minimum commitments under noncancelable satellite
construction and launch contracts totaled $870.9 million.
In connection with the direct-to-home broadcast businesses, Hughes has
commitments related to certain programming agreements which are variable based
upon the number of underlying subscribers and market penetration rates. Minimum
payments over the terms of applicable contracts are anticipated to be
approximately $1.5 billion, payable as follows: $418.7 million in 2002, $260.2
million in 2003, $159.4 million in 2004, $158.0 million in 2005, $165.7 million
in 2006 and $366.8 million thereafter.
As part of a series of agreements entered into with America Online, Inc.
("AOL") on June 21, 1999, Hughes committed to spend up to approximately $1.5
billion in sales, marketing, development and promotion efforts in support of
DirecPC(R)/AOL-Plus, DIRECTV(R), DIRECTV(TM)/AOL TV and DirecDuo(TM) products
and services. At March 31, 2002, Hughes had spent approximately $500 million in
support of these efforts. Consistent with the requirements of the agreements
with AOL, additional funds will continue to be spent until the contractual
spending limits have been satisfied or until applicable timeframes expire, which
in some cases can be for periods of ten years or more.
Accounting Changes
Hughes adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" on January 1, 2002. SFAS No. 144 refines existing impairment
accounting guidance and extends the use of accounting for discontinued
operations to both reporting segments and distinguishable components thereof.
SFAS No. 144 also eliminates the existing exception to consolidation of a
subsidiary for which control is likely to be temporary. The adoption of SFAS No.
144 did not have any impact on Hughes' consolidated results of operations or
financial position.
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HUGHES ELECTRONICS CORPORATION
Hughes also adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on
January 1, 2002. SFAS No. 142 requires that existing and future goodwill and
intangible assets with indefinite lives not be amortized, but written down, as
needed, based upon an impairment analysis that must occur at least annually. All
other intangible assets are amortized over their estimated useful lives.
Intangible assets of $209.8 million that no longer qualify for separate
accounting were combined with goodwill during the first quarter of 2002. The
following represents Hughes' reported net loss on a comparable basis excluding
the after-tax effect of amortization expense associated with goodwill and
intangible assets with indefinite lives:
Three Months Ended
March 31,
-----------------
2002 2001
------- -------
(Dollars in Millions)
Reported net loss................................. $(156.4) $(105.3)
Add:
Goodwill and intangibles with indefinite
lives amortization -- 49.4
------- -------
Adjusted net loss.............................. $(156.4) $ (55.9)
======= =======
Hughes is currently in the process of completing the transitional impairment
test required by SFAS No. 142 to determine whether there was a potential
impairment to recorded goodwill as of January 1, 2002. In accordance with SFAS
No. 142, step one of the two part transitional impairment test requires Hughes
to compare the fair value of each reporting unit with its respective carrying
amount, including goodwill. If the carrying amount of a reporting unit exceeds
its fair value, step two of the transitional impairment test will be performed
to measure the amount of impairment loss, if any. Based on preliminary results
of step one of the transitional impairment test, Hughes has identified PanAmSat,
DIRECTV Broadband, Inc. ("DIRECTV Broadband") and DIRECTV Latin America, LLC
("DLA") as reporting units for which the carrying value may exceed the fair
value as of January 1, 2002. Goodwill associated with these reporting units
totaled $3,448.4 million at January 1, 2002. Step one of the transitional
impairment test must be completed in the second quarter of 2002. Step two of the
transitional impairment test must be completed by the end of 2002 and the
resulting impairment loss, if any, will be recorded as a cumulative effect of
accounting change in the consolidated statements of operations. The amount of
any such impairment loss cannot be determined at this time. The amount of any
such loss, however, could be material to Hughes' consolidated financial results.
In addition to the annual impairment test, SFAS No. 142 also requires Hughes to
perform an impairment test if an event occurs or circumstances change that would
more likely than not result in an impairment loss. Such subsequent impairment
losses, if any, will be reflected in operating income in the consolidated
statements of operations in the period the event occurs.
Hughes had $445.5 million and $656.5 million of intangible assets, net at
March 31, 2002 and December 31, 2001, respectively. As discussed above, $209.8
million of intangible assets that no longer qualify for separate accounting were
combined with goodwill during the first quarter of 2002. At March 31, 2002,
intangible assets primarily consisted of FCC licenses for direct-to-home
broadcasting frequencies ("Orbital Slots") with indefinite useful lives. Orbital
Slots at March 31, 2002 were $ 432.3 million, net of $ 30.6 million accumulated
amortization. In accordance with SFAS No. 142, Hughes completed the transitional
impairment test related to intangible assets with indefinite lives during the
first quarter of 2002. It was determined that the fair value of the Orbital
Slots exceeded the carrying value at January 1, 2002. In addition, as required
by SFAS No. 142, Hughes will test for impairment its intangible assets with
indefinite lives at least annually, or more frequently if events or changes in
circumstances indicate that the assets may be impaired.
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HUGHES ELECTRONICS CORPORATION
Hughes adopted SFAS No. 141, "Business Combinations," on July 1, 2001. SFAS
No. 141 requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and prohibits the amortization of
goodwill and intangible assets with indefinite lives acquired thereafter. The
adoption of SFAS No. 141 did not have a significant impact on Hughes'
consolidated results of operations or financial position.
Hughes adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," on January 1, 2001. SFAS No. 133 requires Hughes to carry
all derivative financial instruments on the balance sheet at fair value. In
accordance with the transition provisions of SFAS No. 133, Hughes recorded a
one-time after-tax charge of $7.4 million on January 1, 2001 as a cumulative
effect of accounting change in the Consolidated Statements of Operations and
Available Separate Consolidated Net Income (Loss) and an after-tax unrealized
gain of $0.4 million in OCI.
Security Ratings
On March 14, 2002, Moody's Investor Services ("Moody's") assigned a Ba3 debt
rating to Hughes' Amended Credit Agreement. The rating remains on review for
possible downgrade pending the outcome of the EchoStar Merger. On January 16,
2002, Moody's reduced Hughes' senior unsecured bank debt rating from Ba1 to Ba3
(on review for possible downgrade). The ratings action noted rising leverage at
Hughes and stated that while there may be margin expansion resulting from
continued growth in DIRECTV subscribers, this would be offset by losses at DLA,
HNS, and DIRECTV Broadband. Moody's added that if the announced merger with
EchoStar did not receive regulatory approval, Hughes' longer term funding issues
would be remedied by the contractually-obligated sale of its approximately 81%
stake in PanAmSat and the merger transaction termination fee. On October 30,
2001, Moody's downgraded Hughes' long-term debt rating from Baa2 To Ba1,
subsequent to the EchoStar Merger announcement. The ratings action cited weak
operating performance, rising leverage, and the likelihood that Hughes could not
maintain an investment grade rating under any merger scenario.
On March 8, 2002, Standard and Poor's Rating Services ("S&P") lowered Hughes'
unsecured long-term corporate credit rating from BB+ to BB-, remaining on Credit
Watch negative pending the outcome of the EchoStar Merger. S&P also assigned a
BB rating to Hughes' senior secured credit facility (also Credit Watch
negative). S&P noted that the action was based on Hughes' credit quality on a
stand-alone basis if the EchoStar Merger is not approved, with the ratings on
Credit Watch negative because the corporate credit rating of a combined
EchoStar/Hughes/PanAmSat might be one rating grade lower. On December 7, 2001,
S&P lowered Hughes' long-term corporate credit rating from BBB- to BB+. This
ratings action noted that Hughes needs to deliver planned operating performance
improvements to receive an investment grade rating, despite a strong balance
sheet in the event that the EchoStar-Hughes merger does not receive regulatory
approval.
Debt ratings by the various rating agencies reflect each agency's opinion of
the ability of issuers to repay debt obligations as they come due. Ratings below
Baa3 and BBB- denote sub-investment grade status for Moody's and S&P,
respectively. Ratings in the Ba/BB range generally indicate moderate protection
of interest and principal payments, potentially outweighed by exposure to
uncertainties or adverse conditions. In general, lower ratings result in higher
borrowing costs. A security rating is not a recommendation to buy, sell, or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization.
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HUGHES ELECTRONICS CORPORATION
Market Risk Disclosure
The following discussion and the estimated amounts generated from the
sensitivity analysis referred to below include forward-looking statements of
market risk which assume for analytical purposes that certain adverse market
conditions may occur. Actual future market conditions may differ materially from
such assumptions because the amounts noted below are the result of analysis used
for the purpose of assessing possible risks and the mitigation thereof.
Accordingly, the forward-looking statements should not be considered projections
by Hughes of future events or losses.
Interest Rate Risk
Hughes is subject to interest rate risk related to its outstanding debt. As
of March 31, 2002, Hughes' $3,387.4 million of total debt consisted of
PanAmSat's fixed rate borrowings of $1,550.0 million and variable rate
borrowings of $1,000.0 million, Hughes' variable rate borrowings of $764.8
million, and various other variable and fixed rate borrowings. Outstanding
borrowings bore interest rates ranging from 2.84% to 14.50% at March 31, 2002.
Hughes is subject to fluctuating interest rates, which may adversely impact its
results of operations and cash flows for its variable rate bank borrowings.
Also, to the extent interest rates increase, Hughes' cost of financing could
increase at such time that debt matures and is refinanced. As of March 31, 2002,
the hypothetical impact of a one percentage point increase in interest rates
related to Hughes' outstanding variable rate debt would be to increase annual
interest expense by approximately $18 million.
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