EXHIBIT 99
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUMMARY DATA
Years Ended December 31,
---------------------------
2002 2001 2000
---------------------------
(Dollars in Millions)
Consolidated Statements of Operations Data:
Total revenues.......................................... $8,934.9 $8,264.0 $7,287.6
Total operating costs and expenses...................... 9,334.0 9,021.8 7,641.7
------- ------- -------
Operating loss.......................................... (399.1) (757.8) (354.1)
Other income (expenses), net............................ 113.8 (231.9) (461.5)
Income tax benefit...................................... 94.4 325.6 406.1
Minority interests in net (earnings) losses of subsidiaries (21.6) 49.9 54.1
------ ---- ----
Loss from continuing operations before cumulative effect of
accounting changes.................................... (212.5) (614.2) (355.4)
Income from discontinued operations, net of taxes....... -- -- 36.1
Gain on sale of discontinued operations, net of taxes... -- -- 1,132.3
Cumulative effect of accounting changes, net of taxes... (681.3) (7.4) --
------- ----- -------
Net income (loss)....................................... (893.8) (621.6) 813.0
Adjustment to exclude the effect of GM purchase accounting. -- 3.3 16.9
Preferred stock dividends............................... (46.9) (96.4) (97.0)
------ ------ -----
Earnings (Loss) Used for Computation of Available Separate
Consolidated Net Income (Loss)........................ $(940.7) $(714.7) $732.9
====== ====== =====
December 31,
------------
2002 2001
--------------------
(Dollars in Millions)
Consolidated Balance Sheet Data:
Cash and cash equivalents......... $1,128.6 $700.1
Total current assets.............. 3,656.4 3,341.1
Total assets...................... 17,885.1 19,210.1
Total current liabilities......... 3,203.1 4,406.5
Long-term debt.................... 2,390.0 988.8
Minority interests................ 555.3 531.3
Preferred stock................... 914.1 1,498.4
Total stockholder's equity........ 9,977.1 11,071.9
IV-19
HUGHES ELECTRONICS CORPORATION
SUMMARY DATA -- (continued)
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
(Dollars in Millions)
Other Data:
EBITDA(1)............................. $668.0 $389.9 $594.0
EBITDA Margin(1)...................... 7.5% 4.7% 8.2%
Cash flows from operating activities $1,126.1 $190.3 $1,090.7
Cash flows from investing activities (887.2) (1,741.2) 2,210.8
Cash flows from financing activities 189.6 742.9 (849.6)
Depreciation and amortization......... 1,067.1 1,147.7 948.1
Capital expenditures.................. 1,298.1 1,743.5 1,716.1
(1) EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with
accounting principles generally accepted in the United States of America.
Hughes management uses EBITDA to evaluate the operating performance of
Hughes and its business segments, to allocate resources and capital to its
business segments and as a measure of performance for incentive compensation
purposes. Hughes believes EBITDA is a measure of performance used by some
investors, equity analysts and others to make informed investment decisions.
EBITDA is used as an analytical indicator of income generated to service
debt and fund capital expenditures. In addition, multiples of current or
projected EBITDA are used to estimate current or prospective enterprise
value. Hughes management believes that EBITDA is a common measure used to
compare Hughes' operating performance and enterprise value to other
communications, entertainment and media service providers. EBITDA does not
give effect to cash used for debt service requirements consisting of
interest payments of $398.0 million, $268.4 million and $312.9 million for
the years ended December 31, 2002, 2001 and 2000, respectively. As a result,
EBITDA does not reflect funds available for investment in the business of
Hughes, dividends or other discretionary uses. EBITDA margin is calculated
by dividing EBITDA by total revenues. EBITDA and EBITDA margin as presented
herein may not be comparable to similarly titled measures reported by other
companies.
IV-20
HUGHES ELECTRONICS CORPORATION
SUMMARY DATA -- (concluded)
Selected Segment Data
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
(Dollars in Millions)
Direct-To-Home Broadcast
Total Revenues................ $7,193.3 $6,306.4 $5,238.0
% of Total Revenues........... 80.5 % 76.3 % 71.9 %
Operating Loss................ $(505.2) $(749.9) $(557.9)
EBITDA........................ 160.8 (74.8) (24.5)
EBITDA Margin................. 2.2 % N/A N/A
Depreciation and Amortization $666.0 $675.1 $533.4
Segment Assets................ 7,957.2 9,484.1 9,278.3
Capital Expenditures.......... 524.1 734.3 913.5
Satellite Services
Total Revenues................ $812.3 $870.1 $1,023.6
% of Total Revenues........... 9.1 % 10.5 % 14.0 %
Operating Profit.............. $255.9 $165.3 $356.6
Operating Profit Margin....... 31.5 % 19.0 % 34.8 %
EBITDA........................ $591.6 $580.0 $694.0
EBITDA Margin................. 72.8 % 66.7 % 67.8 %
Depreciation and Amortization $335.7 $414.7 $337.4
Segment Assets................ 6,487.7 6,296.8 6,178.4
Capital Expenditures.......... 294.3 338.2 449.5
Network Systems
Total Revenues................ 1,169.9 $1,325.8 $1,409.8
% of Total Revenues........... 13.1 % 16.0 % 19.3 %
Operating Loss................ $(160.7) $(171.8) $(63.5)
EBITDA........................ (87.0) (111.8) 0.1
Depreciation and Amortization 73.7 60.0 63.6
Segment Assets................ 2,526.9 2,339.1 1,789.9
Capital Expenditures.......... 400.4 664.6 369.5
Eliminations and Other
Total Revenues................ $(240.6) $(238.3) $(383.8)
Operating Profit (Loss)....... 10.9 (1.4) (89.3)
EBITDA........................ 2.6 (3.5) (75.6)
Depreciation and Amortization (8.3) (2.1) 13.7
Segment Assets................ 913.3 1,090.1 2,032.7
Capital Expenditures.......... 79.3 6.4 (16.4)
Total
Total Revenues................ $8,934.9 $8,264.0 $7,287.6
Operating Loss................ (399.1) (757.8) (354.1)
EBITDA........................ 668.0 389.9 594.0
EBITDA Margin................. 7.5 % 4.7 % 8.2 %
Depreciation and Amortization $1,067.1 $1,147.7 $948.1
Total Assets.................. 17,885.1 19,210.1 19,279.3
Capital Expenditures.......... 1,298.1 1,743.5 1,716.1
IV-21
HUGHES ELECTRONICS CORPORATION
The following discussion excludes purchase accounting adjustments related to
General Motors acquisition of Hughes.
Merger Transaction and Strategic Options
On October 28, 2001, Hughes Electronic Corporation ("Hughes") and General Motors
Corporation ("GM"), together with EchoStar Communications Corporation
("EchoStar"), announced the signing of definitive agreements that provided for
the split-off of Hughes from GM and the subsequent merger of the Hughes business
with EchoStar (the "Merger"). Hughes, GM and EchoStar entered into a termination
agreement on December 9, 2002, pursuant to which GM, Hughes and EchoStar agreed
to terminate the merger agreement and certain related agreements. Under the
terms of the termination agreement, EchoStar paid Hughes $600 million in cash
and Hughes retained its 81% ownership position in PanAmSat Corporation
("PanAmSat").
GM has announced that it is currently evaluating a variety of strategic options
for Hughes, including a reduction or elimination of its retained economic
interest in Hughes, transactions that would involve strategic investors and
public offerings of GM Class H common stock or related securities for cash or in
exchange for outstanding GM debt obligations. Any such transaction might involve
the separation of Hughes from GM. GM and Hughes have engaged in preliminary
discussions with some parties. No other decisions have been made regarding which
options or combinations of options, if any, GM will pursue. Due to the numerous
uncertainties involved in these matters, there can be no assurance that any
transaction or offering will be announced or completed or as to the time at
which such a transaction or offering might be completed.
On February 28, 2003, GM announced plans to contribute approximately 150 million
shares of GM Class H common stock to certain of its United States ("U.S.")
employee benefit plans. GM expects to make the contribution during the month of
March 2003. The contribution would increase the amount of GM Class H common
stock held by GM's employee benefit plans to approximately 330 million shares
and reduce GM's retained economic interest in Hughes to approximately 20.0% from
30.7%.
Use of Estimates in the Preparation of the Consolidated Financial Statements
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates, judgments and assumptions that affect
amounts reported therein. Management bases its estimates, judgments and
assumptions on historical experience and on various other factors that are
believed to be reasonable under the circumstances. Due to the inherent
uncertainty involved in making estimates, actual results reported in future
periods may be affected by changes in those estimates. The following represent
what Hughes believes are the critical accounting policies that may involve a
higher degree of estimation, judgment and complexity.
Valuation of Long-Lived Assets. Hughes evaluates the carrying value of
long-lived assets to be held and used, other than goodwill and intangible assets
with indefinite lives, when events and circumstances warrant such a review. The
carrying value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately identifiable and is less
than its carrying value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair value of the long-lived asset. Fair
value is determined primarily using the estimated cash flows associated with the
asset under review, discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a similar
manner, except that fair values are reduced for the cost of disposal. Changes in
estimates of future cash flows could result in a write-down of the asset in a
future period.
IV-22
HUGHES ELECTRONICS CORPORATION
Valuation of Goodwill and Intangible Assets with Indefinite Lives. Hughes
evaluates the carrying value of goodwill and intangible assets with indefinite
lives on an annual basis, and when events and circumstances warrant such a
review in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," which is described in
"Accounting Changes," below. SFAS No. 142 requires the use of fair value in
determining the amount of impairment, if any, for recorded goodwill and
intangible assets with indefinite lives. Fair value is determined primarily
using the estimated future cash flows associated with the asset under review,
discounted at a rate commensurate with the risk involved. Changes in estimates
of future cash flows could result in a write-down of the asset in a future
period.
Financial Instruments and Investments. Hughes maintains investments in equity
securities of unaffiliated companies. 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 and
business outlook of the investee, including industry and sector performance,
changes in technology, and operational and financing cash flow factors; and
Hughes' intent and ability to hold the investment. If the decline in fair value
is judged to be other-than-temporary, the cost basis of the security is
written-down to fair value and the amount is recognized in the consolidated
statements of operations as part of "Other, net" and recorded as a
reclassification adjustment from OCI. Future adverse changes in market
conditions or poor operating results of underlying investments could result in
losses or an inability to recover an investment's carrying value, thereby
possibly requiring a charge in a future period.
Reserves for Doubtful Accounts. A significant amount of management estimate is
required in determining the amount of reserves required for the potential
non-collectibility of accounts receivable. Management estimates the amount of
required reserves based upon past experience of collection and consideration of
other relevant factors; however, past experience may not be indicative of future
collections and therefore additional charges could be incurred in the future to
reflect differences between estimated and actual collections.
Contingent Matters. A significant amount of management estimate is required in
determining when, or if, an accrual should be recorded for a contingent matter
and the amount of such accrual, if any. Due to the uncertainty of determining
the likelihood of a future event occurring and the potential financial statement
impact of such an event, it is possible that upon further development or
resolution of a contingent matter, a charge could be recorded in a future period
that would be material to Hughes' consolidated results of operations and
financial position.
Business Overview
The continuing operations of Hughes are comprised of the following segments:
Direct-To-Home Broadcast, Satellite Services and Network Systems. The satellite
systems manufacturing businesses ("Satellite Businesses"), which Hughes sold to
The Boeing Company ("Boeing") on October 6, 2000, are reported as discontinued
operations for 2000. This transaction is discussed more fully in "Liquidity and
Capital Resources--Acquisitions and Divestitures," below. Hughes' business
segments are described in more detail below, including a discussion of
significant transactions affecting the comparability of operating results for
each of the three years ended December 31, 2002, 2001 and 2000.
IV-23
HUGHES ELECTRONICS CORPORATION
Direct-To-Home Broadcast Segment
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. Hughes
announced, in December of 2002, that DIRECTV Broadband would close its
high-speed Internet service business in the first quarter of 2003 and transition
its existing customers to alternative service providers. See further discussion
of this item in "Liquidity and Capital Resources--Acquisitions and
Divestitures," below.
In December 2002, DIRECTV announced a five-year agreement with The National
Football League ("NFL") for the exclusive Direct Broadcast Satellite television
rights to the NFL SUNDAY TICKET through 2007 and the exclusive multi-channel
television rights through 2005. The agreement with the NFL will allow DIRECTV to
distribute expanded programming to its NFL SUNDAY TICKET subscribers, including
the NFL CHANNEL on DIRECTV.
On June 4, 2002, DIRECTV and General Electric Capital Corporation ("GECC")
executed an agreement to settle, for $180 million, a claim arising from a
contractual arrangement whereby GECC managed a credit program for consumers who
purchased DIRECTV(R) programming and related hardware. As a result, in 2002
DIRECTV increased its provision for loss related to this matter by $130 million,
of which $56 million was recorded as a charge to "Selling, general and
administrative expenses" and $74 million ($27 million in the first quarter of
2002 and $47 million in the second quarter of 2002) was recorded as a charge to
"Interest expense." See Item 3. Legal Proceedings under Part I for further
information.
The Direct-To-Home Broadcast segment also includes the operating results of the
Latin America DIRECTV businesses, which include DIRECTV Latin America, LLC
("DLA"), Hughes' 74.7% owned subsidiary that provides DIRECTV programming to
local operating companies ("LOC's") 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 LOC's. The non-operating results of the Latin America DIRECTV
businesses include Hughes' share of the results of unconsolidated LOC's that are
the exclusive distributors of DIRECTV in Venezuela and Puerto Rico and are
included in "Other, net." During 2001, Hughes began recording 100.0% of the net
losses incurred by DLA and certain other consolidated LOC's due to the
accumulation of net losses in excess of the minority investors' investment and
Hughes' continued funding of those businesses.
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 "Liquidity and Capital Resources--Acquisitions and Divestitures,"
below, for further discussion of this transaction.
Also in 2001, DLA secured a contract for the exclusive rights to broadcast and
re-sell the FIFA World Cup soccer tournaments, occurring in 2002 and 2006, in
Argentina, Chile, Colombia, Mexico, Uruguay and Venezuela. The costs of the live
sporting events are recorded in the period the events are broadcast. As a
result, the cost of the June 2002 competitions of $135 million was charged to
operations in 2002. Because of weak economic conditions in several of its
largest markets, DLA was unable to recover the entire cost of the programming,
resulting in an $80 million loss on the contract in 2002.
IV-24
HUGHES ELECTRONICS CORPORATION
DLA's 2002 operating results have been adversely affected by the economic and
political instability throughout Latin America, as well as the ongoing
devaluation of several local currencies. The unfavorable and volatile conditions
in certain Latin American countries has made it difficult for DLA to continue to
develop its business, generate additional revenues, add new subscribers or
achieve profitability. DLA has implemented steps in an attempt to improve its
financial results. DLA has, among other steps, (i) renegotiated major supplier
contracts, including programming contracts, (ii) reduced general and
administrative expenses, (iii) attempted to eliminate all non-critical business
activities, (iv) reduced investment in subscriber acquisition costs, as
appropriate, in each market, (v) slowed subscriber growth, (vi) implemented
local currency price adjustments to increase average monthly revenue per
subscriber ("ARPU") to offset devaluation and (vii) minimized capital
expenditures. DLA's business could deteriorate if conditions worsen, continue
for a sustained period or spread to other Latin American countries. Further,
changes in the leadership or in the ruling party in the countries in which DLA
operates may affect the economic programs developed under the prior
administration, which in turn may adversely affect DLA's business, operations
and prospects in these countries.
In January 2003, DLA announced the commencement of further discussions with
certain programmers, suppliers and business associates to address DLA's current
financial and operational challenges. The agreements which DLA is seeking to
restructure include certain long-term or exclusive programming agreements which
have resulted in payment obligations substantially in excess of the current
economic value of the programming to DLA. DLA has ceased making payments under
certain of these agreements and has received notices of default relating to
approximately $32 million claimed to be owed to programmers and a claim that
DLA's restructuring had resulted in an acceleration of an obligation to
repurchase a 4% equity interest in DLA for $195 million. DLA does not believe
that the purchase obligation has been accelerated. All such amounts correspond
to agreements that are currently under renegotiation. If DLA does not comply
with its obligations under its programming contracts and is unsuccessful in
reaching a settlement with the relevant programmers, such programmers could seek
to terminate the programming contracts, which would result in a loss of such
programming to DLA. If the discussions do not result in a reasonable agreement
in the near future, DLA has indicated that it would consider other options,
including restructuring the company under Chapter 11 of the U.S. bankruptcy law.
If DLA initiates proceedings under Chapter 11 of the U.S. bankruptcy law, it
could reject some or all of its long-term programming agreements (as well as
other non-essential executory contracts), in which event the programming related
to such rejected agreements would no longer be available to DLA. This could
result in increased churn or reduced demand for the DLA service, which would be
a consideration for DLA in determining which programming contracts to reject in
the event of Chapter 11 bankruptcy proceedings. A filing under Chapter 11 of the
U.S. bankruptcy law could result in a charge in a future period that could be
material to Hughes' consolidated results of operations and financial position.
The results of operations for DIRECTV Broadband, formerly a provider of digital
subscriber line ("DSL") services, have been included in Hughes' financial
information since April 4, 2001, the date of its acquisition.
On December 13, 2002, Hughes announced that DIRECTV Broadband would close its
high-speed Internet service business in the first quarter of 2003 and transition
its existing customers to alternative service providers. As a result, in
December 2002, Hughes notified approximately half of DIRECTV Broadband's 400
employees of a layoff, with a minimum of 60 days notice during which time they
were paid, followed by receipt of a severance package. The remaining employees
worked with customers during the transition and assisted with the closure of the
business, which occurred on February 28, 2003. As a result, Hughes recorded a
fourth quarter 2002 charge of $92.8 million related to accruals for employee
severance benefits, contract termination payments and write-off of customer
premise equipment. This charge was recorded in "Selling, general and
administrative expenses" in the Consolidated Statements of Operations and
Available Separate Consolidated Net Income (Loss).
See "Liquidity and Capital Resources--Acquisitions and Divestitures" below, for
further discussion of the DIRECTV Broadband transactions described above.
IV-25
HUGHES ELECTRONICS CORPORATION
Also included as part of the non-operating results of the Direct-To-Home
Broadcast segment is DIRECTV Japan Management, Inc., DIRECTV Japan, Inc.,
certain related companies (collectively "DIRECTV Japan") and Hughes affiliates
that provided DIRECTV services in Japan. DIRECTV Japan's operations were
discontinued and ceased broadcasting on September 30, 2000. See "Liquidity and
Capital Resources--Acquisitions and Divestitures," below, for further
discussion.
Satellite Services Segment
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 transponder
capacity on its satellites, and is the distribution platform for the delivery of
entertainment and information to cable television systems, television broadcast
affiliates, direct-to-home television operators, ISP's, telecommunications
companies and other corporations and governments. PanAmSat provides satellite
services to its customers primarily through long-term operating lease contracts
for the full or partial use of satellite transponder capacity. From time to
time, and in response to customer demand, PanAmSat sells transponders to
customers through outright sales and sales-type lease transactions.
In October 2001, PanAmSat filed a proof of loss under an insurance policy on
PAS-7 related to circuit failures, which occurred in September 2001 and resulted
in a reduction of 28.9% of the satellite's total power available for
communications. During 2002, PanAmSat's insurers settled the claim by payment to
PanAmSat of $215.0 million. PanAmSat recorded a net gain of approximately $40.1
million related to this insurance claim in the first quarter of 2002.
Network Systems Segment
The Network Systems segment represents the results of Hughes Network Systems,
Inc. ("HNS"), which is a leading supplier of broadband satellite services and
products to both enterprises and consumers through its DIRECWAY(R) services. HNS
designs, manufactures and installs advanced networking solutions for businesses
worldwide using very small aperture terminals. HNS is 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).
Other
During the first quarter of 2003, Hughes and America Online, Inc. ("AOL") agreed
to terminate their strategic alliance, which the companies had entered into in
June 1999. In connection with the termination of the alliance, Hughes recorded a
pre-tax charge of $23 million in the fourth quarter of 2002 to "Selling, general
and administrative expenses" and was released from its commitment to spend up to
approximately $1 billion in additional sales, marketing, development and
promotion efforts in support of certain specified products and services. Under
the terms of the agreement, HNS will continue to provide services to current
bundled AOL broadband subscribers using the HNS high-speed Internet satellite
services as the companies develop a transition plan to an unbundled service.
During the first quarter of 2002, Hughes recorded a $95 million gain, net of
legal costs, as an offset to "Selling, general and administrative expenses" as a
result of the favorable resolution of a lawsuit filed against the United States
Government on March 22, 1991. The lawsuit was based upon the National
Aeronautics and Space Administration's ("NASA") breach of contract to launch ten
satellites on the Space Shuttle. See Item 3. Legal Proceedings under Part I for
further information.
IV-26
HUGHES ELECTRONICS CORPORATION
Hughes adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on January
1, 2002. SFAS No. 142 required that existing and future goodwill and intangible
assets with indefinite lives not be amortized, but written-down, as needed,
based upon an impairment analysis that must occur at least annually, or sooner
if an event occurs or circumstances change that would more likely than not
result in an impairment loss. All other intangible assets are amortized over
their estimated useful lives. As a result, Hughes recognized amortization
expense of $249 million for goodwill and intangible assets with indefinite lives
for the year ended December 31, 2001 for which there is no comparable amount in
2002. In addition, as a result of adopting SFAS No. 142, Hughes recorded a
cumulative effect of accounting change, net of taxes, of $681.3 million ($755.7
million pre-tax) as of January 1, 2002 in the Consolidated Statements of
Operations and Available Separate Consolidated Net Income (Loss) primarily
related to the write-off of goodwill at DLA and DIRECTV Broadband. See further
discussion under "Accounting Changes" below.
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 an expense of $22.2 million in the second quarter of 2001 and
$65.3 million in the third quarter of 2001 for a total charge to "Selling,
general and administrative expenses" of $87.5 million. Of that charge, $80.0
million was related to employee severance benefits and $7.5 million was for
other costs primarily related to a remaining lease obligation associated with
excess office space and employee equipment. The remaining accrual amounted to
$14.1 million at December 31, 2002 and related to long-term employee severance
benefits.
In addition to the significant operating gains and losses described above,
Hughes has recognized a number of significant non-operating gains and losses
during the years ended December 31, 2002, 2001 and 2000. These transactions are
more fully described below in "Liquidity and Capital Resources--Acquisitions and
Divestitures" and "Liquidity and Capital Resources--Investments in Marketable
Securities."
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. In the third quarter of 2001, Hughes recorded a
decrease to "Capital stock and additional paid-in capital" of $574.2 million as
a result of the settlement.
At December 31, 2002, Hughes had a cash balance of $1,128.6 million and unused
debt capacity of $1,532.9 million, which includes $248.9 million of debt
capacity at PanAmSat. Included as part of Hughes' cash balance of $1,128.6 at
December 31, 2002 was $784.0 million of cash at PanAmSat, which is generally not
available for use by Hughes. Hughes believes it has adequate liquidity to fund
cash requirements for its continuing operations in 2003 of about $200 million to
$300 million. In addition, in the first quarter of 2003, Hughes completed a
series of financing transactions designed to provide sufficient liquidity to
fund Hughes' business plan through cash flow breakeven. See further discussion
under "Liquidity and Capital Resources--Notes Payable and Credit Facilities"
below.
On June 6, 2000, the GM Board of Directors ("GM Board") declared a three-for-one
stock split of the GM Class H common stock. The stock split was in the form of a
200% stock dividend, paid on June 30, 2000 to GM Class H common stockholders of
record on June 13, 2000. As a result, the numbers of shares of GM Class H common
stock presented for all periods prior to the stock split have been adjusted to
reflect the stock split, unless otherwise noted.
IV-27
HUGHES ELECTRONICS CORPORATION
Satellite Fleet
Hughes has a fleet of 28 satellites, seven owned by DIRECTV and 21 owned and
operated by PanAmSat. Eight additional satellites are currently under
construction, including one for DIRECTV, four for PanAmSat and three for the
SPACEWAY(R) platform under development by HNS.
In the fourth quarter of 2001, DIRECTV successfully launched and commenced
service from the DIRECTV 4S high-power spot-beam satellite. In the second
quarter of 2002, DIRECTV successfully launched DIRECTV 5, which is currently
providing services from the 119 degrees west longitude orbital location
previously provided by DIRECTV 6, which is now serving as a backup at that
location. The DIRECTV 4S and DIRECTV 5 satellites enabled DIRECTV to increase
its capacity to approximately 800 channels, including the capacity to transmit
more than 530 local channels.
DIRECTV U.S. currently has one satellite under construction, the DIRECTV 7S
satellite, a high-powered spot-beam, which is expected to be launched in the
fourth quarter of 2003. DIRECTV 7S will be positioned at 119 degrees west
longitude and will provide additional capacity, enabling DIRECTV to further
expand its services, including local channel coverage.
PanAmSat completed a three-year, $2.0 billion, seven-satellite fleet
modernization program in 2002. The program added approximately 400 36-megahertz
equivalent transponders, bringing the total number of transponders to 913.
PanAmSat's satellite fleet was expanded in 2000 with the commencement of service
on Galaxy XR, Galaxy XI, Galaxy IVR and PAS-9. Also during 2000, PanAmSat
completed the planned retirement of its SBS-4 and SBS-5 satellites. In 2001,
PanAmSat commenced service on PAS-1R and PAS-10. In 2002, PanAmSat commenced
service on its Galaxy IIIC satellite. Galaxy IIIC supports direct-to-home
services for DLA as well as video and broadcast services for other customers.
PanAmSat is currently constructing and expects to launch up to four satellites
by 2006. PanAmSat expects to launch Galaxy XII in the second quarter of 2003 and
expects to launch the Galaxy XIII/Horizons-1 satellite in mid-2003. PanAmSat is
currently scheduled to launch a third satellite to replace Galaxy V prior to the
end of its useful life in 2005. The fourth satellite is scheduled to replace
Galaxy 1R prior to the end of its useful life in 2006.
HNS is currently developing the SPACEWAY platform for DIRECWAY's next generation
of services. SPACEWAY will eventually include three satellites, which are
currently under construction. SPACEWAY is expected to begin its North American
service in 2004.
Results of Operations
2002 compared to 2001
Overall
Revenues. Revenues increased 8.1% to $8,934.9 million in 2002 compared with
$8,264.0 million in 2001. The increase in revenues resulted primarily from
$886.9 million of higher revenues in the Direct-To-Home Broadcast segment from
the addition of new DIRECTV subscribers in the United States and higher ARPU.
The increased revenues from the Direct-To-Home Broadcast segment were partially
offset by a decrease in revenues of $155.9 million in the Network Systems
segment and $57.8 million at the Satellite Services segment. The decrease in
revenues from the Network Systems segment resulted from the substantial
completion in late 2001 of two significant customer contracts for the sale of
phones and systems for mobile satellite programs. The decrease in revenues from
the Satellite Services segment was primarily due to a sales-type lease
transaction executed during 2001 for which there was no comparable transaction
in 2002.
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HUGHES ELECTRONICS CORPORATION
Operating Costs and Expenses. Operating costs and expenses increased to $9,334.0
million in 2002 from $9,021.8 million in 2001. Broadcast programming and other
costs increased by $851.8 million during 2002 due to higher costs at the
Direct-To-Home Broadcast segment resulting from higher programming costs
associated with the increase in subscribers and programming rate increases,
higher subscriber service expenses and the $135 million cost of the 2002 World
Cup, partially offset by decreased costs at the Satellite Services segment
associated with a sales-type lease transaction executed during 2001 for which
there was no comparable transaction in 2002. Costs of products sold decreased by
$81.6 million in 2002 from 2001 due to the decreased equipment sales at the
Network Systems segment discussed above, partially offset by increased shipments
of DIRECTV receiving equipment. Selling, general and administrative expenses
decreased by $377.4 million in 2002 from 2001 due primarily to a $95 million net
gain recorded from the NASA claim, a $40.1 million net gain related to the PAS-7
insurance claim, lower expenses resulting from cost saving initiatives, lower
third-party customer acquisition costs and an $87.5 million charge, primarily
for severance, recorded in 2001. These decreases were partially offset by a
$92.8 million charge related to the shutdown of the DIRECTV Broadband business,
the $56 million loss recorded for the GECC settlement at DIRECTV U.S. and the
$23 million loss recorded in connection with the termination of the AOL
alliance. Depreciation and amortization decreased by $80.6 million in 2002 over
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 $249.0 million for 2001, partially offset by added depreciation
expense related to capital expenditures for property and satellites placed into
service since December 31, 2001, the consolidation of GEA in May 2001 and the
acquisition of DIRECTV Broadband 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 uses EBITDA to evaluate the operating performance of Hughes and its
business segments, to allocate resources and capital to its business segments
and as a measure of performance for incentive compensation purposes. Hughes
believes EBITDA is a measure of performance used by some investors, equity
analysts and others to make informed investment decisions. EBITDA is used as an
analytical indicator of income generated to service debt and fund capital
expenditures. In addition, multiples of current or projected EBITDA are used to
estimate current or prospective enterprise value. Hughes management believes
that EBITDA is a common measure used to compare Hughes' operating performance
and enterprise value to other communications, entertainment and media service
providers. EBITDA does not give effect to cash used for debt service
requirements, 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 2002 was $668.0 million and EBITDA margin was 7.5%, compared to
EBITDA of $389.9 million and EBITDA margin of 4.7% for 2001. The increase in
EBITDA and EBITDA margin resulted from the additional profit resulting from the
DIRECTV U.S. revenue growth, lower subscriber acquisition costs, the $95 million
net gain for the NASA claim, the $87.5 million charge primarily related to
severance recorded in 2001 and the $40.1 million net gain related to the PAS-7
insurance claim. These increases were partially offset by the $92.8 million
charge related to the shutdown of the DIRECTV Broadband business, the $80
million loss from the 2002 World Cup, the $56 million loss recorded for the
settlement of the GECC dispute settlement and the $23 million loss recorded in
connection with the termination of the AOL alliance.
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HUGHES ELECTRONICS CORPORATION
Operating Loss. Hughes' operating loss was $399.1 million in 2002, compared to
$757.8 million in 2001. The decreased operating loss resulted from the
additional profit resulting from the DIRECTV U.S. revenue growth, lower
subscriber acquisition costs, lower amortization expense resulting from the
discontinuation of amortization for goodwill and intangible assets with
indefinite lives in accordance with SFAS No. 142, the $95 million net gain for
the NASA claim, the $87.5 million charge primarily related to severance recorded
in 2001 and the $40.1 million net gain related to the PAS-7 insurance claim.
These increases were partially offset by higher depreciation expense due to
capital expenditures since December 31, 2001, the $92.8 million charge related
to the shutdown of DIRECTV Broadband, the $80 million loss from the 2002 World
Cup, the $56 million loss recorded for the settlement of the GECC dispute
settlement and the $23 million loss recorded in connection with the termination
of the AOL alliance.
Over the past several years, Hughes has incurred operating losses, principally
due to the costs of acquiring new subscribers in its Direct-To-Home Broadcast
businesses. Hughes expects operating results to improve and, barring significant
changes in circumstances, to generate operating profit in the future as DIRECTV
U.S.'s large subscriber base begins generating additional operating profit due
to continued revenue growth and improved operating leverage. In addition, Hughes
does not currently intend to increase the subscriber base aggressively for DLA
and the DIRECWAY consumer business in the near term to avoid cash requirements
for subscriber acquisition costs.
Interest Income and Expense. Interest income decreased to $24.5 million in 2002
compared to $56.7 million in 2001 due to a decrease in average cash balances.
Interest expense increased to $336.2 million in 2002 from $195.9 million in 2001
primarily from the $74 million of interest recorded in connection with the
settlement of the GECC dispute and interest expense associated with higher
average outstanding borrowings in 2002. Interest expense is net of capitalized
interest of $116.8 million and $76.3 million in 2002 and 2001, respectively.
Changes in cash and cash equivalents and debt are discussed in more detail below
under "Liquidity and Capital Resources."
Other, Net. Other, net increased to income of $425.5 million in 2002 compared to
a loss of $92.7 million in 2001. Other, net for 2002 resulted primarily from the
$600.0 million gain for the settlement on the terminated merger agreement with
EchoStar, $136.2 million of net gains from the sale of certain marketable equity
securities, including a $158.6 million gain related to the sale of the
investment in Thomson multimedia S.A. ("Thomson") and a $24.5 million loss
recorded from the sale of the Sky Perfect Communications, Inc. ("Sky Perfect")
investment, and the reversal of $41.1 million of accrued exit costs related to
the DIRECTV Japan business upon the resolution of all remaining claims. These
gains were partially offset by $148.9 million of losses recognized for the
other-than-temporary decline in the fair value of marketable equity securities,
$52.1 million of charges recorded for the Hughes Tele.com (India) Limited
("HTIL") transactions, and $70.1 million of equity method investee losses.
Other, net for 2001 resulted primarily from $226.1 million of losses recognized
for the other-than-temporary decline in the fair value of certain marketable
equity securities, which included a $212.0 million write-down related to the Sky
Perfect investment, and equity method investee losses of $61.3 million,
partially offset by $130.6 million of net gains from the sale of certain
marketable equity securities, primarily Thomson, and the reversal of $32.0
million of accrued exit costs related to the DIRECTV Japan business. See
"Liquidity and Capital Resources--Acquisitions and Divestitures" and "Liquidity
and Capital Resources--Investment in Marketable Securities" below for additional
information regarding the transactions discussed above.
Income Taxes. Hughes recognized an income tax benefit of $94.4 million in 2002
compared to $325.6 million in 2001. The lower tax benefit in 2002 was primarily
due to lower pre-tax losses and a
IV-30
HUGHES ELECTRONICS CORPORATION
lower benefit associated with the shutdown of the DIRECTV Broadband business.
These decreases were partially offset by the favorable resolution of certain tax
contingencies and the discontinuation of amortization of non-deductible goodwill
in 2002.
Loss Before Cumulative Effect of Accounting Changes. Hughes reported a loss from
continuing operations before cumulative effect of accounting changes of $212.5
million in 2002, compared to $614.2 million in 2001.
Cumulative Effect of Accounting Changes. Hughes adopted SFAS No. 142, "Goodwill
and Other Intangible Assets," on January 1, 2002. The adoption of this standard
resulted in the discontinuation of amortization of goodwill and intangible
assets with indefinite lives. In accordance with the transition provisions of
SFAS No. 142, Hughes recorded a one-time after-tax charge of $681.3 million
related to the initial impairment test on January 1, 2002 as a cumulative effect
of accounting change. See "Accounting Changes" below for additional information.
Hughes adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," on January 1, 2001. SFAS No. 133 required 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 and an after-tax unrealized gain of $0.4 million in
"Accumulated other comprehensive income (loss)."
Direct-To-Home Broadcast Segment
Direct-To-Home Broadcast segment revenues increased 14.1% to $7,193.3 million in
2002 from $6,306.4 million in 2001. The Direct-To-Home Broadcast segment had
positive EBITDA of $160.8 million in 2002 compared with negative EBITDA of $74.8
million in 2001. The operating loss for the segment decreased to $505.2 million
in 2002 from $749.9 million in 2001.
United States. Revenues for DIRECTV U.S. grew to $6,445 million in 2002, a 16%
increase over 2001 revenues of $5,552 million. The increase in revenues resulted
primarily from an increased number of DIRECTV subscribers and an increase in
ARPU. As of December 31, 2002, DIRECTV had approximately 11.2 million
subscribers compared to about 10.3 million subscribers as of December 31, 2001.
Excluding subscribers in the National Rural Telecommunications Cooperative
("NRTC") territories, DIRECTV owned and operated subscribers totaled 9.5 million
and 8.4 million at December 31, 2002 and 2001, respectively. DIRECTV added 1.1
million net new owned and operated subscribers in 2002, compared to 1.2 million
net new owned and operated subscribers in 2001. ARPU was $59.80 and $58.70 for
the years ended December 31, 2002 and 2001, respectively. The increased ARPU was
driven primarily from broader local channel offerings, higher revenues from
seasonal and live sporting events and other subscriber revenues, such as
revenues from an increased number of subscribers with multiple set-top boxes,
partially offset by lower subscriber pay-per-view purchases.
EBITDA was $564 million in 2002 compared to $160 million in 2001. The operating
profit in 2002 for the DIRECTV U.S. businesses was $158 million compared to an
operating loss of $279 million in 2001. The change in EBITDA was primarily
attributable to the additional profit resulting from the higher revenues
discussed above, lower total subscriber acquisition costs and a $48 million
charge primarily related to severance costs recorded in 2001. These improvements
were partially offset by higher subscriber service expenses and the $56 million
expense associated with the settlement with GECC. The change in operating loss
was due to the increased EBITDA and lower amortization expense of $124 million
that resulted from the adoption of SFAS No. 142, which was partially offset by a
$91 million increase in depreciation expense related to the addition of property
and satellites.
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HUGHES ELECTRONICS CORPORATION
Latin America. Revenues for the Latin America DIRECTV businesses decreased 6% to
$680 million in 2002 from $727 million in 2001. The change in revenues resulted
from the devaluation of several foreign currencies, the most significant of
which was in Argentina, and lower 2002 subscribers, partially offset by $55
million of revenues generated from the 2002 World Cup. Subscribers declined
slightly to about 1.58 million as of December 31, 2002 from about 1.61 million
as of December 31, 2001. Due to the economic conditions in Latin America, DLA
lost approximately 28,000 net subscribers in 2002, compared to 305,000 net new
subscribers additions in 2001. During 2002 and 2001, ARPU for DLA was about $35
and $43 per month, respectively, of which approximately $27 and $34 was
generated from monthly programming subscriptions, respectively, with the
remainder derived from fees associated with leased equipment. The decrease in
ARPU was primarily the result of the devaluation of the Argentinean, Brazilian
and Venezuelan currencies against the U.S. dollar.
EBITDA was a negative $202 million in 2002 compared to negative EDITDA of $132
million in 2001. The change in EBITDA was due to the decreased revenues
discussed above, the $80 million loss from the 2002 World Cup and the
consolidation of GEA beginning in May of 2001, partially offset by lower
operating expenses resulting from cost saving initiatives including a reduction
in advertising and promotion costs, and renegotiated programming contracts. The
Latin America DIRECTV businesses incurred an operating loss of $415 million in
2002 compared to an operating loss of $331 million in 2001. The increased
operating loss resulted from the decline in EBITDA and higher depreciation
expense of $44 million resulting from the addition of property, partially offset
by a decrease in amortization expense of $30 million resulting from the
discontinuation of goodwill amortization expense in accordance with SFAS No.
142.
DIRECTV Broadband. Revenues increased $45 million to $72 million for 2002
compared to $27 million for 2001. The increased revenues were primarily due to a
larger subscriber base in 2002 and a full year of revenues in 2002 compared with
2001, which only includes revenues from the date of DIRECTV Broadband's
acquisition in April 2001. DIRECTV Broadband added about 60,600 net new
subscribers for 2002 compared to 26,500 net new subscribers added from the date
of its acquisition in 2001. As of December 31, 2002, DIRECTV Broadband had about
151,600 residential broadband subscribers in the United States compared with
about 91,000 subscribers as of December 31, 2001.
EBITDA was a negative $201 million for 2002 compared to a negative $106 million
for 2001. The operating loss was $248 million for 2002 and $143 million for
2001. The increase in negative EBITDA and operating loss was due to the $92.8
million charge recorded for the costs associated with the shutdown of
operations. For further discussion of the DIRECTV Broadband shutdown, see
"Liquidity and Capital Resources--Acquisitions and Divestitures" below.
Satellite Services Segment
Revenues for the Satellite Services segment in 2002 decreased $57.8 million to
$812.3 million from $870.1 million in 2001. The decrease was primarily due to a
decline in outright sales and sales-type lease revenue that amounted to $19.6
million for 2002 compared to $67.9 million for 2001. Revenues from operating
leases of transponders, satellite services and other were 97.6% of total 2002
revenues and decreased to $792.7 million from $802.2 million in 2001. Generally,
revenues from outright sales and sales-type lease agreements, equal to the net
present value of the future minimum lease payments, are recognized at service
commencement. Interest income from sales-type leases is recognized over the
lease term. Revenues from operating leases are recognized monthly on a
straight-line basis over the lease term.
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HUGHES ELECTRONICS CORPORATION
EBITDA for 2002 was $591.6 million compared to $580.0 million for 2001. EBITDA
margin for 2002 was 72.8% compared to 66.7% for 2001. The higher EBITDA and
EBITDA margin was principally due to increased operating efficiencies that
resulted from cost saving initiatives, a $40.1 million net gain related to the
settlement of the PAS-7 insurance claim and a $7.0 million severance charge in
the third quarter of 2001. These gains were partially offset by the decline in
revenues from outright sales and sales type lease transactions discussed above,
an $18.7 million charge for the write-off of receivables due to the conversion
of several sales-type leases to operating leases by a PanAmSat customer and a
$13.7 million provision for idle facilities and severance costs in 2002.
Operating profit was $255.9 million for 2002, compared to $165.3 million in
2001. The increase in operating profit resulted from the increase in EBITDA and
lower amortization expense of $65 million for 2002 due to the discontinuation of
goodwill amortization in accordance with SFAS No. 142.
Backlog for the Satellite Services segment, which consists primarily of
operating leases on satellite transponders, was about $5.55 billion as of
December 31, 2002 compared to about $5.84 billion as of December 31, 2001.
Network Systems Segment
Revenues for the Network Systems segment decreased by 11.8% to $1,169.9 million
in 2002 from $1,325.8 million for 2001. The lower revenues resulted primarily
from the substantial completion in late 2001 of two significant customer
contracts for the sale of phones and systems for mobile satellite programs,
partially offset by increased sales of DIRECTV receiving equipment, which
totaled about 2.6 million units in 2002 compared to about 2.0 million units in
2001.
The Network Systems segment reported negative EBITDA of $87.0 million for 2002
compared to negative EBITDA of $111.8 million for 2001. The Network Systems
segment had an operating loss of $160.7 million in 2002 compared to an operating
loss of $171.8 million in 2001. The change in EBITDA and operating loss resulted
from higher operating margins from increased sales of DIRECTV receiving
equipment, a $24.5 million gain resulting from the recovery of receivables
written-off in 1999 and lower general and administrative costs, partially offset
by a provision for inventory and receivables and a $10.3 million charge related
to severance benefits in 2002.
Eliminations and Other
The elimination of revenues increased to $240.6 million in 2002 from $238.3
million in 2001.
Operating profit from "Eliminations and Other" improved to $10.9 million in 2002
from an operating loss of $1.4 million in 2001. The increase in operating profit
resulted primarily from the $95 million net gain recorded from the NASA claim
and a 2001 severance charge of $23 million, partially offset by the $23 million
loss recorded in connection with the termination of the AOL alliance, higher
corporate expenditures related to costs associated with the terminated EchoStar
Merger and employee benefit costs.
2001 compared to 2000
Overall
Revenues. Revenues increased 13.4% to $8,264.0 million in 2001 compared with
$7,287.6 million in 2000. The increase in revenues resulted primarily from
$1,068.4 million of higher revenues at the Direct-To-Home Broadcast segment over
2000. This increase was due primarily to the addition of about 1.5 million net
new DIRECTV subscribers in the United States and Latin America
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HUGHES ELECTRONICS CORPORATION
since December 31, 2000 and the added revenues from the consolidation of GEA
beginning in May 2001. The increased revenues from the Direct-To-Home Broadcast
segment were partially offset by a decrease in revenues of $153.5 million at the
Satellite Services segment and $84.0 million at the Network Systems segment. The
decrease in revenues from the Satellite Services segment was principally due to
a lower volume of new outright sales and sales-type lease transactions executed
during 2001 compared to 2000. The decrease in revenues from the Network Systems
segment was principally due to decreased shipments of DIRECTV(TM) receiving
equipment that resulted from DIRECTV completing the conversion of the PRIMESTAR
By DIRECTV customers to the DIRECTV service in the third quarter of 2000.
Operating Costs and Expenses. Operating costs and expenses increased to $9,021.8
million in 2001 from $7,641.7 million in 2000. Broadcast programming and other
costs increased by $517.8 million during 2001 due to higher costs at the
Direct-To-Home Broadcast segment, resulting from higher programming costs
associated with the increase in subscribers and added costs from DIRECTV
Broadband. This increase was partially offset by decreased costs at the
Satellite Services segment associated with the lower new outright sales and
sales-type lease transaction activity in 2001. Costs of products sold increased
by $85.1 million in 2001 from 2000 mainly due to higher costs associated with a
mobile telephony contract and increased costs associated with the DIRECWAY
service at the Network Systems segment. Selling, general and administrative
expenses increased by $577.6 million in 2001 from 2000 due primarily to higher
subscriber acquisition and marketing costs at the Direct-To-Home Broadcast
segment in both the United States and Latin America, added costs from DIRECTV
Broadband, and the $87.5 million charge related to the 2001 company-wide
employee reductions. Depreciation and amortization increased by $199.6 million
in 2001 over 2000 due primarily to the addition of property and satellites since
December 31, 2000, a reduction in the useful life of the Galaxy VIII-i satellite
due to the failure of its primary propulsion system during the third quarter of
2000, and added goodwill amortization and depreciation that resulted from the
DIRECTV Broadband and GEA transactions.
EBITDA. EBITDA for 2001 was $389.9 million and EBITDA margin was 4.7%, compared
to EBITDA of $594.0 million and EBITDA margin of 8.2% for 2000. The change in
EBITDA and EBITDA margin resulted from lower EBITDA at the Satellite Services
segment principally due to decreased new outright sales and sales-type lease
transactions executed during 2001 compared to 2000 and higher direct operating
and selling, general and administrative expenses; lower EBITDA at the Network
Systems segment primarily due to increased costs associated with the rollout of
new DIRECWAY(R) services and decreased shipments of DIRECTV receiving equipment;
and lower EBITDA at the Direct-To-Home Broadcast segment due to negative EBITDA
from DIRECTV Broadband and the company-wide $87.5 million charge primarily
related to severance.
Operating Loss. Hughes' operating loss was $757.8 million in 2001, compared to
$354.1 million in 2000. The increased operating loss resulted from the decrease
in EBITDA and the higher depreciation and amortization expense discussed above.
Interest Income and Expense. Interest income increased to $56.7 million in 2001
compared to $49.3 million in 2000 due to an increase in cash and cash
equivalents that resulted from the sale of the Satellite Businesses in October
of 2000. Interest expense decreased to $195.9 million in 2001 from $218.2
million in 2000. The lower interest expense resulted primarily from lower
average outstanding borrowings. Interest expense is net of capitalized interest
of $76.3 million and $82.4 million in 2001 and 2000, respectively. Changes in
cash and cash equivalents and debt are discussed in more detail below under
"Liquidity and Capital Resources."
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HUGHES ELECTRONICS CORPORATION
Other, Net. Other, net decreased to a loss of $92.7 million in 2001 from a loss
of $292.6 million in 2000. Other, net for 2001 resulted primarily from equity
method investee losses of $61.3 million, a write-down of $212.0 million related
to the Sky Perfect investment, partially offset by $130.6 million of net gains
from the sale of certain marketable equity securities and the reversal of $32.0
million of accrued exit costs related to the DIRECTV Japan business. Including
the write-down of the Sky Perfect investment, Hughes recognized $226.1 million
of write-downs related to other-than-temporary declines in the fair value of
marketable equity securities in 2001. The loss in 2000 included $164.2 million
of equity method investee losses and $128.4 million of costs related to the exit
of the DIRECTV Japan business. The change in equity method investee losses in
2001 compared to 2000 resulted from lower losses at DIRECTV Japan due to the
shutdown of the business at September 30, 2000. See "Liquidity and Capital
Resources--Acquisitions and Divestitures" and "Liquidity and Capital
Resources--Investments in Marketable Securities" below for additional
information regarding the transaction discussed above.
Income Taxes. Hughes recognized an income tax benefit of $325.6 million in 2001
compared to $406.1 million in 2000. The lower tax benefit in 2001 was primarily
due to an additional tax benefit in 2000 associated with the write-off of
Hughes' historical investment in DIRECTV Japan as well as the effect of
favorable tax settlements recorded in 2000. The 2000 tax benefits were partially
offset by higher pre-tax losses in 2001 compared to 2000 and a 2001 tax benefit
resulting from the write-off of an investment in Motient Corporation
("Motient").
Loss from Continuing Operations. Hughes reported a loss from continuing
operations before cumulative effect of accounting change of $614.2 million in
2001, compared to $355.4 million in 2000.
Cumulative Effect of Accounting Change. Hughes adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," on January 1, 2001. SFAS No.
133 requires Hughes to carry all derivative financial instruments on the balance
sheet at fair value. In accordance with the transition provisions of SFAS No.
133, Hughes recorded a one-time after-tax charge of $7.4 million on January 1,
2001 as a cumulative effect of accounting change and an after-tax unrealized
gain of $0.4 million in "Accumulated other comprehensive income (loss)."
Direct-To-Home Broadcast Segment
Direct-To-Home Broadcast segment revenues increased 20.4% to $6,306.4 million in
2001 from $5,238.0 million in 2000. The Direct-To-Home Broadcast segment had
negative EBITDA of $74.8 million in 2001 compared with negative EBITDA of $24.5
million in 2000. The operating loss for the segment increased to $749.9 million
in 2001 from $557.9 million in 2000.
United States. The DIRECTV U.S. businesses were the biggest contributors to the
segment's revenue growth with revenues of $5,552 million in 2001, an 18%
increase over 2000 revenues of $4,694 million. The large increase in revenues
resulted primarily from an increased number of DIRECTV subscribers since
December 31, 2000 and higher revenues from local channel offerings, pay-per-view
movies, sporting events and other subscriber revenues, such as revenues from an
increased number of subscribers with multiple set-top boxes. The DIRECTV U.S.
businesses added 1.2 million net new subscribers in 2001, compared to 1.8
million net new subscribers in 2000. In addition, during the third quarter of
2001, DIRECTV made a one-time downward adjustment of approximately 143,000
subscribers. This adjustment primarily corrected errors that had accumulated
over the preceding 18 months related to subscribers who disconnected service
prior to June 30, 2001 but were counted as active subscribers in DIRECTV's
database. As of December 31, 2001, DIRECTV had about 10.3 million subscribers
compared to about 9.1 million subscribers at December 31, 2000. ARPU for DIRECTV
U.S. was $58.70 and $57.70 in 2001 and 2000, respectively.
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HUGHES ELECTRONICS CORPORATION
EBITDA was $160 million in 2001 compared to $151 million in 2000. The operating
loss in 2001 for the DIRECTV U.S. businesses was $279 million compared to $244
million in 2000. The change in EBITDA resulted from increased profit on the
higher revenues discussed above and the improvement in subscriber service
expenses and broadcast operations expenses due mostly to the exit of the
PRIMESTAR business in September 2000, which more than offset higher subscriber
acquisition costs and operating costs and a $48 million charge related to 2001
employee reductions. The higher operating loss was principally due to increased
depreciation primarily associated with customer leased DIRECTV receiving
equipment.
Latin America. Revenues for the Latin America DIRECTV businesses increased 34%
to $727 million in 2001 from $541 million in 2000. The increase in revenues was
primarily due to continued subscriber growth as well as the consolidation of
GEA. Subscribers grew to 1.6 million at December 31, 2001 compared to 1.3
million in 2000. Latin America DIRECTV added 305,000 net new subscribers in
2001, compared to 501,000 net new subscribers added in 2000. During 2001 and
2000, the average revenue per subscriber for the Latin American businesses was
about $43 and $45 per month, respectively, of which approximately $34 and $36
was generated from monthly programming subscriptions, respectively, with the
remainder derived from fees associated with leased equipment.
EBITDA was a negative $132 million in 2001 compared to negative EDITDA of $171
million in 2000. The change in EBITDA resulted primarily from the increased
revenues discussed above, partially offset by a $29 million charge for the
recent devaluation of the Argentinean peso, higher marketing costs and a $10
million charge related to 2001 employee reductions. The Latin America DIRECTV
businesses incurred an operating loss of $331 million in 2001 compared to an
operating loss of $309 million in 2000. The increased operating loss resulted
from higher depreciation expense due to an increase in customer leased DIRECTV
receiving equipment and amortization of goodwill that resulted primarily from
the GEA transaction.
DIRECTV Broadband. Revenues and EBITDA for DIRECTV Broadband were $27 million
and negative $106 million for 2001, respectively. DIRECTV Broadband incurred an
operating loss of $143 million for 2001. Since its April 3, 2001 acquisition,
DIRECTV Broadband has added about 26,500 net subscribers. Net subscriber
additions were negatively impacted by customer churn that resulted from the
bankruptcy of two wholesale providers of DSL services. At December 31, 2001,
DIRECTV Broadband had more than 91,000 residential broadband subscribers in the
United States.
Satellite Services Segment
Revenues for the Satellite Services segment in 2001 decreased $153.5 million to
$870.1 million from $1,023.6 million in 2000. The decrease was primarily due to
a decline in new outright sales and sales-type lease transactions. Revenues
associated with outright sales and sales-type leases of transponders were $67.9
million in 2001 compared to $243.3 million for 2000. Revenues from operating
leases of transponders, satellite services and other were 92.2% of total 2001
revenues and increased by 2.8% to $802.2 million from $780.3 million in 2000.
EBITDA for 2001 was $580.0 million compared to $694.0 million for 2000. The
decrease in EBITDA was due to the decreased revenues discussed above, higher
direct operating and selling, general and administrative expenses to support the
continued satellite fleet expansion, costs associated with new service
initiatives, and a $7.0 million severance charge in the third quarter of 2001.
EBITDA margin for 2001 was 66.7% compared to 67.8% for 2000. The decrease in
EBITDA margin was due to the lower sales and higher operating costs. Operating
profit was $165.3 million for
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HUGHES ELECTRONICS CORPORATION
2001, compared to $356.6 million for 2000. The decrease in operating profit
resulted from the decrease in EBITDA and higher depreciation expense related to
additional satellites placed into service since December 31, 2000, and increased
depreciation expense that resulted from a reduction in the useful life of the
Galaxy VIII-i satellite due to the failure of its primary propulsion system
during the third quarter of 2000.
Backlog for the Satellite Services segment, which consists primarily of
operating leases on satellite transponders, was about $5.84 billion as of
December 31, 2001 compared to about $6.0 billion as of December 31, 2000.
Network Systems Segment
Revenues for the Network Systems segment decreased by 6.0% to $1,325.8 million
in 2001 from $1,409.8 million in 2000. The lower revenues resulted primarily
from decreased shipments of DIRECTV receiver equipment, which totaled about 2.0
million units in 2001 compared to about 3.0 million units in 2000, due primarily
to DIRECTV completing the conversion of PRIMESTAR By DIRECTV customers to the
DIRECTV service in the third quarter of 2000.
The Network Systems segment reported negative EBITDA of $111.8 million for 2001
compared to EBITDA of $0.1 million for 2000. The Network Systems segment had an
operating loss of $171.8 million for 2001 compared to an operating loss of $63.5
million for 2000. The change in EBITDA and operating loss resulted from
increased costs associated with the rollout of new DIRECWAY services, including
AOL Plus Powered by DIRECWAY and the decreased revenues discussed above.
Eliminations and Other
The elimination of revenues decreased to $238.3 million in 2001 from $383.8
million in 2000 due primarily to the decline in intercompany purchases of
DIRECTV receiving equipment and lower manufacturing subsidies paid by DIRECTV to
HNS. Intercompany transactions include sales of receiving equipment from HNS to
DIRECTV, and PanAmSat transponder leases to HNS and DLA.
Operating losses from "Eliminations and Other" improved to a loss of $1.4
million in 2001 from a loss of $89.3 million in 2000 due primarily to decreased
corporate expenditures for employee benefits and lower margins on intercompany
sales.
Liquidity and Capital Resources
In 2002, Hughes had sources of cash of $2,141.7 million, resulting primarily
from additional net borrowings of $470.5 million, proceeds from the sale of
investments of $322.4 million, insurance proceeds of $215.0 million and cash
provided by operations of $1,126.1 million. Cash provided by operations included
cash receipts of $600.0 million from the settlement payment related to the
terminated merger agreement with EchoStar and a cash payment by Hughes of $180.0
million related to the GECC settlement. These sources of cash were offset by
cash used during 2002 of about $1,713.2 million, primarily for expenditures for
satellites and property of $1,298.1 million, the final settlement payment to
Raytheon of $134.2 million, the $99.8 million purchase of short-term
investments, preferred stock dividends paid to GM of $68.7 million and debt
issuance costs of $85.4 million.
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HUGHES ELECTRONICS CORPORATION
As a measure of liquidity, the current ratio (ratio of current assets to current
liabilities) at December 31, 2002 and 2001 was 1.14 and 0.76, respectively.
Working capital increased by $1,518.7 million to working capital of $453.3
million at December 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, the cash receipts of
$600 million from the settlement payment related to the terminated merger
agreement with EchoStar and proceeds from the sale of investments.
Hughes expects to have cash requirements for its continuing operations in 2003
of about $200 million to $300 million. This cash will be used primarily for
capital expenditures for satellites and property, interest expense and
investments in affiliated companies, including the Latin America DIRECTV
businesses. The above cash requirements do not include non-operational cash
requirements such as costs related to the shutdown of the DIRECTV Broadband
business and a potential purchase price adjustment payment to Boeing. For
further discussion of the Boeing purchase price adjustment, see "Commitments and
Contingencies" below. Hughes' cash requirements are expected to be funded from a
combination of existing cash balances, cash provided from operations, amounts
available under credit facilities, and additional borrowings or refinancings, as
needed. In the first quarter of 2003, Hughes completed a series of financing
transactions designed to provide sufficient liquidity to fund Hughes' business
plan through cash flow breakeven. See "Notes Payable and Credit Facilities"
below for additional information.
Hughes' and its subsidiaries' 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 its
subsidiaries' ability to, among other things: incur or guarantee additional
indebtedness; make restricted payments, including dividends; create or permit to
exist certain liens; enter into business combinations and asset sale
transactions; make investments; enter into transactions with affiliates; and
enter into new businesses. In addition, the terms of the PanAmSat debt and
credit facilities restrict PanAmSat from transferring funds to Hughes in the
form of cash dividends, loans or advances. At December 31, 2002, Hughes and its
subsidiaries were in compliance with all such covenants.
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 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. Future Hughes earnings,
if any, are expected to be retained for the development of the businesses of
Hughes.
Cash and Cash Equivalents. Cash and cash equivalents were $1,128.6 million at
December 31, 2002 compared to $700.1 million at December 31, 2001. Included
within cash and cash equivalents at December 31, 2002 was $784.0 million of cash
and cash equivalents at PanAmSat, which are available to PanAmSat but are
generally not available for use by Hughes in its other businesses.
Cash provided by operating activities was $1,126.1 million in 2002 compared to
$190.3 million in 2001 and $1,090.7 million in 2000. The change in 2002 compared
to 2001 resulted from the settlement
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HUGHES ELECTRONICS CORPORATION
payment related to the terminated merger agreement with EchoStar and $452.6
million of lower cash requirements for the change in operating assets and
liabilities. The change in 2001 compared to 2000 resulted from $506.9 million of
higher cash requirements for the change in operating assets and liabilities and
$393.5 million of lower income from continuing operations excluding non-cash
adjustments, such as deferred income taxes and other, depreciation and
amortization, net gain from sale of investments and net loss on write-down of
investments.
Cash provided by (used in) investing activities was $(887.2) million in 2002
compared to $(1,741.2) million in 2001 and $2,210.8 million in 2000. The change
from 2002 to 2001 was primarily from reduced expenditures for satellites and
property, reduced investments in companies, increased proceeds from the sale of
investments and insurance claims, partially offset by a $99.8 million purchase
of short-term investments by PanAmSat in 2002. The change from 2001 to 2000 was
primarily from decreased proceeds from the sale of investments, which in 2000
included the proceeds from the sale of the Satellite Businesses to Boeing, and
an increase in satellites and investment in companies in 2001, offset by lower
expenditures for property and higher proceeds from insurance claims in 2001.
Cash provided by (used in) financing activities was $189.6 million in 2002
compared to $742.9 million in 2001 and $(849.6) million in 2000. Financing
activities in 2002 includes net borrowings of $470.5 million, partially offset
by the $134.2 million final payment of the Raytheon settlement, the payment of
preferred stock dividends to GM and debt issuance costs of $85.4 million.
Financing activities in 2001 includes an increase in borrowings of $1,314.8
million, partially offset by the $500 million partial payment of the Raytheon
settlement and the payment of preferred stock dividends to GM. Financing
activities in 2000 reflect the repayment of debt and payment of preferred stock
dividends to GM.
Cash used in discontinued operations was $1.2 billion in 2000, which was
primarily due to $1.1 billion of taxes associated with the sale of the Satellite
Businesses.
Property and Satellites. Property, net of accumulated depreciation, decreased
$180.4 million to $2,017.4 million in 2002 from $2,197.8 million in 2001. The
decrease in property resulted primarily from depreciation partially offset by
capital expenditures of $566.4 million. The decrease in capital expenditures for
property of $233.0 million in 2002 compared to 2001 was primarily due to a
decrease in the purchase of DIRECTV receiving equipment in Latin America due to
the economic environment and reduction in subscribers as well as decreased
capital expenditures for property at PanAmSat. Satellites, net of accumulated
depreciation, increased $116.0 million to $4,922.6 million in 2002 from $4,806.6
million in 2001. The increase in satellites resulted primarily from capital
expenditures of $731.7 million for the construction of satellites, offset by
depreciation of $375.7 million and the write-off of PAS-7 during the first
quarter of 2002. The decrease in capital expenditures for satellites of $212.4
million in 2002 compared to 2001 was primarily due to decreased spending on
SPACEWAY as the platform nears completion and DIRECTV 4S, which was launched in
the fourth quarter of 2001. Total capital expenditures decreased to $1,298.1
million in 2002 from $1,743.5 million in 2001.
Notes Payable and Credit Facilities. Notes Payable. In February 2002, PanAmSat
completed an $800 million private placement notes offering. Such notes were
exchanged for registered notes in November 2002. These unsecured notes bear
interest at an annual rate of 8.5%, payable semi-annually and mature in 2012.
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.
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HUGHES ELECTRONICS CORPORATION
PanAmSat issued five, seven, ten and thirty-year fixed rate notes totaling
$750.0 million in January 1998. The $200 million five-year notes were repaid in
January 2003. The outstanding principal balances and interest rates for the
seven, ten and thirty-year notes as of December 31, 2002 were $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 provided availability of $1,235.2 million in revolving
borrowings. The facility was secured by substantially all of Hughes' assets
other than the assets of DLA and PanAmSat. In March 2002, Hughes borrowed an
additional $764.8 million under a term loan tranche that was added to the
Amended Credit Agreement. The Amended Credit Agreement was subsequently amended
in November 2002. The November 2002 amendment reduced the size of the term loan
from $764.8 million to $650.0 million and increased the size of the revolving
component to $1,284.0 million, of which $500 million was committed by General
Motors Acceptance Corporation ("GMAC"). In December 2002, EchoStar paid $600
million for the termination of the merger agreement, which resulted in a $143.7
million mandatory prepayment of the term loan under the Amended Credit
Agreement. Accordingly, the term loan was reduced from $650.0 million to $506.3
million. As of December 31, 2002, the revolving component of the Amended Credit
Agreement was undrawn and $506.3 million was outstanding under the term loan.
The Amended Credit Agreement was terminated on February 28, 2003 and all amounts
outstanding were repaid by Hughes from the proceeds of the DIRECTV Holdings LLC
("DIRECTV") notes offering described below.
In the first quarter of 2003, Hughes completed a series of financing
transactions to replace the Amended Credit Agreement with a capital structure
that is more long-term in nature. On February 28, 2003, DIRECTV issued $1.4
billion in senior notes due in 2013. The ten-year senior notes are unsecured
indebtedness guaranteed by all of DIRECTV's domestic subsidiaries and bear
interest at 8.375%. In addition, on March 6, 2003, DIRECTV entered into a new
senior secured credit facility with total term loan and revolving loan
commitments of $1.675 billion. The new senior secured credit facility is
comprised of a $375.0 million Tranche A Term Loan, $200.0 million of which was
undrawn at March 6, 2003, a $1,050.0 million Tranche B Term Loan and a $250.0
million revolving credit facility which was undrawn at March 6, 2003. The new
senior secured credit facility has a term of five to seven years and is secured
by substantially all of DIRECTV's assets and guaranteed by all of DIRECTV's
domestic subsidiaries. The revolving credit facility and term loans bear
interest at the London Interbank Offered Rate ("LIBOR") plus 3.50%. DIRECTV
distributed to Hughes the net proceeds from the senior secured credit facility
and the sale of the senior notes totaling $2.56 billion. The $200 million
undrawn portion of the Tranche A Term Loan is expected to be drawn by December
31, 2003 with the proceeds distributed to Hughes. The revolving portion of the
senior secured credit facility will be available to DIRECTV to fund working
capital and other requirements. The above distribution enabled Hughes to repay
all amounts outstanding under its existing Amended Credit Agreement and is
expected to provide sufficient liquidity to fund Hughes' business plan through
projected cash flow breakeven and for Hughes' other corporate purposes.
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 December 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 December 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
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HUGHES ELECTRONICS CORPORATION
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 and November 2002.
The most recent amendment reduced the size of the facility to $1,500 million and
provided for a commitment through August 31, 2003. The facility is comprised of
a $1,500 million tranche secured by a $1,500 million Hughes cash deposit.
Borrowings under the facility bear interest at GMAC's cost of funds plus 0.125%.
The $1,500 million cash deposit earns interest at a rate equivalent to GMAC's
cost of funds. Hughes has the legal right of setoff with respect to the $1,500
million GMAC cash deposit, and accordingly offsets it against amounts borrowed
from GMAC under the $1,500 million tranche in the consolidated statement of
financial position. The facility was fully drawn as of December 31, 2002.
On January 5, 2001, DLA entered into a $450.0 million revolving credit facility.
The obligations under the DLA facility were assigned to Hughes in February 2002.
In addition, the obligations under SurFin's unsecured revolving credit
facilities of $400.0 million and $212.5 million were assigned to Hughes in
February 2002.
Other. $61.5 million in other short-term and long-term debt, related primarily
to DLA and HNS' international subsidiaries, was outstanding at December 31,
2002, bearing fixed and floating rates of interest of 4.30% to 16.00%. Principal
on these borrowings is due in varying amounts through 2007.
Acquisitions and Divestitures. DIRECTV Broadband. On April 3, 2001, Hughes
acquired Telocity, a company that provided land-based DSL services, through the
completion of a tender offer and merger. Telocity was operated as DIRECTV
Broadband and is included as part of the Direct-To-Home Broadcast segment. The
purchase price was $197.8 million and was paid in cash.
On December 13, 2002, Hughes announced that DIRECTV Broadband would close its
high-speed Internet service business in the first quarter of 2003 and transition
its existing customers to alternative service providers. As a result, in
December 2002, Hughes notified approximately half of DIRECTV Broadband's 400
employees of a layoff, with a minimum of 60 days notice during which time they
were paid, followed by receipt of a severance package. The remaining employees
worked with customers during the transition and assisted with the closure of the
business, which occurred on February 28, 2003. As a result, Hughes recorded a
fourth quarter 2002 charge of $92.8 million related to accruals for employee
severance benefits, contract termination payments and write-off of customer
premise equipment. This charge was recorded in "Selling, general and
administrative expenses" in the Consolidated Statements of Operations and
Available Separate Consolidated Net Income (Loss). Included in the $92.8 million
charge were accruals for employee severance benefits of $21.3 million and
contract termination payments of $18.6 million. No amounts were paid as of
December 31, 2002.
The financial information included herein reflects the acquisition discussed
above from its date of acquisition. The acquisition was 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.
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HUGHES ELECTRONICS CORPORATION
Hughes Tele.com (India) Limited. On December 6, 2002, HNS completed a series of
transactions to exchange its equity interest in HTIL of $58.8 million, long-term
receivables from HTIL of $75.0 million, and a net receivable of $25.4 million
from HTIL's Indian sponsor, Ispat, in exchange for investments in Tata
Teleservices Limited ("TTSL"). The transactions were accounted for as a sale of
the assets surrendered at their fair values and the purchase of the instruments
in TTSL on the date of the transactions. HNS allocated the fair value of the
assets surrendered of $135.1 million to the assets received, which include
redeemable preference shares ($110.1 million), a 15 year zero coupon note ($9.7
million) and 50 million common stock purchase warrants ($15.3 million), based on
their relative fair values. The preference shares are redeemable at the end of
51 or 75 months at the option of HNS and are also convertible to common equity
at the end of 75 months at the option of HNS. The redemption is guaranteed in
the form of a put to TTSL's parent company, Tata Sons. The preference shares are
carried at fair value as an available-for-sale debt security, with unrealized
gains and losses reported, net of tax, as a component of OCI.
Based on the fair value of the assets surrendered on December 6, 2002, HNS
recognized an after-tax loss of approximately $14.1 million, which is comprised
of a pre-tax loss recognized in "Other, net" of $52.1 million, based on the
difference between fair value and carrying value of the assets surrendered and
the requirement to recognize cumulative translation adjustments of $28.0 million
associated with the HTIL investment, which were offset by an approximate $38.0
million tax benefit which includes the tax benefit from equity method losses
that were not previously recognized for tax purposes.
Also during 2002, HNS recorded the receivable from Ispat described above when it
honored a $54.4 million loan guarantee. The receivable was immediately reduced
to its estimated net realizable value of $25.4 million through a charge to
"Other, net" of $29.0 million.
During September 2000, HTIL sold new common shares in a public offering in
India. As a result of this transaction, Hughes' equity interest was reduced from
44.7% to 29.1% and Hughes recorded a $23.3 million increase to "Capital stock
and additional paid-in capital."
Galaxy Entertainment Argentina. On May 1, 2001, DLA acquired from Grupo Clarin
S.A. ("Clarin") a 51% ownership interest in 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 its 3.98%
interest back to DLA in November 2003 for $195 million (see "Commitments and
Contingencies" below for further discussion). As a result of the transaction,
Hughes' interest in DLA decreased from 77.8% to 74.7% and Hughes' ownership in
GEA increased from 20% to 58.1%. Hughes' portion of the purchase price, which
amounted to about $130 million, was recorded as an increase to "Capital stock
and additional paid-in capital."
The financial information included herein reflects the acquisition discussed
above from its date of acquisition. The acquisition was 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.
Satellite Systems Manufacturing Businesses. On October 6, 2000, Hughes completed
the sale of its satellite systems manufacturing businesses for $3.75 billion in
cash. The transaction resulted in the recognition of a pre-tax gain of $2,036.0
million, or $1,132.3 million after-tax. Included in this gain is a net after-tax
curtailment loss of $42.0 million related to pension and other post retirement
benefit plan assets and liabilities associated with the Satellite Businesses.
The purchase price is subject to adjustment based upon the final closing date
financial statements as discussed in "Commitments and Contingencies" below.
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HUGHES ELECTRONICS CORPORATION
In a separate, but related transaction, Hughes also sold to Boeing its 50%
interest in HRL Laboratories LLC ("HRL") for $38.5 million, which represented
the net book value of Hughes' interest in HRL at October 6, 2000.
DIRECTV Japan. On March 1, 2000, Hughes announced that the operations of DIRECTV
Japan would be discontinued. Pursuant to an agreement with Japan Digital
Broadcasting Services Inc. (now named Sky Perfect), qualified subscribers to the
DIRECTV Japan service were offered the opportunity to migrate to the Sky Perfect
service. DIRECTV Japan was paid a commission for each subscriber who actually
migrated. Hughes also acquired a 6.6% interest in Sky Perfect. As a result,
Hughes wrote-off its net investment in DIRECTV Japan of $164.6 million and
accrued exit costs of $403.7 million and involuntary termination benefits of
$14.5 million. Accrued exit costs consist of claims arising out of contracts
with dealers, manufacturers, programmers and others, satellite transponder and
facility and equipment leases, subscriber migration and termination costs, and
professional service fees and other. The write-off and accrual were partially
offset by the difference between the cost of the Sky Perfect shares acquired and
the estimated fair value of the shares ($428.8 million), as determined by an
independent appraisal, and by $40.2 million for anticipated contributions from
other DIRECTV Japan shareholders. The net effect of the transaction was a charge
to "Other, net" in the Consolidated Statements of Operations and Available
Separate Consolidated Net Income (Loss) of $170.6 million at March 31, 2000.
DIRECTV Japan employed approximately 290 personnel as of March 31, 2000, of
which 244 were terminated during 2000. All remaining personnel were terminated
in the first quarter of 2001.
During 2002, $41.1 million of accrued liabilities related to the exit costs were
reversed upon the resolution of the remaining claims, resulting in a credit
adjustment to "Other, net." In the third quarter of 2001, $32.0 million of
accrued exit costs were reversed as a credit adjustment to "Other, net." In the
fourth quarter of 2000, $106.6 million of accrued exit costs were reversed and
$0.6 million of involuntary termination benefits were added, resulting in a net
credit adjustment to "Other, net" of $106.0 million. The third quarter of 2001
and fourth quarter of 2000 adjustments made to the exit cost accrual were
primarily attributable to earlier than anticipated cessation of the DIRECTV
Japan broadcasting service, greater than anticipated commission payments for
subscriber migration and favorable settlements of various contracts and claims.
In the fourth quarter of 2000, Sky Perfect completed an initial public offering,
at which date the fair value of Hughes' interest (diluted by the public offering
to approximately 5.3%) in Sky Perfect was approximately $343 million. In the
third quarter of 2001 and fourth quarter of 2000, a portion of the decline in
the value of the Sky Perfect investment was determined to be
"other-than-temporary," resulting in a write-down of the carrying value of the
investment by $212 million and $86 million, respectively. At December 31, 2001,
the investment's market value approximated its carrying value. In October 2002,
Hughes sold all of its interest in Sky Perfect for approximately $105 million in
cash, resulting in a pre-tax loss of about $24.5 million.
Investments in Marketable Securities. Investments in marketable equity
securities stated at current fair value and classified as available-for-sale
totaled $98.2 million and $725.4 million at December 31, 2002 and 2001,
respectively, and were recorded in the Consolidated Balance Sheets in
"Investment and Other Assets." Investments in debt securities, stated at current
fair value and classified as available-for-sale, totaled $209.9 million at
December 31, 2002. Investments in debt securities with maturities of less than
one year totaling $99.8 million are carried in "Prepaid expenses and other."
Investments in debt securities with remaining maturities of six years totaling
$110.1 million are carried in "Investments and Other Assets."
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HUGHES ELECTRONICS CORPORATION
At December 31, 2002, $3.4 million in accumulated unrealized pre-tax losses were
recorded as part of OCI. At December 31, 2001, $323.1 million of accumulated
unrealized pre-tax gains were recorded as part of OCI. During 2002 and 2001,
Hughes recorded a write-down for other-than-temporary declines in certain
marketable equity investments of $148.9 million and $226.1 million,
respectively.
On August 21, 2002, Hughes sold about 8.8 million shares of Thomson common stock
for approximately $211.0 million in cash, resulting in a pre-tax gain of about
$158.6 million.
On November 19, 2001, Hughes repaid $74.9 million of debt pursuant to the terms
of a debt guarantee provided by Hughes for the benefit of Motient. In connection
with the payment, Hughes received from Motient 7.1 million common shares of XM
Satellite Radio Holdings Inc. stock, with a market value as of November 2001 of
$67.9 million and $3.6 million in cash. The repayment of Motient's debt released
Hughes of any further obligations related to Motient's indebtedness and
therefore Hughes reversed a related reserve of $39.5 million. The net effect of
these actions resulted in a credit of $36.1 million to "Other, net" in the
Consolidated Statement of Operations and Available Separate Consolidated Net
Income (Loss).
On July 31, 2001, Hughes sold about 4.1 million shares of Thomson common stock
for approximately $132.7 million in cash, resulting in a pre-tax gain of
approximately $108.3 million.
Pension Plans. Hughes recorded pension expense of $24.2 million in 2002, $10.2
million in 2001, and $10.9 million in 2000 related to its funded and unfunded
defined benefit retirement plans. Hughes contributed $7.9 million in 2002, $6.4
million in 2001 and $8.0 million in 2000 to its unfunded plans for benefit
payments. The pension benefit obligation of Hughes' defined benefit retirement
plans exceeded the fair value of plan assets by about $135.5 million at December
31, 2002 and $39.9 million at December 31, 2001. The increase in the unfunded
benefit obligation is largely the result of unfavorable equity market
performance, a lower discount rate and benefit payments made during 2002.
Hughes uses December 1 as the measurement date to determine the Projected
Benefit Obligation ("PBO") reported for year end and for the pension expense to
be recorded in the subsequent year. The discount rate assumption is determined
based on the yield of high quality fixed-income debt instruments. For purposes
of determining Hughes' PBO as of December 31, 2002 and pension expense in 2003,
Hughes used a discount rate of 7.00% as of December 1, 2002, a 1/4% reduction
from the 7.25% discount rate used in the prior year. A further 1/4% decrease in
the discount rate would increase the PBO by approximately $11.5 million and
reduce equity, net of taxes, by approximately $6.0 million, while a 1/4%
increase in the discount rate would decrease the PBO by approximately $11.2
million and increase equity, net of taxes, by approximately $5.5 million. These
assumed changes in discount rates would also result in a change to pension
expense of less than $1 million.
Hughes' expected return on plan assets assumption is derived from a review of
Hughes' long-term actual return on plan assets, annual survey data, and periodic
detailed studies conducted by Hughes' actuary. While the review gives
appropriate consideration to recent fund performance and historical returns, the
assumption is primarily a long-term, prospective rate. Based on the most recent
review, Hughes is revising its expected long-term return on plan assets
assumption for 2003 to 9.00%, a reduction from its previous level of 9.50%.
Although in 2002 and 2001, asset returns have been below Hughes' long-term
return on plan asset assumption, Hughes has achieved a compounded annual return
on plan assets of about 12% over the 20 year period ended December 1, 2002. An
additional 1/4% reduction in the expected return on plan assets would increase
the 2003 expense by approximately $1 million. Hughes' funding requirements would
not be impacted by changes in the discount rate or the expected return on plan
asset assumption.
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HUGHES ELECTRONICS CORPORATION
Commitments and Contingencies
Litigation
In connection with the 2000 sale by Hughes of its satellite systems
manufacturing businesses to Boeing, the stock purchase agreement provides for
potential adjustment to the purchase price based upon the final closing date
financial statements of the satellite systems manufacturing businesses. The
stock purchase agreement also provides for a dispute resolution process to
resolve any disputes that arise in determining the purchase price adjustment.
Based upon the final closing date financial statements of the satellite systems
manufacturing businesses that were prepared by Hughes, Boeing is owed a purchase
price adjustment of $164 million plus interest at a rate of 9.5% from the date
of sale, the total amount of which has been provided for in Hughes' consolidated
financial statements. However, Boeing has submitted additional proposed
adjustments, which are being resolved through the dispute resolution process. As
of December 31, 2002, approximately $670 million of proposed adjustments remain
unresolved. Hughes is contesting the matter in the arbitration process, which
will result in a binding decision unless the matter is otherwise settled.
Although Hughes believes it has adequately provided for the disposition of this
matter, the impact of its disposition cannot be determined at this time. 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 results
of operations and financial position.
Litigation is subject to uncertainties and the outcome of individual litigated
matters is not predictable with assurance. In addition to the above item,
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
December 31, 2002. After discussion with counsel representing Hughes in those
actions, it is the opinion of management that such liability is not expected to
have a material adverse effect on Hughes' consolidated results of operations and
financial position. See Item 3. Legal Proceedings under Part I for further
information.
Other
The in-orbit satellites of Hughes and its subsidiaries are subject to the risk
of failing prematurely due to, among other things, mechanical failure, collision
with objects in space or an inability to maintain proper orbit. Satellites are
subject to the risk of launch delay and failure, destruction and damage while on
the ground or during launch and failure to become fully operational once
launched. Delays in the production or launch of a satellite or the complete or
partial loss of a satellite, in-orbit or during launch, could have a material
adverse impact on the operation of Hughes' businesses. Hughes has, in the past,
experienced technical anomalies on some of its satellites. Service interruptions
caused by anomalies, depending on their severity, could result in claims by
affected customers for termination of their transponder agreements, cancellation
of other service contracts or the loss of other customers.
Hughes uses in-orbit and launch insurance to mitigate the potential financial
impact of satellite fleet in-orbit and launch failures unless the premium costs
are considered uneconomic relative to the risk of satellite failure. The
insurance generally covers the unamortized book value of covered satellites and
does not compensate for business interruption or loss of future revenues or
customers. Hughes relies on in-orbit spare satellites and excess transponder
capacity at key orbital slots to mitigate the effects of satellite failure on
its ability to provide service. Where insurance costs related to known satellite
anomalies are prohibitive, Hughes' insurance policies contain coverage
exclusions and
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HUGHES ELECTRONICS CORPORATION
Hughes is not insured for certain other satellites. The book value of satellites
that were insured with coverage exclusions amounted to $563.5 million and the
book value of the satellites that were not insured was $1,049.7 million at
December 31, 2002.
On February 19, 2003, PanAmSat filed proofs of loss under the insurance policies
for Galaxy XI and PAS-1R for constructive total losses based on degradation of
the solar panels. Service to existing customers has not been affected, and
PanAmSat expects that both of these satellites will continue to serve these
existing customers. The insurance policies for these satellites total
approximately $289 million and $345 million, respectively, and both include a
salvage provision for PanAmSat to share 10% of future revenues from these
satellites with their respective insurers if the proof of loss is accepted. The
availability and use of the proceeds from these insurance claims are restricted
by the agreements governing PanAmSat's debt obligations. No assurances can be
made that the proof of loss with respect to these two satellites will be
accepted by the insurers. PanAmSat is working with the satellite manufacturer to
determine the long-term implications to the satellites and will continue to
assess the operational impact these losses may have. At this time, based upon
all information currently available to PanAmSat, as well as planned
modifications to the operation of the satellites in order to maximize revenue
generation, PanAmSat currently expects to operate these satellites through their
expected economic ends of life, although a portion of the transponder capacity
on these satellites will not be useable during such time. Hughes currently
believes that the net book values of these satellites are fully recoverable and
does not expect a material impact on 2003 revenues as a result of the
difficulties on these two satellites.
PanAmSat and the manufacturer of the Galaxy VIII-iR satellite have agreed in
principle to terminate the Galaxy VIII-iR satellite construction contract. The
agreement is subject to the execution of mutually acceptable documentation, but
there can be no assurance that this will occur. In connection with the
termination of the contract, as of December 31, 2002, PanAmSat had a receivable
due from the satellite manufacturer of $72.0 million, which represents amounts
previously paid to the manufacturer (of approximately $58.8 million), liquidated
damages and interest owed under the construction agreement. PanAmSat expects
that it will collect substantially all of this receivable and does not
anticipate recording a charge to earnings related to this receivable. In
addition, PanAmSat has agreed with the Galaxy VIII-iR launch vehicle provider to
defer use of the launch to a future satellite. PanAmSat had intended to locate
the Galaxy VIII-iR satellite at 95 degrees west longitude. However, with the
successful launch and commencement of service on the Galaxy IIIC satellite at
this same orbital location in September 2002, PanAmSat believes it has
sufficient capacity to meet customer demand for services at this location.
Hughes is contingently liable under standby letters of credit and bonds in the
aggregate amount of $65.1 million which were undrawn at December 31, 2002 and
DLA has guaranteed $3.0 million of bank debt related to non-consolidated DLA
local operating companies, which is due in varying amounts through 2005.
Additionally, as described in "Liquidity and Capital Resources--Acquisitions and
Divestitures" above, DLA may be required to repurchase Clarin's 3.98% interest
in DLA for $195 million in November 2003. In the first quarter of 2003, Clarin
notified DLA that it believes that DLA's decision to initiate discussions with
Clarin and certain other programmers, suppliers and business associates to
address DLA's financial and operational challenges has caused DLA to be
responsible immediately to purchase Clarin's equity interest in DLA. DLA does
not believe that the purchase obligation has been accelerated. See Note 22 of
the Notes to the Consolidated Financial Statements in Item 8 for further
discussion of this matter.
The Hughes Board of Directors has approved several benefit plans designed to
provide benefits for the retention of about 205 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.
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HUGHES ELECTRONICS CORPORATION
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 $105 million for
retention benefits will be paid, with approximately 50% paid at the time of a
change-in-control and 50% paid up to 12 months following the date of a
change-in-control. The amount of severance benefits to be paid will be based
upon decisions that will be made relating to employee layoffs, if any, following
the date of a change-in-control. In addition, as of December 31, 2002,
approximately 30.5 million employee stock options to purchase shares of GM Class
H common stock will vest upon a qualifying change-in-control and up to an
additional 8.4 million employee stock options could vest if employees are laid
off within one year of a change-in-control.
At December 31, 2002, minimum future commitments under noncancelable operating
leases having lease terms in excess of one year were primarily for real property
and aggregated $769.4 million, payable as follows: $252.5 million in 2003,
$210.6 million in 2004, $107.6 million in 2005, $52.3 million in 2006, $46.1
million in 2007, and $100.3 million thereafter. Certain of these leases contain
escalation clauses and renewal or purchase options. Rental expenses under
operating leases, net of sublease rental income, were $68.0 million in 2002,
$59.7 million in 2001 and $55.9 million in 2000.
Hughes has minimum commitments under noncancelable satellite construction and
launch contracts and programming agreements. Minimum payments over the terms of
applicable contracts are anticipated to be approximately $3,461.5 million,
payable as follows: $825.1 million in 2003, $596.8 million in 2004, $437.5
million in 2005, $693.0 million in 2006, $762.1 million in 2007, and $147.0
million thereafter.
During the first quarter of 2003, Hughes and AOL agreed to terminate their
strategic alliance, which the companies had entered into in June 1999. In
connection with the termination of the alliance, Hughes recorded a pre-tax
charge of $23 million in the fourth quarter of 2002 to "Selling, general and
administrative expenses" and was released from its commitment to spend up to
approximately $1 billion in additional sales, marketing, development and
promotion efforts in support of certain specified products and services. Under
the terms of the agreement, HNS will continue to provide services to current
bundled AOL broadband subscribers using the HNS high-speed Internet satellite
service as the companies develop a transition plan to an unbundled service.
Certain Relationships and Related Party Transactions
Satellite Procurement Agreements. Currently, Hughes is a party to agreements
with Boeing Satellite Systems, Inc., formerly Hughes Space and Communications
Company ("HSC"), for the construction of four satellites with a total contract
value of $1,434.6 million that were entered into prior to the sale of HSC to
Boeing on October 6, 2000. Although Hughes believes the agreements are on
commercially reasonable terms, there can be no assurance that Hughes will be
able to procure satellites on similar terms in the future. At December 31, 2002,
Hughes' remaining obligation under these contracts was $178.3 million.
Income Taxes. Hughes and its domestic subsidiaries join with GM in filing a
consolidated U.S. federal income tax return. The terms of the current tax
allocation agreement with GM generally require that Hughes provide for income
taxes as if it filed on a separate return basis. At December 31, 2002, the
Consolidated Balance Sheets reflect deferred tax assets attributable to the
future benefits from the utilization of certain foreign tax credits, alternative
minimum tax credits, general business credits and net operating losses of
acquired subsidiaries available to be carried forward in the amounts of $61.5
million, $46.3 million, $14 million and $98.3 million, respectively.
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HUGHES ELECTRONICS CORPORATION
Equity Method Investments. Hughes holds 19.5% and 40.0% equity interests in
LOC's that are the exclusive distributors of DIRECTV in Venezuela and Puerto
Rico, respectively. During 2001, Hughes began recording approximately 75.0% of
the net losses incurred from these entities due to the accumulation of net
losses in excess of the other investors' investments, and Hughes' continued
funding of those businesses. During the years ended December 31, 2002, 2001 and
2000, DLA recognized revenues of $189.9 million, $160.6 million, and $90.1
million, respectively, primarily for sales of programming to the LOC's.
Broadcast programming and other costs associated with these revenues were $110.4
million, $90.7 million, and $51.6 million during the years ended December 31,
2002, 2001 and 2000, respectively. Also during the years ended December 31,
2002, 2001 and 2000, Hughes recognized equity method losses in "Other, net" of
$54.1 million, $16.2 million, and $18.8 million, respectively. DLA had accounts
receivable of $310.9 million and $217.5 million from the LOC's as of December
31, 2002 and 2001, respectively.
Accounting Changes
Hughes adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" on January 1, 2002. SFAS No. 144 refined existing impairment
accounting guidance and extended the use of this accounting to discontinued
operations. SFAS No. 144 allowed the use of discontinued operations accounting
treatment for both reporting segments and distinguishable components thereof.
SFAS No. 144 also eliminated 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. However, operating results of discontinued businesses such
as DIRECTV Broadband, which previously would not have been reported as a
discontinued operation, will be reported as a discontinued operation under this
new standard in future periods.
Hughes also adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on
January 1, 2002. SFAS No. 142 required that existing and future goodwill and
intangible assets with indefinite lives not be amortized, but written-down, as
needed, based upon an impairment analysis that must occur at least annually, or
sooner if an event occurs or circumstances change that would more likely than
not result in an impairment loss. All other intangible assets are amortized over
their estimated useful lives. SFAS No. 142 required that Hughes perform step one
of a two-part transitional impairment test to compare the fair value of each
reportable unit with its respective carrying amount, including goodwill. If the
carrying value exceeds the fair value, step two of the transitional impairment
test must be performed to measure the amount of the impairment loss, if any.
SFAS No. 142 also required that intangible assets be reviewed as of the date of
adoption to determine if they continue to qualify as intangible assets under the
criteria established under SFAS No. 141, "Business Combinations," and to the
extent previously recorded intangible assets do not meet the criteria that they
be reclassified to goodwill.
As part of Hughes' acquisition of PRIMESTAR in 1999, dealer network and
subscriber base intangible assets were identified and valued in accordance with
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations." The
dealer network intangible asset originally valued as part of Hughes' acquisition
of PRIMESTAR was based on established distribution, customer service and
marketing capability that had been put in place by PRIMESTAR. The subscriber
base intangible asset originally valued as part of Hughes' acquisition of
PRIMESTAR was primarily based on the expected non-contractual future cash flows
to be earned over the life of the PRIMESTAR subscribers converted to the DIRECTV
service. In accordance with SFAS No. 142, Hughes completed a review of its
intangible assets and determined that the previously recorded dealer network and
subscriber base intangible assets established under APB Opinion No. 16 did not
meet the contractual or other legal
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HUGHES ELECTRONICS CORPORATION
rights criteria. The dealer network and subscriber base intangible assets also
did not meet the separability criteria because the intangible assets could not
be sold, transferred, licensed, rented or exchanged individually or in
combination with other assets or liabilities, apart from selling the entire
DIRECTV business. As a result, in the first quarter of 2002, Hughes reclassified
$209.8 million, net of $146.0 million of accumulated amortization, of previously
reported intangible assets to goodwill. As a result of this reclassification,
approximately $13.2 million of quarterly amortization expense ceased, beginning
January 1, 2002. In October 2002, Emerging Issues Task Force ("EITF") Issue No.
02-17, "Recognition of Customer Relationship Intangible Assets Acquired in a
Business Combination" was issued, which gave clarifying guidance on the
treatment of certain subscriber-related relationships. As a result, as of the
beginning of the fourth quarter of 2002, the subscriber base and dealer network
intangible assets were reinstated and are being amortized over their estimated
remaining useful lives of 2 and 12 years, respectively. As a result of this
change, Hughes recognized amortization expense of $18.5 million in the fourth
quarter of 2002.
In the first quarter of 2002, Hughes also completed the required transitional
impairment test for intangible assets with indefinite lives, which consist of
FCC licenses for direct-to-home broadcasting frequencies ("Orbital Slots"), and
determined that no impairment existed because the fair value of these assets
exceeded the carrying value as of January 1, 2002.
In the second quarter of 2002, with the assistance of an independent valuation
firm, Hughes completed step one of the transitional test to determine whether a
potential impairment existed for goodwill recorded at January 1, 2002. Primarily
based on the present value of expected future cash flows, it was determined that
the fair values of DIRECTV U.S. and the Satellite Services segment exceeded
their carrying values, therefore no further impairment test was required. It was
also determined that the carrying values of DLA and DIRECTV Broadband exceeded
their fair values, therefore requiring step two of the impairment test be
performed. No goodwill or intangible assets existed at the Network Systems
segment and therefore no impairment test was required.
Hughes completed step two of the impairment test for DLA and DIRECTV Broadband
in the fourth quarter of 2002 as required by SFAS No. 142. Step two of the
transitional test requires the comparison of the implied value of the reporting
unit goodwill with the carrying amount of that goodwill. If the carrying amount
of reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss will be recognized in an amount equal to that excess. In the
initial year of adoption, the impairment loss, if any, is recorded as a
cumulative effect of accounting change, net of taxes. As a result of completing
step two, Hughes determined that $631.8 million and $107.9 million representing
all of the goodwill recorded at DLA and DIRECTV Broadband, respectively, was
impaired. In addition, Hughes also recorded a $16.0 million charge representing
its share of the goodwill impairment of an equity method investee. Therefore,
Hughes recorded a cumulative effect of accounting change, net of taxes, of
$681.3 million ($755.7 million pre-tax) as of January 1, 2002 in the
Consolidated Statements of Operations and Available Separate Consolidated Net
Income (Loss).
In accordance with SFAS No. 142, Hughes will perform its annual impairment test
for all reporting units during the fourth quarter of each year, commencing in
the fourth quarter of 2002. If an impairment loss results from the annual
impairment test, the loss will be recorded as a pre-tax charge to operating
income. In the fourth quarter of 2002, with the assistance of an independent
valuation firm, Hughes completed its first annual impairment test for DIRECTV
U.S. and the Satellite Services segment. The independent valuation, which was
primarily based on the present value of expected future cash flows, resulted in
fair values for DIRECTV U.S. and for the Satellite Services segment that
exceeded Hughes' carrying values. As a result, no impairment loss existed for
DIRECTV U.S. and the Satellite Services segment for 2002.
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HUGHES ELECTRONICS CORPORATION
Hughes adopted SFAS No. 141, "Business Combinations" on July 1, 2001. SFAS No.
141 required that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and prohibited 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 required Hughes to carry all
derivative financial instruments on the balance sheet at fair value. In
accordance with the transition provisions of SFAS No. 133, Hughes recorded a
one-time after-tax charge of $7.4 million on January 1, 2001 as a cumulative
effect of accounting change in the Consolidated Statements of Operations and
Available Separate Consolidated Net Income (Loss) and an after-tax unrealized
gain of $0.4 million in "Accumulated other comprehensive income (loss)."
New Accounting Standards
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities--an
interpretation of ARB No. 51" ("FIN 46"). FIN 46 requires the consolidation of
affiliated companies where a controlling financial interest is achieved through
arrangements other than voting interests. Affiliated companies are considered
variable interest entities in instances where affiliate capital is insufficient
to permit the affiliate to finance its activities without additional
subordinated financial support, and in certain other circumstances. The
determination as to whether an affiliate is a variable interest entity must be
based on the circumstances on the date that an entity becomes involved with an
affiliate or when certain events occur that would indicate a potential change in
a previous determination. Consolidation of an affiliate is required when it is
determined that the affiliate is a variable interest entity and that the
investor will absorb a majority of the expected losses or residual returns if
they occur. As required, Hughes will apply the provisions of FIN 46 for all
investments in affiliates after January 31, 2003. For investments in variable
interest entities made before February 1, 2003, Hughes will follow the
provisions of FIN 46, as required, no later than July 1, 2003. The adoption of
this standard could result in the consolidation of certain affiliates which were
previously accounted for under the equity method of accounting. Such adoption
would be reflected as a cumulative effect of accounting change in the
consolidated statements of operations.
Hughes has identified the partially-owned local operating companies providing
DLA programming services in Venezuela and Puerto Rico, of which Hughes owns
19.5% and 40.0%, respectively, as potential variable interest entities. Hughes
currently accounts for these investments under the equity method of accounting
and reflects approximately 75.0% of their net income or loss in Hughes'
consolidated statements of operations due to the accumulation of net losses in
excess of the other investors' investments.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123." This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide two alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Hughes currently follows the
intrinsic value based method of accounting for stock- based compensation of APB
No. 25. Hughes will adopt the fair value based method of accounting for
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HUGHES ELECTRONICS CORPORATION
stock-based compensation for all stock-based compensation granted after December
31, 2002 in accordance with the original transition provisions of SFAS No. 123.
Adoption of this standard will result in an increase in compensation cost
recognized in operating results. Had Hughes followed the fair value based method
of accounting for stock-based compensation under SFAS No. 123 for the years
ended December 31, 2002, 2001 and 2000, pro forma earnings (loss) used for
computation of available separate consolidated net income (loss) would have been
$(1,112.4) million, $(946.5) million and $585.3 million, respectively.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21
addresses determination of whether an arrangement involving more than one
deliverable contains more than one unit of accounting and how the related
revenues should be measured and allocated to the separate units of accounting.
EITF Issue No. 00-21 will apply to revenue arrangements entered into after June
30, 2003; however, upon adoption, the EITF allows the guidance to be applied on
a retroactive basis, with the change, if any, reported as a cumulative effect of
accounting change in the consolidated statements of operations. Hughes has not
yet determined the impact this issue will have on its consolidated results of
operations or financial position, if any.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 generally requires the
recognition of costs associated with exit or disposal activities when incurred
rather than at the date of a commitment to an exit or disposal plan. SFAS No.
146 replaces previous accounting guidance provided by EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Hughes is required to implement SFAS No. 146 on January 1, 2003. Hughes'
adoption of this standard on January 1, 2003 is not expected to have a
significant impact on Hughes' consolidated results of operations or financial
position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
SFAS No. 145 eliminates the requirement to present gains and losses on the early
extinguishment of debt as an extraordinary item, and resolves accounting
inconsistencies for certain lease modifications. Hughes' adoption of this
standard on January 1, 2003 is not expected to have an impact on Hughes'
consolidated results of operations or financial position.
Security Ratings
Debt ratings by the various rating agencies reflect each agency's opinion of the
ability of issuers to repay debt obligations as they come due. Ratings below
Baa3 and BBB- denote sub-investment grade status for Moody's and S&P,
respectively. Ratings in the Ba/BB range generally indicate moderate protection
of interest and principal payments, potentially outweighed by exposure to
uncertainties or adverse conditions. Ratings in the B range generally indicate
that the obligor currently has financial capacity to meet its financial
commitments but there is limited assurance over any long period of time that
interest and principal payments will be made or that other terms will be
maintained. In general, lower ratings result in higher borrowing costs. A
security rating is not a recommendation to buy, sell, or hold securities and may
be subject to revision or withdrawal at any time by the assigning rating
organization.
Hughes
On December 11, 2002, Moody's Investor Services ("Moody's") confirmed Hughes'
Ba3 senior secured and senior implied rating. The rating outlook, which
previously remained on review for possible
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HUGHES ELECTRONICS CORPORATION
downgrade pending the outcome of the EchoStar Merger, was revised to stable, and
Moody's stated that the credit focus had turned to liquidity and Hughes
obtaining permanent financing for its long-term needs. The rating action
resulted from the December 10, 2002 announcement that Hughes received a $600
million cash settlement payment related to the terminated merger agreement with
EchoStar.
On December 11, 2002, Standard & Poor's Ratings Services ("S&P") affirmed its
long-term corporate credit rating on Hughes of B+ and its rating of BB- on
Hughes' senior secured credit facility. At the same time, S&P revised its Credit
Watch implications on Hughes from negative to developing. The rating action
stated that the termination of the EchoStar merger agreement on December 10,
2002 provided meaningful cash to Hughes and enabled Hughes to freely pursue
strategic alternatives. S&P further noted that considerable uncertainty
surrounds the eventual ownership of Hughes and that a new assessment would be
needed if Hughes enters into merger discussions with another party.
DIRECTV
On February 19, 2003, Moody's assigned to DIRECTV a Ba2 senior secured rating
with respect to its senior secured credit facilities and a B1 senior unsecured
rating on the $1.4 billion of senior unsecured notes. Moody's has also assigned
a Ba3 senior implied and a B2 issuer rating to DIRECTV. The outlook is stable.
The rating outlook presumed diminishing capital and investment requirements,
combined with operating profit improvement to generate eventual free cashflow,
and therefore the ratings were considered to be moderately prospective.
On February 12, 2003, S&P assigned a BB- rating on the senior secured credit
facilities and a B rating on the $1.4 billion of senior unsecured notes. The
ratings were placed on Credit Watch with positive implications, based on S&P's
assessment of the likelihood that Hughes or DIRECTV could be acquired by an
entity with higher credit quality than Hughes' B+ corporate credit rating.
PanAmSat
On December 11, 2002 Moody's confirmed PanAmSat's Ba2 senior secured debt rating
and Ba3 senior unsecured debt rating. The rating actions resulted from the
termination of the EchoStar merger agreement and the announcement that Hughes
would retain its 81% interest in PanAmSat. The outlook for the PanAmSat rating
is stable.
On December 11, 2002 S&P revised its Credit Watch implications for the corporate
credit rating on PanAmSat to developing from negative, following the termination
of the EchoStar merger agreement. On November 18, 2002 S&P lowered PanAmSat's
corporate credit rating to B+ from BB-. A BB- rating was assigned to PanAmSat's
senior secured credit facilities and notes, and a B- rating was assigned to the
$800 million of senior notes which are unsecured. S&P stated that the PanAmSat
downgrade reflected Hughes' majority ownership and not PanAmSat's stand-alone
operating performance or financial conditions, which was considered stable.
Market Risk Disclosure
The following discussion and the estimated amounts generated from the
sensitivity analyses referred to below include forward-looking statements of
market risk which assume for analytical purposes that certain adverse market
conditions may occur. Actual future market conditions may differ materially from
such assumptions because the amounts noted below are the result of analyses used
for the purpose of assessing possible risks and the mitigation thereof.
Accordingly, the forward-looking statements should not be considered projections
by Hughes of future events or losses.
General
Hughes' cash flows and earnings are subject to fluctuations resulting from
changes in foreign currency exchange rates, interest rates and changes in the
market value of its equity investments. Hughes manages its exposure to these
market risks through internally established policies and procedures and, when
deemed appropriate, through the use of derivative financial instruments.
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HUGHES ELECTRONICS CORPORATION
Hughes enters into derivative instruments only to the extent considered
necessary to meet its risk management objectives, and does not enter into
derivative contracts for speculative purposes.
Foreign Currency Risk
Hughes generally conducts its business in U.S. dollars with some business
conducted in a variety of foreign currencies and therefore is exposed to
fluctuations in foreign currency exchange rates. Hughes' objective in managing
its exposure to foreign currency changes is to reduce earnings and cash flow
volatility associated with foreign exchange rate fluctuations. Accordingly,
Hughes enters into foreign exchange contracts to mitigate risks associated with
foreign currency denominated assets, liabilities, commitments and anticipated
foreign currency transactions. By policy, Hughes maintains coverage between
minimum and maximum percentages of its anticipated foreign exchange exposures.
The gains and losses on derivative foreign exchange contracts offset changes in
value of the related exposures. The impact of a hypothetical 10% adverse change
in exchange rates on the fair values of foreign exchange contracts and foreign
currency denominated assets and liabilities would be a charge of $12.5 million
and $11.6 million, net of taxes, at December 31, 2002 and December 31, 2001,
respectively.
Investments
Hughes maintains investments in publicly-traded common stock of unaffiliated
companies and is therefore subject to equity price risk. These investments are
classified as available-for-sale and, consequently, are reflected in Hughes'
Consolidated Balance Sheets at fair value with unrealized gains or losses, net
of taxes, recorded as part of OCI, a separate component of stockholder's equity.
Declines in market value that are judged to be "other-than-temporary" are
charged to "Other, net" in the Consolidated Statements of Operations and
Available Separate Consolidated Net Income (Loss). The fair values of the
investments in such common stock were $98.2 million and $725.4 million at
December 31, 2002 and December 31, 2001, respectively, based on closing market
prices. A 10% decline in the market price of these investments would cause the
fair value of the investments in common stock to decrease by $9.8 million and
$72.5 million at December 31, 2002 and December 31, 2001, respectively. No
actions have been taken by Hughes to hedge this market risk exposure.
Interest Rate Risk
Hughes is subject to interest rate risk related to its outstanding debt of $3.1
billion at December 31, 2002 and $2.6 billion at December 31, 2001. As of
December 31, 2002, debt consisted of PanAmSat's fixed rate borrowings of
$1,550.0 million and variable rate borrowings of $1,000 million, Hughes'
variable rate borrowings of $506.3 million, and various other floating and fixed
rate borrowings. Hughes is subject to fluctuating interest rates, which may
adversely impact its consolidated results of operations and cash flows for its
variable rate bank borrowings. At December 31, 2002, outstanding borrowings bore
interest rates ranging from 4.3% to 16.0%. As of December 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 $15 million.
Credit Risk
Hughes is exposed to credit risk in the event of non-performance by the
counterparties to its derivative financial instrument contracts. While Hughes
believes this risk is remote, credit risk is managed through the periodic
monitoring and approval of financially sound counterparties.
* * *
IV-53
HUGHES ELECTRONICS CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Hughes Electronics Corporation:
We have audited the accompanying Consolidated Balance Sheets of Hughes
Electronics Corporation as of December 31, 2002 and 2001, and the related
Consolidated Statements of Operations and Available Separate Consolidated Net
Income (Loss), Consolidated Statements of Changes in Stockholder's Equity and
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2002. Our audits also included the financial statement
schedules listed in Item 15. These financial statements and the financial
statement schedules are the responsibility of Hughes Electronics Corporation's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hughes Electronics Corporation at
December 31, 2002 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in Note 3 of the Notes to the Consolidated Financial Statements,
effective January 1, 2002, Hughes Electronics Corporation changed its method of
accounting for goodwill and other intangible assets to conform to Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ DELOITTE & TOUCHE LLP
- ------------------------------
Deloitte & Touche LLP
Los Angeles, California
January 15, 2003
(March 6, 2003 as to Note 22)
IV-54
HUGHES ELECTRONICS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS)
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
(Dollars in Millions)
Revenues
Direct broadcast, leasing and other services........... $8,031.0 $7,204.3 $6,262.2
Product sales.......................................... 903.9 1,059.7 1,025.4
----- ------- -------
Total Revenues..................................... 8,934.9 8,264.0 7,287.6
------- ------- -------
Operating Costs and Expenses, Exclusive of Depreciation
and Amortization Expenses Shown Below
Broadcast programming and other costs................. 4,187.1 3,335.3 2,817.5
Cost of products sold................................. 818.6 900.2 815.1
Selling, general and administrative expenses.......... 3,261.2 3,638.6 3,061.0
Depreciation and amortization......................... 1,067.1 1,147.7 948.1
------- ------- -------
Total Operating Costs and Expenses................ 9,334.0 9,021.8 7,641.7
------- ------- -------
Operating Loss........................................... (399.1) (757.8) (354.1)
Interest income.......................................... 24.5 56.7 49.3
Interest expense......................................... (336.2) (195.9) (218.2)
Other, net............................................... 425.5 (92.7) (292.6)
----- ------ -------
Loss From Continuing Operations Before Income Taxes,
Minority Interests and Cumulative Effect of
Accounting Changes..................................... (285.3) (989.7) (815.6)
Income tax benefit....................................... 94.4 325.6 406.1
Minority interests in net (earnings) losses of
subsidiaries........................................... (21.6) 49.9 54.1
------ ------ -----
Loss from continuing operations before cumulative effect of
accounting changes..................................... (212.5) (614.2) (355.4)
Income from discontinued operations, net of taxes........ -- -- 36.1
Gain on sale of discontinued operations, net of taxes.... -- -- 1,132.3
---- ---- -------
Income (loss) before cumulative effect of accounting
changes................................................ (212.5) (614.2) 813.0
Cumulative effect of accounting changes, net of taxes.... (681.3) (7.4) --
----- ----- ----
Net Income (Loss)........................................ (893.8) (621.6) 813.0
Adjustment to exclude the effect of GM purchase accounting -- 3.3 16.9
---- ---- -----
Earnings (loss) excluding the effect of GM purchase
accounting adjustment.................................. (893.8) (618.3) 829.9
Preferred stock dividends................................ (46.9) (96.4) (97.0)
------ ------ ------
Earnings (Loss) Used for Computation of Available Separate
Consolidated Net Income (Loss)......................... $(940.7) $(714.7) $732.9
===== ===== =====
Available Separate Consolidated Net Income (Loss)
Average number of shares of General Motors Class H Common
Stock outstanding (in millions) (Numerator)............ 919.5 876.3 681.2
Average Class H dividend base (in millions) (Denominator). 1,343.1 1,300.0 1,297.0
Available Separate Consolidated Net Income (Loss)........ $(644.0) $(481.8) $384.9
===== ===== =====
- -------------------
Reference should be made to the Notes to the Consolidated Financial Statements.
IV-55
HUGHES ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
-------------
2002 2001
(Dollars in Millions)
ASSETS
Current Assets
Cash and cash equivalents...................................... $1,128.6 $700.1
Accounts and notes receivable, net of allowances of
$102.4 and $113.6............................................ 1,133.9 1,090.5
Contracts in process........................................... 165.9 153.1
Inventories.................................................... 230.3 360.1
Deferred income taxes.......................................... 97.7 118.9
Prepaid expenses and other..................................... 900.0 918.4
----- -----
Total Current Assets..................................... 3,656.4 3,341.1
Satellites, net................................................... 4,922.6 4,806.6
Property, net..................................................... 2,017.4 2,197.8
Goodwill, net..................................................... 5,775.2 6,496.6
Intangible Assets, net............................................ 644.7 660.2
Net Investment in Sales-type Leases............................... 161.9 227.0
Investments and Other Assets...................................... 706.9 1,480.8
-------- --------
Total Assets............................................. $17,885.1 $19,210.1
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable.............................................. $1,039.0 $1,227.5
Deferred revenues............................................. 166.4 178.5
Short-term borrowings and current portion of long-term debt... 727.8 1,658.5
Accrued liabilities and other................................. 1,269.9 1,342.0
------- -------
Total Current Liabilities............................... 3,203.1 4,406.5
------- -------
Long-Term Debt................................................... 2,390.0 988.8
Other Liabilities and Deferred Credits........................... 1,178.4 1,465.1
Deferred Income Taxes............................................ 581.2 746.5
Commitments and Contingencies
Minority Interests............................................... 555.3 531.3
Stockholder's Equity
Capital stock and additional paid-in capital.................. 10,151.8 9,561.2
Preferred stock, Series A..................................... -- 1,498.4
Convertible preferred stock, Series B......................... 914.1 --
Retained earnings (deficit)................................... (1,027.1) (86.4)
-------- --------
Subtotal Stockholder's Equity.................................... 10,038.8 10,973.2
Accumulated Other Comprehensive Income (Loss)
Minimum pension liability adjustment........................ (32.3) (17.3)
Accumulated unrealized gains (losses) on securities
and derivatives........................................... (3.3) 192.6
Accumulated foreign currency translation adjustments........ (26.1) (76.6)
------ ------
Accumulated other comprehensive income (loss)................. (61.7) 98.7
------- --------
Total Stockholder's Equity.............................. 9,977.1 11,071.9
------- --------
Total Liabilities and Stockholder's Equity.............. $17,885.1 $19,210.1
======== ========
Reference should be made to the Notes to the Consolidated Financial Statements.
IV-56
HUGHES ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Accumulated
Capital Stock Retained Other Total
and Additional Retained Earnings Comprehensive Stockholder's Comprehensive
Paid-In Capital Stock (Deficit) Income (Loss) Equity Income (Loss)
--------------- -------- --------- ------------- ------------- -------------
(Dollars in Millions)
Balance at December 31, 1999... $9,809.5 $1,487.5 $(84.4) $468.7 $11,681.3
Net Income..................... 813.0 813.0 $813.0
Preferred stock................ 8.2 (3.2) 5.0
Preferred stock dividends...... (93.8) (93.8)
Stock options exercised........ 67.9 67.9
Tax benefit from exercise of GM
Class H common stock options.. 62.3 62.3
Subsidiary common stock issued in
connection with acquisition and other 34.1 34.1
Minimum pension liability adjustment (8.8) (8.8) (8.8)
Foreign currency translation adjustments (25.9) (25.9) (25.9)
Unrealized holding losses on securities. (209.0) (209.0) (209.0)
-----
Comprehensive income........... $569.3
------- ------- ----- ----- -------- =====
Balance at December 31, 2000... 9,973.8 1,495.7 631.6 225.0 12,326.1
Net Loss....................... (621.6) (621.6) $(621.6)
Preferred stock................ 2.7 (2.7)
Preferred stock dividends...... (93.7) (93.7)
Stock options exercised........ 22.3 22.3
Tax benefit from exercise of GM
Class H common stock options.. 7.1 7.1
Adjustment related to Raytheon
purchase price settlement..... (574.2) (574.2)
Subsidiary common stock issued in
connection with acquisition
and other..................... 132.2 132.2
Minimum pension liability adjustment (1.2) (1.2) (1.2)
Foreign currency translation adjustments (60.7) (60.7) (60.7)
Cumulative effect of accounting change 0.4 0.4 0.4
Unrealized gains (losses) on securities
and derivatives:.
Unrealized holding losses.... (121.4) (121.4) (121.4)
Less: reclassification
adjustment for net
losses recognized
during the period........... 56.6 56.6 56.6
----
Comprehensive loss............. $(747.9)
------- ------- ---- ---- -------- =====
Balance at December 31, 2001... 9,561.2 1,498.4 (86.4) 98.7 11,071.9
Net Loss....................... (893.8) (893.8) $(893.8)
Preferred stock................ 1.6 (1.6)
Preferred stock dividends...... (45.3) (45.3)
Stock options exercised........ 7.7 7.7
Tax benefit from exercise of GM Class H
common stock options.......... 1.2 1.2
Cancellation of Hughes Series A
Preferred Stock............... 1,500.0 (1,500.0)
Issuance of Hughes Series B Convertible
Preferred Stock............... (914.1) 914.1
Other.......................... (4.2) (4.2)
Minimum pension liability adjustment (15.0) (15.0) (15.0)
Foreign currency translation adjustments:
Unrealized gains............. 1.6 1.6 1.6
Less: reclassification adjustment for net
losses recognized during the period 48.9 48.9 48.9
Unrealized losses on securities and
derivatives:
Unrealized holding losses.... (96.8) (96.8) (96.8)
Less: reclassification adjustment for net
gains recognized during the period. (99.1) (99.1) (99.1)
-------
Comprehensive loss............. $(1,054.2)
--------- ------ ------- ---- -------- =======
Balance at December 31, 2002... $10,151.8 $914.1 $(1,027.1) $(61.7) $9,977.1
========= ====== ======= ==== =======
Reference should be made to the Notes to the Consolidated Financial Statements.
IV-57
HUGHES ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
(Dollars in Millions)
Cash Flows from Operating Activities
Loss from continuing operations before cumulative
effect of accounting changes........................... $(212.5) $(614.2) $(355.4)
Adjustments to reconcile loss from continuing
operations before cumulative effect of accounting
changes to net cash provided by operating activities.
Depreciation and amortization....................... 1,067.1 1,147.7 948.1
Equity losses from unconsolidated affiliates........ 70.1 61.3 164.2
Net gain from sale of investments................... (84.1) (130.6) --
Net loss on write-down of investments............... 180.6 239.0 --
Net (gain) loss on discontinuation of businesses.... 51.7 (32.0) 128.4
Loss on disposal of assets.......................... 53.8 15.3 14.6
Net gain from insurance claim....................... (40.1) -- --
Gross (profit) loss on sales-type leases............ 18.7 (32.7) (136.4)
Deferred income taxes and other..................... 125.0 93.3 377.1
Change in other operating assets and liabilities
Accounts and notes receivable...................... (65.6) 49.9 (164.4)
Inventories........................................ 129.8 (19.8) (101.9)
Prepaid expenses and other......................... 233.1 (23.3) 5.3
Accounts payable................................... (187.5) (320.8) 162.0
Accrued liabilities................................ 66.2 (100.7) (132.1)
Other.............................................. (280.2) (142.1) 181.2
------ ------ -------
Net Cash Provided by Operating Activities....... 1,126.1 190.3 1,090.7
------- ----- -------
Cash Flows from Investing Activities
Investment in companies, net of cash acquired........... (27.0) (287.8) (181.2)
Purchase of short-term investments...................... (99.8) -- --
Expenditures for property............................... (566.4) (799.4) (939.0)
Expenditures for satellites............................. (731.7) (944.1) (777.1)
Proceeds from sale of investments....................... 322.4 204.9 4,040.3
Proceeds from insurance claims.......................... 215.0 132.4 36.2
Other, net.............................................. 0.3 (47.2) 31.6
------- ------- -------
Net Cash Provided by (Used in) Investing
Activities (887.2) (1,741.2) 2,210.8
------- ------- -------
Cash Flows from Financing Activities
Net increase (decrease) in notes and loans payable...... (1,147.3) 1,187.4 (496.6)
Long-term debt borrowings............................... 1,801.1 1,642.6 5,262.2
Repayment of long-term debt............................. (183.3) (1,515.2) (5,591.5)
Debt issuance costs..................................... (85.4) -- --
Stock options exercised................................. 7.4 21.8 70.1
Preferred stock dividends paid to General Motors........ (68.7) (93.7) (93.8)
Payment of Raytheon settlement.......................... (134.2) (500.0) --
------- ------- -----
Net Cash Provided by (Used in) Financing Activities 189.6 742.9 (849.6)
----- ------- -----
Net cash provided by (used in) continuing operations..... 428.5 (808.0) 2,451.9
Net cash used in discontinued operations................. -- -- (1,182.0)
----- ----- --------
Net increase (decrease) in cash and cash equivalents..... 428.5 (808.0) 1,269.9
Cash and cash equivalents at beginning of the year....... 700.1 1,508.1 238.2
----- ------- -------
Cash and cash equivalents at end of the year............. $1,128.6 $700.1 $1,508.1
======== ====== ========
Reference should be made to the Notes to the Consolidated Financial Statements.
IV-58
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation and Description of Business
Hughes Electronics Corporation ("Hughes") is a wholly-owned subsidiary of
General Motors Corporation ("GM"). The GM Class H common stock tracks the
financial performance of Hughes.
Hughes is a leading provider of digital entertainment, information and
communication services and satellite-based private business networks. Hughes is
the world's leading digital multi-channel entertainment service provider, based
on the number of subscribers, with its programming distribution service known as
DIRECTV(R), which was introduced in the United States ("U.S.") in 1994 and was
the first high-powered, all digital, direct-to-home television distribution
service in North America. DIRECTV Broadband, Inc. ("DIRECTV Broadband"),
formerly known as Telocity Delaware, Inc. ("Telocity"), which was acquired by
Hughes in April 2001, provided digital subscriber line ("DSL") services
purchased from wholesale providers. DIRECTV Latin America, LLC, ("DLA"), which
is 74.7% owned by Hughes, is the leading direct-to-home satellite television
service in Latin America and the Caribbean that began service in 1996. Hughes is
the owner and operator of one of the largest commercial satellite fleets in the
world through its approximately 81% owned subsidiary, PanAmSat Corporation
("PanAmSat"). Hughes is also a leading provider of broadband services and
products, including satellite wireless communications ground equipment and
business communications services. Hughes' equipment and services are applied in,
among other things, data, video and audio transmission, cable and network
television distribution, private business networks, digital cellular
communications and direct-to-home satellite broadcast distribution of television
programming.
Hughes announced, in December of 2002, that DIRECTV Broadband would close its
high-speed Internet service business in the first quarter of 2003 and transition
existing customers to alternative service providers. See further discussion of
this item in Note 18.
Revenues, operating costs and expenses, and other non-operating results for the
discontinued operations of the satellite systems manufacturing businesses
("Satellite Businesses"), which were sold to The Boeing Company ("Boeing") on
October 6, 2000, are excluded from Hughes' results from continuing operations
for 2000. Alternatively, the financial results are presented in Hughes'
Consolidated Statements of Operations and Available Separate Consolidated Net
Income (Loss) in a single line item entitled "Income from discontinued
operations, net of taxes" and the net cash flows are presented in the
Consolidated Statements of Cash Flows as "Net cash used in discontinued
operations." See further discussion in Note 18.
The accompanying consolidated financial statements include the applicable
portion of intangible assets, including goodwill, and related amortization
resulting from purchase accounting adjustments associated with GM's purchase of
Hughes in 1985, with certain amounts allocated to the Satellite Businesses. With
Hughes' adoption of Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," Hughes ceased amortization of
goodwill and intangible assets with indefinite lives on January 1, 2002. See
further discussion in Note 3.
On October 28, 2001, Hughes and GM, together with EchoStar Communications
Corporation ("EchoStar"), announced the signing of definitive agreements that
provided for the split-off of Hughes from GM and the subsequent merger of the
Hughes business with EchoStar (the "Merger"). Hughes, GM and EchoStar entered
into a termination agreement on December 9, 2002, pursuant to which GM,
IV-59
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Hughes and EchoStar agreed to terminate the merger agreement and certain related
agreements. Under the terms of the termination agreement, EchoStar paid Hughes
$600 million in cash and Hughes retained its 81% ownership position in PanAmSat.
GM has announced that it is currently evaluating a variety of strategic options
for Hughes, including a reduction or elimination of its retained economic
interest in Hughes, transactions that would involve strategic investors and
public offerings of GM Class H common stock or related securities for cash or in
exchange for outstanding GM debt obligations. Any such transaction might involve
the separation of Hughes from GM. GM and Hughes have engaged in preliminary
discussions with some parties. No other decisions have been made regarding which
options or combinations of options, if any, GM will pursue. Due to the numerous
uncertainties involved in these matters, there can be no assurance that any
transaction or offering will be announced or completed or as to the time at
which such a transaction or offering might be completed.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying financial statements are presented on a consolidated basis and
include the accounts of Hughes and its domestic and foreign subsidiaries that
are more than 50% owned or controlled by Hughes after elimination of
intercompany accounts and transactions. Hughes allocates earnings and losses to
minority interests only to the extent of a minority investor's investment in a
subsidiary.
Use of Estimates in the Preparation of the Consolidated Financial Statements
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect amounts
reported therein. Management bases its estimates and assumptions on historical
experience and on various other factors that are believed to be reasonable under
the circumstances. Due to the inherent uncertainty involved in making estimates,
actual results reported in future periods may be affected by changes in those
estimates.
Reclassifications
During 2002, Hughes changed the classification of certain subscriber acquisition
costs. As a result, the costs of free programming and the costs of installation
and hardware subsidies for subscribers added through DIRECTV's direct sales
program are now included as part of "Broadcast programming and other costs" in
the Consolidated Statements of Operations and Available Separate Consolidated
Net Income (Loss) rather than in "Selling, general and administrative expenses"
where they had previously been reported. Prior period amounts have been
reclassified to conform to the 2002 presentation.
Revenue Recognition
Revenues are generated from sales of direct-to-home broadcast subscriptions, the
sale of transponder capacity and related services through outright sales,
sales-type leases and operating
IV-60
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
lease contracts, and sales of DIRECTV(R) receiving equipment, communications
equipment and communications services.
Sales are generally recognized as products are shipped or services are rendered.
Direct-To-Home subscription and pay-per-view revenues are recognized when
programming is broadcast to subscribers. Equipment rental revenue is recognized
monthly as earned. Advertising revenue is recognized when the related services
are performed. Programming payments received from subscribers in advance of the
broadcast are recorded as deferred revenues until earned.
Pursuant to an outright sale contract, all rights and title to a transponder are
purchased. In connection with an outright sale, Hughes recognizes the sale
amount as revenue and the cost basis of the transponder is charged to "Broadcast
programming and other costs."
Satellite transponder lease contracts qualifying for capital lease treatment
(typically based, among other factors, on the term of the lease) are accounted
for as sales-type leases, with revenues recognized at inception of the lease
equal to the net present value of the future minimum lease payments. Upon
inception of a sales-type lease, the cost basis of the transponder is charged to
"Broadcast programming and other costs." The portion of each periodic lease
payment deemed to be attributable to interest income is recognized in each
respective period.
Transponder and other lease contracts that do not qualify as sales-type leases
are accounted for as operating leases. Operating lease revenues are generally
recognized on a straight-line basis over the respective lease term. Differences
between operating lease payments received and revenues recognized are deferred
and included in "Accounts and notes receivable" and "Investments and Other
Assets."
Sales-type lease agreements and contracts for the sale of transponders typically
include a telemetry, tracking and control ("TT&C") service agreement with the
customer, which require the customer to pay monthly service fees which are
recognized and billable as the services are performed. For a significant portion
of the customer lease agreements, TT&C services are performed for the customer
and the fees for such services are included in the customer's monthly lease
payment.
A small percentage of revenues are derived from long-term contracts for the sale
of wireless communications systems. Sales under long-term contracts are
recognized primarily using the percentage-of-completion (cost-to-cost) method of
accounting. Under this method, sales are recorded equivalent to costs incurred
plus a portion of the profit expected to be realized, determined based on the
ratio of costs incurred to estimated total costs at completion. Profits expected
to be realized on long-term contracts are based on estimates of total sales
value and costs at completion. These estimates are reviewed and revised
periodically throughout the lives of the contracts, and adjustments to profits
resulting from such revisions are recorded in the accounting period in which the
revisions are made. Estimated losses on contracts are recorded in the period in
which they are identified.
Subscriber Acquisition Costs
Subscriber acquisition costs in the consolidated statements of operations
consist of costs incurred to acquire new subscribers through third parties and
the direct customer acquisition program. The deferred portion of the costs are
included in "Prepaid expenses and other" in the Consolidated Balance Sheets.
IV-61
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Subscriber acquisition costs primarily consist of amounts paid for third-party
customer acquisitions, which consist of the cost of commissions paid to
authorized retailers and dealers for subscribers added through their respective
distribution channels which are included in the consolidated statements of
operations in "Selling, general and administrative expenses," and the cost of
installation and hardware subsidies for subscribers added through the direct
customer acquisition program which are included in the consolidated statements
of operations in "Broadcast programming and other costs." Additional components
of subscriber acquisition costs include subsidies paid to manufacturers of
receiving equipment, if any, and the cost of print and television advertising.
The cost of advertising and manufacturer subsidies is expensed as incurred.
Manufacturer subsidies for hardware activated on the DIRECTV service prior to
August 2000 are payable over five years, the present value of which was accrued
in the period of activation with interest expense recorded over the term of the
obligation. The current portion of these manufacturer subsidies are recorded in
the Consolidated Balance Sheets in "Accrued liabilities and other," with the
long-term portion recorded in "Other Liabilities and Deferred Credits."
Substantially all commissions paid to retailers and dealers for third-party
customer acquisitions, although paid in advance, are earned by the retailers or
dealers over 12 months from the date of subscriber activation and may be
recouped by Hughes on a pro-rata basis should the subscriber cancel the service
during the 12-month service period. Accordingly, prepaid commissions are
deferred and amortized to expense over the 12-month service period. The amount
deferred is limited to the estimated average gross margin (equal to an average
subscriber's revenue to be earned over 12 months, less the related cost of
programming) to be derived from the subscriber over the 12-month period. The
excess commission over the estimated gross margin and non-refundable commissions
are expensed immediately.
The cost of installation and hardware under the direct customer acquisition
program is deferred when a customer commits to 12 months of the service. The
amount deferred is amortized to expense over the commitment period and limited
to the estimated gross margin (equal to the contractual revenues to be earned
from the subscriber over 12 months, less the related cost of programming)
expected to be earned over the contract term, less a reserve for estimated
unrecoverable amounts. The cost of installation and hardware in excess of the
estimated gross margin and where no customer commitment is obtained is expensed
immediately.
Hughes actively monitors the recoverability of prepaid commissions and deferred
installation and hardware costs. To the extent Hughes needs to charge back
prepaid commissions, Hughes offsets the amount due against amounts payable to
the retailers/dealers, and therefore, recoverability of prepaid commissions, net
of existing reserves, is reasonably assured. Generally, new subscribers secure
their accounts by providing a credit card or other identifying information and
agree that a pro-rated early termination fee of $150 will be assessed if the
subscriber cancels service prior to the end of the commitment period. As a
result, with the ability to charge the subscriber an early termination fee,
together with existing reserves, the recoverability of deferred installation and
hardware costs is reasonably assured.
Cash Flows
Cash equivalents consist of highly liquid investments purchased with original
maturities of three months or less.
IV-62
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Net cash provided by operating activities includes cash payments made for
interest of $398.0 million, $268.4 million and $312.9 million in 2002, 2001 and
2000, respectively and net cash refunds received for prior year income taxes of
$354.5 million, $310.7 million and $290.5 million in 2002, 2001 and 2000,
respectively.
Contracts in Process
Contracts in process are stated at costs incurred plus estimated profit, less
amounts billed to customers and advances and progress payments applied.
Engineering, tooling, manufacturing, and applicable overhead costs, including
administrative, research and development and selling expenses, are charged to
costs and expenses when incurred. Advances offset against contract related
receivables amounted to $38.2 million and $37.6 million at December 31, 2002 and
2001, respectively.
Inventories
Inventories are stated at the lower of cost or market principally using the
average cost method.
Major Classes of Inventories 2002 2001
---------------------------- ---- ----
(Dollars in Millions)
Productive material and supplies............ $34.7 $58.3
Work in process............................. 111.2 145.7
Finished goods.............................. 118.9 183.2
Provision for excess or obsolete inventory (34.5) (27.1)
------ ------
Total.................................... $230.3 $360.1
====== ======
Property, Satellites and Depreciation
Property and satellites are carried at cost. Satellite costs include
construction costs, launch costs, launch insurance, incentive obligations,
direct development costs and capitalized interest. Capitalized satellite costs
represent satellites under construction and the costs of successful satellite
launches. The proportionate cost of a satellite, net of accumulated depreciation
and insurance proceeds, is written-off in the period a full or partial loss of
the satellite occurs. Capitalized customer leased set-top box costs include the
cost of hardware and installation. Depreciation is computed generally using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the life of the asset or term of
the lease.
Intangible Assets
As discussed below in Note 3, with the adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets" on January 1, 2002, Hughes ceased amortization of
goodwill and intangible assets with indefinite lives. Goodwill and intangible
assets with indefinite lives are subject to write-down, as needed, based upon an
impairment analysis that must occur at least annually, or sooner if an event
occurs or circumstances change that would more likely than not result in an
impairment loss. Prior to January 1, 2002, goodwill, which represents the excess
of the cost over the net tangible and
IV-63
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
identifiable intangible assets of acquired businesses, and intangible assets
with indefinite lives were amortized using the straight-line method over periods
not exceeding 40 years. Other intangible assets are amortized using the
straight-line method over their expected useful lives, which range from 5 to 15
years.
Broadcast Programming Rights
The cost of television programming broadcast rights is recognized when the
related programming is distributed. The cost of television programming rights to
distribute live sporting events is charged to expense using the straight-line
method as the events occur over the course of the season or tournament. These
costs are included in "Broadcast programming and other costs" in the
consolidated statements of operations.
Advance payments in the form of cash and equity instruments from programming
content providers for carriage of their signal are deferred and recognized as a
reduction of programming costs on a straight-line basis over the related
contract term. Equity instruments are recorded at fair value based on quoted
market prices or appraised values, based on an independent third-party
valuation. Also recorded as a reduction of programming costs is the amortization
of a provision for above-market programming contracts that was recorded in
connection with the United States Satellite Broadcasting Company, Inc. ("USSB")
transaction in May 1999. The provision was based upon an independent third-party
appraisal and recorded at its net present value, with interest expense
recognized over the remaining term of the contract. The current and long-term
portions of these deferred credits are recorded in the Consolidated Balance
Sheets in "Accrued liabilities and other" and "Other Liabilities and Deferred
Credits" and are being amortized using the interest method over the related
contract terms of 92 months.
Software Development Costs
Other assets include certain software development costs capitalized in
accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed." Capitalized software development costs
at December 31, 2002 and 2001, net of accumulated amortization of $170.2 million
and $147.8 million, respectively, totaled $88.0 million and $85.1 million,
respectively. The software is amortized using the greater of the units of
revenue method or the straight-line method over its estimated useful life, not
in excess of five years. Software program reviews are conducted to ensure that
capitalized software development costs are properly treated and costs associated
with programs that are not generating revenues are expensed.
Valuation of Long-Lived Assets
Hughes evaluates the carrying value of long-lived assets to be held and used,
other than goodwill and intangible assets with indefinite lives, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair value of the long-lived asset. Fair value is determined primarily using the
estimated cash flows associated with the asset under review, discounted at a
rate commensurate with the risk involved. Losses on long-lived assets to
IV-64
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
be disposed of are determined in a similar manner, except that fair values are
reduced for the cost of disposal. Changes in estimates of future cash flows
could result in a write-down of the asset in a future period.
Foreign Currency
Some of Hughes' foreign operations have determined the local currency to be
their functional currency. Accordingly, these foreign entities translate assets
and liabilities from their local currencies to U.S. dollars using year-end
exchange rates while income and expense accounts are translated at the average
rates in effect during the year. The resulting translation adjustment is
recorded as part of accumulated other comprehensive income (loss) ("OCI"), a
separate component of stockholder's equity. Translation adjustments for foreign
currency denominated equity investments are also recorded as part of OCI.
Hughes also has foreign operations where the U.S. dollar has been determined as
the functional currency. Gains and losses resulting from remeasurement of the
foreign currency denominated assets, liabilities and transactions into the U.S.
dollar are recognized currently in the consolidated statements of operations.
Financial Instruments and Investments
Hughes maintains investments in equity securities of unaffiliated companies.
Non-marketable equity securities are carried at cost. Marketable equity
securities are considered available-for-sale and carried at current fair value
based on quoted market prices with unrealized gains or losses (excluding
other-than-temporary losses), net of taxes, reported as part of OCI. Hughes
continually reviews its investments to determine whether a decline in fair value
below the cost basis is "other-than-temporary." Hughes considers, among other
factors: the magnitude and duration of the decline; the financial health and
business outlook of the investee, including industry and sector performance,
changes in technology, and operational and financing cash flow factors; and
Hughes' intent and ability to hold the investment. If the decline in fair value
is judged to be other-than-temporary, the cost basis of the security is
written-down to fair value and the amount is recognized in the consolidated
statements of operations as part of "Other, net" and recorded as a
reclassification adjustment from OCI.
Investments in which Hughes owns at least 20% of the voting securities or has
significant influence are accounted for under the equity method of accounting.
Equity method investments are recorded at cost and adjusted for the appropriate
share of the net earnings or losses of the investee. Investee losses are
recorded up to the amount of the investment plus advances and loans made to the
investee, and financial guarantees made on behalf of the investee. In certain
instances, this can result in Hughes recognizing investee earnings or losses in
excess of its ownership percentage.
The carrying value of cash and cash equivalents, accounts and notes receivable,
investments and other assets, accounts payable, and amounts included in "Accrued
liabilities and other" meeting the definition of a financial instrument and debt
approximated fair value at December 31, 2002 and December 31, 2001.
Hughes carries all derivative financial instruments on the Consolidated Balance
Sheets at fair value based on quoted market prices. Hughes uses derivative
contracts to minimize the financial
IV-65
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
impact of changes in the fair value of recognized assets, liabilities, and
unrecognized firm commitments, or the variability of cash flows associated with
forecasted transactions in accordance with internal risk management policies.
Changes in fair value of designated, qualified and effective fair value hedges
are recognized in earnings as offsets to the changes in fair value of the
related hedged items. Changes in fair value of designated, qualified and
effective cash flow hedges are deferred and recorded as a component of OCI until
the hedged transactions occur and are recognized in earnings. The ineffective
portion and changes related to amounts excluded from the effectiveness
assessment of a hedging derivative's change in fair value are immediately
recognized in the Consolidated Statements of Operations and Available Separate
Consolidated Net Income (Loss) in "Other, net." Hughes assesses, both at the
inception of the hedge and on an on-going basis, whether the derivatives are
highly effective. Hedge accounting is prospectively discontinued when hedge
instruments are no longer highly effective.
The net deferred loss from effective cash flow hedges net of taxes in OCI of
$1.2 million at December 31, 2002 is expected to be recognized in earnings over
the next three years.
Stock Compensation
Hughes issues GM Class H common stock options to employees with grant prices
equal to the fair value of the underlying security at the date of grant. No
compensation cost has been recognized for options in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" in the consolidated statements of operations.
Had Hughes followed the fair value based method of accounting for stock-based
compensation under SFAS No. 123, "Accounting for Stock-Based Compensation," for
the years ended December 31, 2002, 2001 and 2000, pro forma earnings (loss) used
for computation of available separate consolidated net income (loss) would have
been $(1,112.4) million, $(946.5) million and $585.3 million, respectively. See
Note 13 for additional information regarding the pro forma effect on earnings of
recognizing compensation cost based on the estimated fair value of the stock
options granted, as required by SFAS No. 123.
As discussed more completely below in Note 3, Hughes will adopt the fair value
based method of accounting for stock-based compensation of SFAS No. 123 for all
stock-based compensation granted after December 31, 2002. As a result, Hughes
will expense the fair market value of stock-based compensation newly granted to
employees pursuant to SFAS No. 123.
Advertising and Research and Development Costs
Advertising and research and development costs are expensed as incurred.
Advertising expenses were $170.5 million in 2002, $163.0 million in 2001 and
$129.6 million in 2000. Expenditures for research and development were $71.7
million in 2002, $85.8 million in 2001 and $104.5 million in 2000.
Market Concentrations and Credit Risk
Hughes provides services and extends credit to a number of wireless
communications equipment customers and to a large number of consumers, both in
the United States and Latin America. DIRECTV has significant accounts receivable
from the National Rural Telecommunications Cooperative ("NRTC") and one of the
NRTC's largest affiliates, Pegasus Satellite Television, Inc.
IV-66
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
("Pegasus"), arising from arrangements granting the NRTC and Pegasus the
exclusive right to distribute certain programming in certain areas. In addition,
DLA provides services and extends credit to unconsolidated local operating
companies ("LOC's) providing the DIRECTV service, particularly in Venezuela and
Puerto Rico. Management monitors its exposure to credit losses and maintains
allowances for anticipated losses.
Note 3: Accounting Changes and New Accounting Standards
Accounting Changes
Hughes adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" on January 1, 2002. SFAS No. 144 refined existing impairment
accounting guidance and extended the use of this accounting to discontinued
operations. SFAS No. 144 allowed the use of discontinued operations accounting
treatment for both reporting segments and distinguishable components thereof.
SFAS No. 144 also eliminated 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. However, operating results of discontinued businesses such
as DIRECTV Broadband, which previously would not have been reported as a
discontinued operation, will be reported as a discontinued operation under this
new standard in future periods.
Hughes also adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on
January 1, 2002. SFAS No. 142 required that existing and future goodwill and
intangible assets with indefinite lives not be amortized, but written-down, as
needed, based upon an impairment analysis that must occur at least annually, or
sooner if an event occurs or circumstances change that would more likely than
not result in an impairment loss. All other intangible assets are amortized over
their estimated useful lives. SFAS No. 142 required that Hughes perform step one
of a two-part transitional impairment test to compare the fair value of each
reportable unit with its respective carrying amount, including goodwill. If the
carrying value exceeds the fair value, step two of the transitional impairment
test must be performed to measure the amount of the impairment loss, if any.
SFAS No. 142 also required that intangible assets be reviewed as of the date of
adoption to determine if they continue to qualify as intangible assets under the
criteria established under SFAS No. 141, "Business Combinations," and to the
extent previously recorded intangible assets do not meet the criteria that they
be reclassified to goodwill.
As part of Hughes' acquisition of PRIMESTAR in 1999, dealer network and
subscriber base intangible assets were identified and valued in accordance with
APB Opinion No. 16, "Business Combinations." The dealer network intangible asset
originally valued as part of Hughes' acquisition of PRIMESTAR was based on
established distribution, customer service and marketing capability that had
been put in place by PRIMESTAR. The subscriber base intangible asset originally
valued as part of Hughes' acquisition of PRIMESTAR was primarily based on the
expected non-contractual future cash flows to be earned over the life of the
PRIMESTAR subscribers converted to the DIRECTV service. In accordance with SFAS
No. 142, Hughes completed a review of its intangible assets and determined that
the previously recorded dealer network and subscriber base intangible assets
established under APB Opinion No. 16 did not meet the contractual or other legal
rights criteria. The dealer network and subscriber base intangible assets also
did not meet the separability criteria because the intangible assets could not
be sold, transferred, licensed, rented or exchanged individually
IV-67
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
or in combination with other assets or liabilities, apart from selling the
entire DIRECTV business. As a result, in the first quarter of 2002, Hughes
reclassified $209.8 million, net of $146.0 million of accumulated amortization,
of previously reported intangible assets to goodwill. As a result of this
reclassification, approximately $13.2 million of quarterly amortization expense
ceased, beginning January 1, 2002. In October 2002, Emerging Issues Task Force
("EITF") Issue No. 02-17, "Recognition of Customer Relationship Intangible
Assets Acquired in a Business Combination" was issued, which gave clarifying
guidance on the treatment of certain subscriber-related relationships. As a
result, as of the beginning of the fourth quarter of 2002, the subscriber base
and dealer network intangible assets were reinstated and are being amortized
over their estimated remaining useful lives of 2 and 12 years, respectively. As
a result of this change, Hughes recognized amortization expense of $18.5 million
in the fourth quarter of 2002.
In the first quarter of 2002, Hughes also completed the required transitional
impairment test for intangible assets with indefinite lives, which consist of
Federal Communications Commission licenses for direct-to-home broadcasting
frequencies ("Orbital Slots"), and determined that no impairment existed because
the fair value of these assets exceeded the carrying value as of January 1,
2002.
In the second quarter of 2002, with the assistance of an independent valuation
firm, Hughes completed step one of the transitional test to determine whether a
potential impairment existed for goodwill recorded at January 1, 2002. Primarily
based on the present value of expected future cash flows, it was determined that
the fair values of DIRECTV U.S. and the Satellite Services segment exceeded
their carrying values, therefore no further impairment test was required. It was
also determined that the carrying values of DLA and DIRECTV Broadband exceeded
their fair values, therefore requiring step two of the impairment test be
performed. No goodwill or intangible assets existed at the Network Systems
segment and therefore no impairment test was required.
Hughes completed step two of the impairment test for DLA and DIRECTV Broadband
in the fourth quarter of 2002 as required by SFAS No. 142. Step two of the
transitional test requires the comparison of the implied value of the reporting
unit goodwill with the carrying amount of that goodwill. If the carrying amount
of reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss will be recognized in an amount equal to that excess. In the
initial year of adoption, the impairment loss, if any, is recorded as a
cumulative effect of accounting change, net of taxes. As a result of completing
step two, Hughes determined that $631.8 million and $107.9 million representing
all of the goodwill recorded at DLA and DIRECTV Broadband, respectively, was
impaired. In addition, Hughes also recorded a $16.0 million charge representing
its share of the goodwill impairment of an equity method investee. Therefore,
Hughes recorded a cumulative effect of accounting change, net of taxes, of
$681.3 million ($755.7 million pre-tax) as of January 1, 2002 in the
Consolidated Statements of Operations and Available Separate Consolidated Net
Income (Loss).
In accordance with SFAS No. 142, Hughes will perform its annual impairment test
for all reporting units during the fourth quarter of each year, commencing in
the fourth quarter of 2002. If an impairment loss results from the annual
impairment test, the loss will be recorded as a pre-tax charge to operating
income. In the fourth quarter of 2002, with the assistance of an independent
valuation firm, Hughes completed its first annual impairment test for DIRECTV
U.S. and the Satellite Services segment. The independent valuation, which was
primarily based on the present value of expected future cash flows, resulted in
fair values for DIRECTV U.S. and for the Satellite Services segment that
exceeded Hughes' carrying values. As a result, no impairment loss existed for
DIRECTV U.S. and the Satellite Services segment for 2002.
IV-68
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The following represents Hughes' reported net income (loss) and reported income
(loss) before cumulative effect of accounting changes on a comparable basis
excluding the after-tax effect of amortization expense associated with goodwill
and intangible assets with indefinite lives:
2002 2001 2000
---- ---- ----
(Dollars in Millions)
Reported net income (loss)....................... $(893.8) $(621.6) $813.0
Add:
Goodwill amortization........................... -- 219.9 215.1
Intangible assets with indefinite lives
amortization................................... -- 7.2 7.2
------- ------- --------
Adjusted net income (loss)....................... $(893.8) $(394.5) $1,035.3
======= ======= ========
Reported income (loss) before cumulative effect
of accounting changes.......................... $(212.5) $(614.2) $813.0
Add:
Goodwill amortization........................... -- 219.9 215.1
Intangible assets with indefinite lives
amortization................................... -- 7.2 7.2
------- ------- --------
Adjusted income (loss) before cumulative effect
of accounting changes........................... $(212.5) $(387.1) $1,035.3
======= ======= ========
Hughes adopted SFAS No. 141, "Business Combinations" on July 1, 2001. SFAS No.
141 required that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method and prohibited 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 required Hughes to carry all
derivative financial instruments on the balance sheet at fair value. In
accordance with the transition provisions of SFAS No. 133, Hughes recorded a
one-time after-tax charge of $7.4 million on January 1, 2001 as a cumulative
effect of accounting change in the Consolidated Statements of Operations and
Available Separate Consolidated Net Income (Loss) and an after-tax unrealized
gain of $0.4 million in "Accumulated other comprehensive income (loss)."
New Accounting Standards
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities--an
interpretation of ARB No. 51" ("FIN 46"). FIN 46 requires the consolidation of
affiliated companies where a controlling financial interest is achieved through
arrangements other than voting interests. Affiliated companies are considered
variable interest entities in instances where affiliate capital is insufficient
to permit the affiliate to finance its activities without additional
subordinated financial support, and in certain other circumstances. The
determination as to whether an affiliate is a variable interest entity must be
based on the circumstances on the date that an entity becomes involved with an
affiliate or when certain events occur that would indicate a potential change in
a previous determination. Consolidation of an affiliate is required when it is
determined that the affiliate is a variable interest entity and that the
investor will absorb a majority of the expected losses or residual returns if
they occur. As required, Hughes will apply the provisions of
IV-69
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
FIN 46 for all investments in affiliates after January 31, 2003. For investments
in variable interest entities made before February 1, 2003, Hughes will follow
the provisions of FIN 46, as required, no later than July 1, 2003. The adoption
of this standard could result in the consolidation of certain affiliates which
were previously accounted for under the equity method of accounting. Such
adoption would be reflected as a cumulative effect of accounting change in the
consolidated statements of operations.
Hughes has identified the partially-owned local operating companies providing
DLA programming services in Venezuela and Puerto Rico, of which Hughes owns
19.5% and 40.0%, respectively, as potential variable interest entities. Hughes
currently accounts for these investments under the equity method of accounting
and reflects approximately 75.0% of their net income or loss in Hughes'
consolidated statements of operations due to the accumulation of net losses in
excess of the other investors' investments.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123." This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide two alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Hughes currently follows the
intrinsic value based method of accounting for stock-based compensation of APB
No. 25. Hughes will adopt the fair value based method of accounting for
stock-based compensation for all stock-based compensation granted after December
31, 2002 in accordance with the original transition provisions of SFAS No. 123.
Adoption of this standard will result in an increase in compensation cost
recognized in operating results. See Note 13 for pro forma information regarding
the compensation costs that would have been recognized had Hughes followed the
fair value based method of accounting for stock-based compensation under SFAS
No. 123 for the years ended December 31, 2002, 2001 and 2000.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21
addresses determination of whether an arrangement involving more than one
deliverable contains more than one unit of accounting and how the related
revenues should be measured and allocated to the separate units of accounting.
EITF Issue No. 00-21 will apply to revenue arrangements entered into after June
30, 2003; however, upon adoption, the EITF allows the guidance to be applied on
a retroactive basis, with the change, if any, reported as a cumulative effect of
accounting change in the consolidated statements of operations. Hughes has not
yet determined the impact this issue will have on its consolidated results of
operations or financial position, if any.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 generally requires the
recognition of costs associated with exit or disposal activities when incurred
rather than at the date of a commitment to an exit or disposal plan. SFAS No.
146 replaces previous accounting guidance provided by EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Hughes is required to implement SFAS No. 146 on January 1, 2003. Hughes'
adoption of this standard on January 1, 2003 is not expected to have a
significant impact on Hughes' consolidated results of operations or financial
position.
IV-70
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
SFAS No. 145 eliminates the requirement to present gains and losses on the early
extinguishment of debt as an extraordinary item, and resolves accounting
inconsistencies for certain lease modifications. Hughes' adoption of this
standard on January 1, 2003 is not expected to have an impact on Hughes'
consolidated results of operations or financial position.
Note 4: Property and Satellites, Net
Estimated
Useful Lives
(years) 2002 2001
------------ ------- -------
(Dollars in Millions)
Land and improvements.................... 10-30 $55.1 $54.4
Buildings and leasehold improvements... 2-40 338.5 323.9
Machinery and equipment.................. 2-23 1,968.1 1,627.2
Customer leased set-top boxes............ 4-7 867.5 969.5
Furniture, fixtures and office machines 2-15 154.9 128.6
Construction in progress................. -- 399.3 450.8
-------- --------
Total.................................... 3,783.4 3,554.4
Less accumulated depreciation............ 1,766.0 1,356.6
-------- --------
Property, net............................ $2,017.4 $2,197.8
======== ========
Satellites............................... 12-16 $6,419.8 $6,215.4
Less accumulated depreciation............ 1,497.2 1,408.8
-------- --------
Satellites, net.......................... $4,922.6 $4,806.6
======== ========
Hughes capitalized interest costs of $116.8 million, $76.3 million and $82.4
million during 2002, 2001 and 2000, respectively, as part of the cost of its
property and satellites under construction.
Note 5: Leasing Activities
Future minimum payments due from customers under sales-type leases and related
service agreements, and noncancelable satellite transponder operating leases as
of December 31, 2002 are as follows:
Sales-Type Leases
---------------------
Minimum Service
Lease Agreement Operating
Payments Payments Leases
-------- --------- ---------
(Dollars in Millions)
2003....... $39.3 $3.1 $568.1
2004....... 39.2 3.0 526.3
2005....... 39.2 3.0 502.3
2006....... 24.5 0.8 502.6
2007....... 21.2 0.4 408.9
Thereafter 114.2 1.9 1,915.5
------ ----- --------
Total.. $277.6 $12.2 $4,423.7
====== ===== ========
IV-71
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Future minimum lease payments due from customers, included in the above table,
related to satellites to be launched totaled approximately $0.8 billion.
Included in the amounts above are $151.6 million of future lease payments, which
may be terminated by the customers pursuant to certain contractual termination
rights.
The components of the net investment in sales-type leases are as follows:
2002 2001
------ ------
(Dollars in Millions)
Total minimum lease payments............................ $277.6 $380.7
Less unearned interest income and allowance for
doubtful accounts 92.8 128.8
------ ------
Total net investment in sales-type leases............... 184.8 251.9
Less current portion.................................... 22.9 24.9
------ ------
Total long-term net investment in sales-type leases.. $161.9 $227.0
====== ======
Note 6: Intangible Assets
Hughes had $5,775.2 million and $6,496.6 million of goodwill at December 31,
2002 and December 31, 2001, respectively, net of accumulated amortization of
$606.9 million and $700.0 million at December 31, 2002 and December 31, 2001,
respectively. Net goodwill of $140.6 million and $505.0 million related to the
Direct-To-Home Broadcast and Satellite Services segments, respectively, which
was carried at Corporate as of December 31, 2002 and 2001, has been allocated to
the respective reporting unit in the presentation below. The changes in the
carrying amounts of goodwill by reporting unit for the year ended December 31,
2002 were as follows:
Direct-To-
Home Satellite Network
Broadcast Services Systems Total
---------- --------- ------- -------
(Dollars in Millions)
Balance as of December 31, 2001 $3,734.0 $2,743.7 $18.9 $6,496.6
Impairment loss................. (739.7) -- (16.0) (755.7)
Other........................... 34.8 -- (0.5) 34.3
-------- -------- ----- --------
Balance as of December 31, 2002 $3,029.1 $2,743.7 $2.4 $5,775.2
======== ======== ===== ========
Hughes had $644.7 million and $660.2 million of intangible assets, net at
December 31, 2002 and December 31, 2001, respectively. Accumulated amortization
for intangible assets was $195.1 million and $182.2 million at December 31, 2002
and December 31, 2001, respectively. Intangible assets at December 31, 2002
primarily consisted of $432.3 million, net of $30.6 million of accumulated
amortization, of Orbital Slots which have indefinite useful lives, and $191.3
million, net of $164.5 million of accumulated amortization, of dealer network
and subscriber base intangible assets which are being amortized over their
estimated remaining useful lives of 2 and 12 years, respectively. See Note 3 for
further discussion.
Amortization expense for intangible assets was $25.4 million, $70.8 million and
$68.7 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Estimated amortization expense in each of the next five years is
as follows: $74.0 million in 2003; $31.1 million in 2004; $9.2 million in
IV-72
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
2005; $9.2 million in 2006; $9.2 million in 2007; and $58.6 million thereafter.
The increase in amortization expense from 2002 to estimated amortization expense
in 2003 is due to the reinstatement of subscriber base and dealer network
intangible assets as a result of the issuance of EITF Issue No. 02-17,
"Recognition of Customer Relationship Intangible Assets Acquired in a Business
Combination." See Note 3 for further discussion.
As discussed in Note 3, Hughes ceased amortization of goodwill and intangible
assets with indefinite lives with the adoption of SFAS No. 142 on January 1,
2002.
Note 7: Investments in Marketable Securities
Investments in marketable equity securities stated at current fair value and
classified as available-for-sale totaled $98.2 million and $725.4 million at
December 31, 2002 and 2001, respectively, and were recorded in the Consolidated
Balance Sheets in "Investments and Other Assets." Investments in debt
securities, stated at current fair value and classified as available-for-sale,
totaled $209.9 million at December 31, 2002. Investments in debt securities with
maturities of less than one year totaling $99.8 million are carried in "Prepaid
expenses and other." Investments in debt securities with remaining maturities of
six years totaling $110.1 million are carried in "Investments and Other Assets."
At December 31, 2002, $3.4 million of accumulated unrealized pre-tax losses were
recorded as part of OCI. At December 31, 2001, $323.1 million of accumulated
unrealized pre-tax gains were recorded as part of OCI. During 2002 and 2001,
Hughes recorded a write-down for other-than-temporary declines in certain
marketable equity investments of $148.9 million and $226.1 million,
respectively.
On August 21, 2002, Hughes sold about 8.8 million shares of Thomson multimedia
S.A. ("Thomson") common stock for approximately $211.0 million in cash,
resulting in a pre-tax gain of about $158.6 million.
On November 19, 2001, Hughes repaid $74.9 million of debt pursuant to the terms
of a debt guarantee provided by Hughes for the benefit of Motient Corporation
("Motient"). In connection with the payment, Hughes received from Motient 7.1
million common shares of XM Satellite Radio Holdings Inc. stock, with a market
value as of November 2001 of $67.9 million and $3.6 million in cash. The
repayment of Motient's debt released Hughes from any further obligations related
to Motient's indebtedness and therefore Hughes reversed a related reserve of
$39.5 million. The net effect of these actions resulted in a credit of $36.1
million to "Other, net" in the Consolidated Statements of Operations and
Available Separate Consolidated Net Income."
On July 31, 2001, Hughes sold about 4.1 million shares of Thomson common stock
for approximately $132.7 million in cash, resulting in a pre-tax gain of
approximately $108.3 million.
Aggregate investments in affiliated companies accounted for under the equity
method at December 31, 2002 and 2001 amounted to $6.8 million and $76.6 million,
respectively.
IV-73
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Note 8: Accrued Liabilities and Other
2002 2001
------ ------
(Dollars in Millions)
Exit costs and other liabilities related to
discontinued businesses $255.1 $386.3
Payroll and other compensation.......................... 212.9 216.8
Programming contract liabilities........................ 120.6 106.3
Subscriber services expenses............................ 75.3 59.0
Interest payable........................................ 63.6 27.2
Other................................................... 542.4 546.4
-------- --------
Total................................................ $1,269.9 $1,342.0
======== ========
Included in "Other Liabilities and Deferred Credits" is a provision for
long-term programming contracts with above-market rates, established as part of
the USSB and PRIMESTAR acquisitions in 1999, which totaled $296.0 million and
$430.1 million at December 31, 2002 and December 31, 2001, respectively.
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 an expense of $22.2 million in the second quarter of 2001 and
$65.3 million in the third quarter of 2001 for a total charge to "Selling,
general and administrative expenses" of $87.5 million. Of that charge, $80.0
million was related to employee severance benefits and $7.5 million was for
other costs primarily related to a remaining lease obligation associated with
excess office space and employee equipment. The remaining accrual amounted to
$14.1 million at December 31, 2002 and related to long-term employee severance
benefits.
See Note 18 for additional information on the exit costs and other liabilities
related to discontinued businesses, including the shutdown of the DIRECTV
Broadband business.
Note 9: Short-Term Borrowings and Long-Term Debt
Short-Term Borrowings and Current Portion of Long-Term Debt
Interest Rates at
December 31, 2002 2002 2001
----------------- ------ ------
(Dollars in Millions)
Revolving credit facilities.............. $450.0
Other short-term borrowings.............. 4.31%-16.00% $21.5 16.4
Current portion of long-term debt........ 5.93%-6.00% 706.3 1,192.1
------ -------
Total short-term borrowings and
current portion of long-term debt.... $727.8 $1,658.5
====== ========
IV-74
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Long-Term Debt
Interest Rates at
December 31, 2002 2002 2001
----------------- ---- ----
(Dollars in Millions)
Notes payable............ 6.00%-8.50% $1,550.0 $796.5
Credit facilities........ 4.42%-5.93% 1,506.3 1,322.6
Other debt............... 4.30%-12.37% 40.0 61.8
------- -------
Total debt............... 3,096.3 2,180.9
Less current portion..... 706.3 1,192.1
------- -------
Total long-term debt. $2,390.0 $988.8
======= ======
Notes Payables and Credit Facilities. Notes Payable. In February 2002,
PanAmSat completed an $800 million private placement notes offering. Such notes
were exchanged for registered notes in November 2002. These unsecured notes bear
interest at an annual rate of 8.5%, payable semi-annually and mature in 2012.
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 $200 million five-year notes were repaid in
January 2003. The outstanding principal balances and interest rates for the
seven, ten, and thirty-year notes as of December 31, 2002 were $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 provided availability of $1,235.2 million in revolving
borrowings. The facility was secured by substantially all of Hughes' assets
other than the assets of DLA and PanAmSat. In March 2002, Hughes borrowed an
additional $764.8 million under a term loan tranche that was added to the
Amended Credit Agreement. The Amended Credit Agreement was subsequently amended
in November 2002. The November 2002 amendment reduced the size of the term loan
from $764.8 million to $650.0 million and increased the size of the revolving
component to $1,284.0 million, of which $500 million was committed by General
Motors Acceptance Corporation ("GMAC"). In December 2002, EchoStar paid $600
million for the termination of the merger agreement, which resulted in a $143.7
million mandatory prepayment of the term loan under the Amended Credit
Agreement. Accordingly, the term loan was reduced from $650.0 million to $506.3
million. As of December 31, 2002, the revolving component of the Amended Credit
Agreement was undrawn and $506.3 million was outstanding under the term loan. As
discussed in Note 22, the Amended Credit Agreement was terminated subsequent to
December 31, 2002 and all amounts outstanding were repaid by Hughes.
IV-75
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
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 December 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 December 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 the London Interbank
Offered Rate ("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 and November 2002.
The most recent amendment reduced the size of the facility to $1,500 million and
provided for a commitment through August 31, 2003. The facility is comprised of
a $1,500 million tranche secured by a $1,500 million Hughes cash deposit.
Borrowings under the facility bear interest at GMAC's cost of funds plus 0.125%.
The $1,500 million cash deposit earns interest at a rate equivalent to GMAC's
cost of funds. Hughes has the legal right of setoff with respect to the $1,500
million GMAC cash deposit, and accordingly offsets it against amounts borrowed
from GMAC under the $1,500 million tranche in the consolidated statement of
financial position. The facility was fully drawn as of December 31, 2002.
On January 5, 2001, DLA entered into a $450.0 million revolving credit facility.
The obligations under the DLA facility were assigned to Hughes in February 2002.
In addition, the obligations under SurFin Ltd.'s unsecured revolving credit
facilities of $400.0 million and $212.5 million were assigned to Hughes in
February 2002.
Other. $61.5 million in other short-term and long-term debt, related primarily
to DLA and Hughes Network Systems, Inc.'s ("HNS") international subsidiaries,
was outstanding at December 31, 2002, bearing fixed and floating rates of
interest of 4.30% to 16.00%. Principal on these borrowings is due in varying
amounts through 2007.
Covenants and Restrictions. Hughes' and its subsidiaries' 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 its subsidiaries' 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 business. The terms of the
PanAmSat debt and credit facilities restrict PanAmSat from transferring funds to
Hughes in the form of cash dividends, loans or advances. At December 31, 2002,
Hughes and its subsidiaries were in compliance with all such covenants.
IV-76
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Note 10: Income Taxes
The income tax benefit is based on the reported loss from continuing operations
before income taxes, minority interests and cumulative effect of accounting
changes. Deferred income tax assets and liabilities reflect the impact of
temporary differences between the amounts of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes,
as measured by applying currently enacted tax laws.
Hughes and its domestic subsidiaries join with GM in filing a consolidated U.S.
federal income tax return. The portion of the consolidated income tax liability
or receivable recorded by Hughes is generally equivalent to the amount that
would have been recorded on a separate return basis.
The income tax benefit consisted of the following:
2002 2001 2000
---- ---- ----
Dollars in Millions)
Taxes currently payable (refundable):
U.S. federal........................ $(234.1) $(422.2) $(757.9)
Foreign............................. 77.4 54.8 31.6
State and local..................... (15.0) (54.1) (52.0)
------ ------ ------
Total........................... (171.7) (421.5) (778.3)
------ ------ ------
Deferred tax liabilities:
U.S. federal........................ 72.3 89.9 361.0
State and local..................... 5.0 6.0 11.2
--- --- ----
Total........................... 77.3 95.9 372.2
---- ---- -----
Total income tax benefit........ (94.4) $(325.6) $(406.1)
==== ===== =====
Loss from continuing operations before income taxes, minority interests and
cumulative effect of accounting changes included the following components:
2002 2001 2000
---- ---- ----
(Dollars in Millions)
U.S. loss......... $(82.7) $(914.7) $(752.2)
Foreign loss...... (202.6) (75.0) (63.4)
------- ------ ------
Total..... $(285.3) $(989.7) $(815.6)
===== ===== =====
IV-77
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The combined income tax benefit was different than the amount computed using the
U.S. federal statutory income tax rate for the reasons set forth in the
following table:
2002 2001 2000
---- ---- ----
(Dollars in Millions)
Expected refund at U.S. federal statutory income tax rate...... $(99.9) $(346.4) $(285.4)
Research and experimentation tax benefits and resolution of tax
contingencies................................................ (98.0) (30.0) (80.9)
Extraterritorial income exclusion and foreign sales corporation
tax benefit.................................................... (34.8) (37.1) (32.8)
U.S. state and local income tax benefit........................ (6.5) (20.9) (26.6)
Tax basis differences attributable to equity method investees.. 14.1 (29.6) (81.2)
Discontinuation of DIRECTV Broadband business.................. 27.9 -- --
Minority interests in losses of partnership.................... -- 33.9 27.8
Non-deductible goodwill amortization........................... -- 46.3 40.3
Foreign losses and taxes, net of credits....................... 100.7 56.8 31.6
Other.......................................................... 2.1 1.4 1.1
--- --- ---
Total income tax benefit.................................... $(94.4) $(325.6) $(406.1)
==== ===== =====
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities at December 31 were as follows:
2002 2001
------------------- -------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
-------- ----------- ------- ----------
(Dollars in Millions)
Accruals and advances....................... $295.9 $316.5
Customer deposits, rebates and commissions.. 146.1 $158.1 172.3 $170.7
State taxes................................. -- 2.6 23.2 --
Gain on PanAmSat merger..................... -- 171.6 -- 176.4
Depreciation and amortization............... 74.8 1,143.2 -- 1,065.1
Net operating loss and tax credit carryforwards 405.3 -- 351.6 --
Discontinuation of DIRECTV Broadband business.. 104.1 -- -- --
Programming contract liabilities............ 168.5 -- 227.0 --
Unrealized gains and losses on securities... 1.4 -- -- 130.5
Other....................................... 72.1 91.0 72.2 135.0
---- ---- ---- -----
Subtotal.................................... 1,268.2 1,566.5 1,162.8 1,677.7
Valuation allowance......................... (185.2) -- (112.7) --
------- ------- ------- -------
Total deferred taxes..................... $1,083.0 $1,566.5 $1,050.1 $1,677.7
======= ======= ======= =======
No income tax provision has been made for the portion of undistributed earnings
of foreign subsidiaries deemed permanently reinvested that amounted to
approximately $76.9 million and $62.5 million at December 31, 2002 and 2001,
respectively. Repatriation of all accumulated earnings would have resulted in
tax liabilities of $26.9 million in 2002 and $21.9 million in 2001.
At December 31, 2002, Hughes has $126.7 million of deferred tax assets relating
to foreign operating loss carryforwards expiring in varying amounts between 2003
and 2007. A valuation allowance was provided for all foreign operating loss
carryforwards. At December 31, 2002, Hughes has $24.2 million of foreign tax
IV-78
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
credits which will expire in 2006, $37.2 million of foreign tax credits
which will expire in 2007 and $58.6 million of foreign tax credits which will
expire in 2008. A valuation allowance was provided for $58.5 million of foreign
tax credits. At December 31, 2002, Hughes has $46.3 million of alternative
minimum tax credits, which can be carried forward indefinitely and $14.0 million
of general business credits which will expire between 2021 and 2022. At December
31, 2002, Hughes' subsidiaries have $98.3 million of deferred tax assets
relating to federal net operating loss carryforwards, which will expire in
varying amounts between 2009 and 2021.
Hughes has an agreement with Raytheon Company ("Raytheon") which governs Hughes'
rights and obligations with respect to U.S. federal and state income taxes for
all periods prior to the spin-off and merger of Hughes' defense electronics
business with Raytheon in 1997. Hughes is responsible for any income taxes
pertaining to those periods prior to the merger, including any additional income
taxes resulting from U.S. federal and state tax audits, and is entitled to any
U.S. federal and state income tax refunds relating to those years.
Hughes also has an agreement with Boeing, which governs Hughes' rights and
obligations with respect to U.S. federal and state income taxes for all periods
prior to the sale of Hughes' Satellite Businesses. Hughes is responsible for any
income taxes pertaining to those periods prior to the sale, including any
additional income taxes resulting from U.S. federal and state tax audits, and is
entitled to any U.S. federal and state income tax refunds relating to those
years.
The U.S. federal income tax returns of Hughes have been examined and Hughes has
concluded its administrative appeals process with the Internal Revenue Service
("IRS") for all tax years through 1994. The IRS is currently examining Hughes'
U.S. federal tax returns for years 1995 through 2000. Management believes that
adequate provision has been made for any adjustment which might be assessed for
open years.
Total taxes receivable from GM at December 31, 2002 and 2001 were approximately
$205 million and $300 million, respectively, of which $75 million and $180
million, respectively, were included in "Prepaid expenses and other" and $130
million and $120 million, respectively, were included in "Investments and Other
Assets" in the Consolidated Balance Sheets.
Note 11: Retirement Programs and Other Postretirement Benefits
Substantially all of Hughes' employees participate in Hughes' contributory and
non-contributory defined benefit retirement plans. Benefits are based on years
of service and compensation earned during a specified period of time before
retirement. Additionally, an unfunded, nonqualified pension plan covers certain
employees. Hughes also maintains a program for eligible retirees to participate
in health care and life insurance benefits generally until they reach age 65.
Qualified employees who elected to participate in the Hughes contributory
defined benefit pension plans may become eligible for these health care and life
insurance benefits if they retire from Hughes between the ages of 55 and 65.
IV-79
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The components of the pension benefit obligation and the other postretirement
benefit obligation, as well as the net benefit obligation recognized in the
Consolidated Balance Sheets, are shown below:
Other
Postretirement
Pension Benefits Benefits
---------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in Millions)
Change in Benefit Obligation
Net benefit obligation at beginning of year............ $455.9 $403.5 $27.6 $30.2
Service cost........................................... 21.7 16.0 0.5 0.5
Interest cost.......................................... 33.8 32.7 2.2 1.9
Plan participants' contributions....................... 1.9 2.1 -- --
Actuarial (gain) loss.................................. 26.4 41.7 5.7 (2.3)
Benefits paid.......................................... (42.7) (40.1) (2.7) (2.7)
----- ----- ----- -----
Net benefit obligation at end of year.................. 497.0 455.9 33.3 27.6
----- ----- ---- ----
Change in Plan Assets
Fair value of plan assets at beginning of year......... 416.0 477.5 -- --
Actual return on plan assets........................... (21.6) (29.9) -- --
Employer contributions................................. 7.9 6.4 2.7 2.7
Plan participants' contributions....................... 1.9 2.1 -- --
Benefits paid.......................................... (42.7) (40.1) (2.7) (2.7)
----- ----- ----- -----
Fair value of plan assets at end of year............... 361.5 416.0 -- --
----- ----- ---- ----
Funded status at end of year........................... (135.5) (39.9) (33.3) (27.6)
Unamortized amount resulting from changes in plan
provisions........................................ 21.0 23.2 -- --
Unamortized net amount resulting from changes in plan
experience and actuarial assumptions.............. 107.1 25.6 (0.8) (6.4)
----- ---- ---- ----
Net amount recognized at end of year............ $(7.4) $8.9 $(34.1)$(34.0)
==== === ==== ====
Amounts recognized in the consolidated balance sheets consist of:
Prepaid benefit cost................................ $0.5 $29.0
Accrued benefit cost................................ (83.1) (52.8) $(34.1)$(34.0)
Intangible asset.................................... 21.0 3.7 -- --
Deferred tax assets................................. 21.9 11.7 -- --
Accumulated other comprehensive loss................ 32.3 17.3 -- --
---- ---- ---- ----
Net amount recognized at end of year............ $(7.4) $8.9 $(34.1)$(34.0)
=== === ==== ====
IV-80
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
There were no GM Class H common stock shares included in the pension plan assets
at December 31, 2002 and December 31, 2001.
Other
Postretirement
Pension Benefits Benefits
---------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Weighted-average assumptions as of December 31
Discount rate................................... 7.00% 7.25% 6.75% 7.00%
Expected return on plan assets.................. 9.50% 9.50% N/A N/A
Rate of compensation increase................... 5.00% 5.00% 5.00% 5.00%
For measurement purposes, an 8.0% annual rate of increase in per capita cost of
covered health care benefits was assumed for 2003. The rate was assumed to
decrease gradually 0.5% per year to 6.0% in 2007.
Hughes determines the discount rate assumption annually for each of its
retirement-related benefit plans on December 1, Hughes' SFAS No. 87 measurement
date, utilizing the yield of high quality fixed-income debt instruments.
Hughes' expected return on plan assets assumption is derived from a review of
Hughes' long-term actual return on plan assets and periodic detailed studies
conducted by Hughes' actuary. While the review gives appropriate consideration
to recent fund performance and historical returns, the assumption is primarily a
long-term, prospective rate. Based on the most recent review, Hughes is revising
its expected return on plan assets assumption for 2003 to 9.0%. Hughes has
achieved a compounded annual return on plan assets of about 12% over the 20 year
period ended December 1, 2002.
Other
Postretirement
Pension Benefits Benefits
------------------ ----------------
2002 2001 2000 2002 2001 2000
------------------ ----------------
(Dollars in Millions)
Components of net periodic benefit cost
Benefits earned during the year................ $21.7 $16.0 $14.7 $0.5 $0.5 $0.6
Interest accrued on benefits earned in
prior years.................................. 33.8 32.7 30.4 2.2 1.9 2.7
Expected return on assets...................... (36.5) (41.0) (37.9) -- -- --
Amortization components.
Amount resulting from changes in plan
provisions................................ 2.2 2.1 0.1 -- -- --
Net amount resulting from changes in plan
experience and actuarial assumptions...... 3.0 0.4 3.6 -- ( 0.5) 0.8
--- --- --- --- --- ---
Net periodic benefit cost............... $24.2 $10.2 $10.9 $2.7 $1.9 $4.1
===== ==== ==== === === ===
The projected benefit obligation and accumulated benefit obligation for the
pension plans with accumulated benefit obligations in excess of plan assets were
$493.5 million and $440.1 million, respectively, as of December 31, 2002 and
$62.3 million and $52.8 million, respectively, as of December 31, 2001. The fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets was $357.1 as of December 31, 2002.
IV-81
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
A one-percentage point change in assumed health care cost trend rates would have
the following effects on other postretirement benefits:
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
(Dollars in Millions)
Effect on total of service and interest
cost components............................. $0.2 $(0.2)
Effect on postretirement benefit obligation.... 2.5 (2.3)
Hughes maintains 401(k) plans for qualified employees. A portion of employee
contributions are matched by Hughes and amounted to $15.7 million, $17.7 million
and $15.1 million in 2002, 2001 and 2000, respectively.
Hughes has disclosed certain amounts associated with estimated future
postretirement benefits other than pensions and characterized such amounts as
"other postretirement benefit obligation." Notwithstanding the recording of such
amounts and the use of these terms, Hughes does not admit or otherwise
acknowledge that such amounts or existing postretirement benefit plans of Hughes
(other than pensions) represent legally enforceable liabilities of Hughes.
Note 12: Stockholder's Equity
GM holds all of the outstanding common stock of Hughes, which consists of 200
shares of $0.01 par value common stock.
The following represents changes in the components of OCI, net of taxes, as of
December 31:
2002 2001 2000
----------------------- --------------------------- ------------------------
Tax
Pre-tax Tax Net Pre-tax (Benefit) Net Pre-tax Tax Net
Amount Benefit Amount Amount Expense Amount Amount Benefit Amount
------ ------- ------ ------ ------- ------ ------ ------- ------
(Dollars in Millions)
Minimum pension liability
adjustments............... $(25.2) $(10.2) $(15.0) $(2.0) $(0.8) $(1.2) $(14.8) $(6.0) $(8.8)
Foreign currency translation
adjustments:
Unrealized gains (losses) 1.6 -- 1.6 (60.7) -- (60.7) (25.9) -- (25.9)
Less: reclassification
adjustment for net losses
recognized during
the period.............. 48.9 -- 48.9 -- -- -- -- -- --
Unrealized losses on securities
and derivatives:
Unrealized holding losses. (162.6) (65.8) (96.8) (203.2) (82.2) (121.0) (351.0) (142.0) (209.0)
Less: reclassification
adjustment for net (gains)
losses recognized
during the period....... (162.8) (63.7) (99.1) 95.2 38.6 56.6 -- -- --
Note 13: Incentive Plans
Under the Hughes Electronics Corporation Incentive Plan (the "Plan"), as
approved by the GM Board of Directors in 1999, shares, rights or options to
acquire up to 159 million shares of GM Class H
IV-82
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
common stock on a cumulative basis were authorized for grant, of which 4.6
million shares were available at December 31, 2002 subject to GM Executive
Compensation Committee approval.
The GM Executive Compensation Committee may grant options and other rights to
acquire shares of GM Class H common stock under the provisions of the Plan. The
option price is equal to 100% of the fair market value of GM Class H common
stock on the date the options are granted. These nonqualified options generally
vest over two to five years, vest immediately in the event of certain
transactions, expire ten years from date of grant and are subject to earlier
termination under certain conditions.
Changes in the status of outstanding options were as follows:
Shares Under Weighted-Average
Option Exercise Price
GM Class H Common Stock
Outstanding at December 31, 1999 47,506,068 $13.28
Granted........................... 35,538,026 37.06
Exercised......................... (5,718,726) 11.88
Terminated........................ ( 10,976,113) 31.47
------------
Outstanding at December 31, 2000 66,349,255 23.04
Granted........................... 37,971,644 23.34
Exercised......................... (1,946,460) 11.44
Terminated........................ (6,565,541) 27.66
-----------
Outstanding at December 31, 2001 95,808,898 23.08
Granted........................... 290,000 15.71
Exercised......................... (570,855) 13.44
Terminated........................ (1,903,967) 21.03
-----------
Outstanding at December 31, 2002 93,624,076 23.16
==========
The following table summarizes information about the Plan stock options
outstanding at December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- --------------- ----------- ------------ -------- ----------- ----------
$3.00 to $8.99 1,246,998 1.8 $7.20 1,246,998 $7.20
9.00 to 16.99 28,412,802 5.1 12.61 27,430,578 12.55
17.00 to 24.99 22,859,726 7.6 19.56 11,393,598 19.09
25.00 to 32.99 17,519,754 8.0 27.80 7,000,140 28.34
33.00 to 41.99 23,584,796 7.3 37.10 7,652,282 40.38
---------- ---------
93,624,076 6.8 23.16 54,723,596 19.60
========== ==========
On May 5, 1997, PanAmSat adopted a stock option incentive plan with terms
similar to the Plan. As of December 31, 2002, PanAmSat had 6,765,242 options
outstanding to purchase its common
IV-83
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
stock with exercise prices ranging from $14.64 per share to $63.25 per share.
The options vest ratably over three to four years and have a remaining life
ranging from four to ten years. At December 31, 2002, 2,749,027 options were
exercisable at a weighted average exercise price of $36.37 per share. The
PanAmSat options have been considered in the following pro forma analysis.
The following table presents pro forma information as if Hughes recorded
compensation cost using the fair value of issued options on their grant date, as
required by SFAS No. 123, "Accounting for Stock Based Compensation":
2002 2001 2000
---- ---- ----
(Dollars in Millions)
Earnings (loss) used for computation
of available separate
consolidated net income
(loss), as reported.............. $(940.7) $(714.7) $732.9
Assumed stock compensation costs.. (171.7) (231.8) (147.6)
----- ----- -----
Pro forma earnings (loss) used for
computation of available separate
consolidated net income (loss)... $(1,112.4) $(946.5) $585.3
======= ===== =====
The pro forma amounts for compensation cost are not indicative of the effects on
operating results for future periods.
The following table presents the estimated weighted-average fair value for
options granted under the Plan using the Black-Scholes valuation model and the
assumptions used in the calculations:
2002 2001 2000
---- ---- ----
Estimated fair value per option granted.. $9.19 $13.66 $20.39
Average exercise price per option granted 15.71 23.34 37.06
Expected stock volatility.................. 51.6% 51.3% 42.1%
Risk-free interest rate.................... 4.7% 5.1% 6.5%
Expected option life (in years)............ 7.0 7.0 6.9
Note 14: Other Income and Expenses
2002 2001 2000
---- ---- ----
(Dollars in Millions)
Equity losses from unconsolidated affiliates.........$(70.1) $(61.3) $(164.2)
EchoStar Merger termination payment.................. 600.0 -- --
Net gain (loss) on discontinuation of businesses... 41.1 32.0 (128.4)
Net loss on write-down of investments to fair value (180.6) (239.0) --
Net gain from sale of investments.................... 84.1 130.6 --
Other................................................ (49.0) 45.0 --
----- ----- --
Total Other, net.................................. $425.5 $(92.7) $(292.6)
===== ==== =====
IV-84
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
2002 equity losses from unconsolidated affiliates are primarily comprised of
losses at the DLA local operating companies. 2001 equity losses from
unconsolidated affiliates are primarily comprised of losses at the DLA LOC's and
Hughes Tele.com (India) Limited ("HTIL"), and in 2000, DIRECTV Japan.
Note 15: Related-Party Transactions
In the ordinary course of its operations, Hughes sells products and services to
related parties, which include GM and equity method investees. During the years
ended December 31, 2002, 2001 and 2000, Hughes sold telecommunications services
and equipment to GM and HTIL, and sold broadcast programming and other services
to DLA LOC's located in Puerto Rico, Venezuela and Argentina. As a result of the
HTIL and Galaxy Entertainment Argentina S.A. ("GEA") transactions described in
Note 18, HTIL and GEA are not considered related parties subsequent to the
completion of those transactions on December 6, 2002 and May 1, 2001,
respectively.
The following table summarizes significant related-party transactions for the
years ended December 31:
2002 2001 2000
---- ---- ----
(Dollars in Millions)
Revenues........... $211.1 $238.8 $243.3
Costs and expenses 117.9 126.2 149.9
The following table sets forth the amounts of accounts receivable from related
parties as of December 31:
2002 2001
---- ----
(Dollars in Millions)
Accounts receivable from related parties........... $317.4 $237.7
Long-term accounts receivable from related parties -- 75.8
The December 31, 2002 accounts receivable balance is primarily from DLA LOC's.
Note 16: 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
IV-85
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
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.
During the second quarter of 2000, GM completed an exchange offer in which GM
repurchased 86 million shares of GM $1 2/3 par value common stock and issued 92
million shares (prior to giving effect to the stock split during 2000) of GM
Class H common stock. In addition, on June 12, 2000, GM contributed
approximately 54 million shares (prior to giving effect to the stock split
during 2000) and approximately 7 million shares (prior to the stock split during
2000) of GM Class H common stock to its U.S. Hourly-Rate Employees Pension Plan
and VEBA trust, respectively.
On June 6, 2000, the GM Board declared a three-for-one stock split of the GM
Class H common stock. The stock split was in the form of a 200% stock dividend,
paid on June 30, 2000 to GM Class H common stockholders of record on June 13,
2000. As a result, the numbers of shares of GM Class H common stock presented
for all periods prior to the stock split have been adjusted to reflect the stock
split, unless otherwise noted.
Shares of Class H common stock delivered by GM in connection with the award of
such shares to and the exercise of stock options by employees of Hughes
increases the numerator and denominator of the fraction referred to above. From
time to time, in anticipation of exercises of stock options, Hughes may purchase
Class H common stock on the open market. Upon purchase, these shares are retired
and therefore decrease the numerator and denominator of the fraction referred to
above.
IV-86
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The following table sets forth comparative information regarding GM Class H
common stock and the GM Class H dividend base for the years ended December 31,
2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
(Shares in Millions)
GM Class H Common Stock Outstanding
Shares at January 1.............................. 877.5 875.3 411.3
Shares issued for mandatory redemption of
GM Series H preference stock................... 80.1 -- --
Shares issued related to GM exchange offer....... -- -- 276.0
Shares issued related to employee benefit plans.. -- -- 181.5
Shares issued for stock options exercised
and other...................................... 0.7 2.2 6.5
--- --- ---
Shares at December 31............................ 958.3 877.5 875.3
===== ===== =====
Weighted average number of shares of
GM Class H common stock
outstanding (Numerator)........................ 919.5 876.3 681.2
===== ===== =====
GM Class H Dividend Base
GM Class H dividend base at January 1............ 1,301.1 1,298.9 1,292.4
Increase for mandatory redemption of
GM Series H preference stock................... 80.1 -- --
Increase for stock options exercised and other... 0.7 2.2 6.5
--- --- ---
GM Class H dividend base at December 31.......... 1,381.9 1,301.1 1,298.9
======= ======= =======
Weighted average GM Class H dividend
base (Denominator)............................. 1,343.1 1,300.0 1,297.0
======= ======= =======
Note 17: Hughes Series A Preferred Stock and Hughes Series B Convertible
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 preferred stock accrued quarterly dividends at a rate of 6.25% per year. 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 were
payable to GM quarterly at an annual rate of 6.25%. The underwriting discount on
the Hughes Series A Preferred Stock was amortized over three years.
On June 24, 2002, the GM Series H preference stock, pursuant to its terms, was
mandatorily converted to about 80.1 million shares of GM Class H common stock.
As a result, the number of shares in the Class H dividend base and the number of
shares of GM Class H common stock outstanding were each increased by the number
of shares issued. Also on June 24, 2002, in connection with the automatic
conversion of the GM Series H preference stock held by AOL, GM contributed the
$1.5 billion of Hughes Series A Preferred Stock back to Hughes, which Hughes
cancelled and recorded as a contribution to "Capital stock and additional
paid-in capital." In exchange for the Hughes Series A Preferred Stock, Hughes
issued $914.1 million of Hughes Series B Convertible Preferred Stock to GM,
which was recorded as a reduction to "Capital stock and additional paid-in
capital." The Hughes Series B Convertible Preferred Stock, which does not accrue
dividends, may be converted to Hughes Class B common stock at the option of GM
anytime after June 24, 2003 ("Optional Conversion").
IV-87
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
As more fully described in the Amended and Restated Certificate of Incorporation
of Hughes, the number of shares of Hughes Class B common stock that will be
issued upon Optional Conversion will be equal to the number of shares of Hughes
Series B Convertible Preferred Stock converted, multiplied by a fraction, the
numerator of which is the stated value of the Hughes Series B Convertible
Preferred Stock ($1,000.00 per share) and the denominator of which is the Fair
Market Value of a share of Hughes Class B common stock (as determined in
accordance with the Amended and Restated Certificate of Incorporation of
Hughes). Issuance of Hughes Class B common stock will have no impact on the
number of GM Class H common stock outstanding and no impact on the GM Class H
dividend base.
Note 18: Acquisitions and Divestitures
DIRECTV Broadband
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 was
operated 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 and
2000 as if the acquisition had occurred as of the beginning of the periods,
giving effect to purchase accounting adjustments. The pro forma data is
presented for informational purposes only and may not necessarily reflect the
consolidated results of operations of Hughes had Telocity operated as part of
Hughes for the periods presented, nor are they necessarily indicative of the
results of future operations. The pro forma information excludes the effect of
non-recurring charges.
2001 2000
---- ----
(Dollars in Millions)
Total revenues.................................. $8,272.1 $7,297.0
Income (loss) before cumulative effect of
accounting change............................. (657.8) 670.0
Net income (loss)............................... (665.2) 670.0
Pro forma earnings (loss) used for
computation of available separate
consolidated net income (loss)................ (758.3) 589.9
On December 13, 2002, Hughes announced that DIRECTV Broadband would close its
high-speed Internet service business in the first quarter of 2003 and transition
its existing customers to alternative service providers. As a result, in
December 2002, Hughes notified approximately half of DIRECTV Broadband's 400
employees of a layoff, with a minimum of 60 days notice during which time they
were paid, followed by receipt of a severance package. The remaining employees
worked with customers during the transition and assisted with the closure of the
business, which occurred on February 28, 2003. As a result, Hughes recorded a
fourth quarter 2002 charge of $92.8 million related to accruals for employee
severance benefits, contract termination payments and write-off of customer
premise equipment. This charge was recorded in "Selling, general and
administrative expenses" in the Consolidated Statements of Operations and
Available Separate Consolidated Net Income (Loss). Included in the $92.8 million
charge were accruals for employee severance benefits of $21.3 million and
contract termination payments of $18.6 million. No amounts were paid as of
December 31, 2002.
The financial information included herein reflects the acquisition discussed
above from its date of acquisition. The acquisition was accounted for by the
purchase method of accounting and, accordingly,
IV-88
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
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.
Hughes Tele.com (India) Limited
On December 6, 2002, HNS completed a series of transactions to exchange its
equity interest in HTIL of $58.8 million, long-term receivables from HTIL of
$75.0 million, and a net receivable of $25.4 million from HTIL's Indian sponsor,
Ispat, in exchange for investments in Tata Teleservices Limited ("TTSL"). The
transactions were accounted for as a sale of the assets surrendered at their
fair values and the purchase of the instruments in TTSL on the date of the
transactions. HNS allocated the fair value of the assets surrendered of $135.1
million to the assets received, which include redeemable preference shares
($110.1 million), a 15 year zero coupon note ($9.7 million) and 50 million
common stock purchase warrants ($15.3 million), based on their relative fair
values. The preference shares are redeemable at the end of 51 or 75 months at
the option of HNS and convertible to common equity at the end of 75 months at
the option of HNS. The redemption is guaranteed in the form of a put to TTSL's
parent company, Tata Sons. The preference shares are carried at fair value as an
available-for-sale security, with unrealized gains and losses reported net of
tax, as a component of OCI.
Based on the fair value of the assets surrendered on December 6, 2002, HNS
recognized an after-tax loss of approximately $14.1 million, which is comprised
of a pre-tax loss recognized in "Other, net" of $52.1 million, based on the
difference between fair value and carrying value of the assets surrendered and
the requirement to recognize cumulative translation adjustments of $28.0 million
associated with the HTIL investment, which were offset by an approximate $38.0
million tax benefit which includes the tax benefit from equity method losses
that were not previously recognized for tax purposes.
Also during 2002, HNS recorded the receivable from Ispat described above when it
honored a $54.4 million loan guarantee. The receivable was immediately reduced
to its estimated net realizable value of $25.4 million through a charge to
"Other, net" of $29.0 million.
During September 2000, HTIL sold new common shares in a public offering in
India. As a result of this transaction, Hughes' equity interest was reduced from
44.7% to 29.1% and Hughes recorded a $23.3 million increase to "Capital stock
and additional paid-in capital."
Galaxy Entertainment Argentina
On May 1, 2001, DLA, which operates the Latin America DIRECTV business, acquired
from Grupo Clarin S.A. ("Clarin") a 51% ownership interest in GEA, a local
operating company 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 its 3.98% interest back to DLA in November 2003 for $195 million
(see further discussion of this item in Note 21). As a result of the
transaction, Hughes' interest in DLA decreased from 77.8% to 74.7% and Hughes'
ownership in GEA increased from 20% to 58.1%. Hughes' portion of the purchase
price, which amounted to about $130 million, was recorded as an increase to
"Capital stock and additional paid-in capital."
The financial information included herein reflects the acquisition discussed
above from its date of acquisition. The acquisition was 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.
IV-89
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Satellite Systems Manufacturing Businesses
On October 6, 2000, Hughes completed the sale of its satellite systems
manufacturing businesses for $3.75 billion in cash. The transaction resulted in
the recognition of a pre-tax gain of $2,036.0 million, or $1,132.3 million
after-tax. Included in this gain is a net after-tax curtailment loss of $42.0
million related to pension and other postretirement benefit plan assets and
liabilities associated with the Satellite Businesses. The purchase price is
subject to adjustment based upon the final closing date financial statements as
discussed in Note 21.
Summarized financial information for the discontinued operations follows:
2000
-------------------
(Dollars in Millions)
Revenues (excluding intercompany transactions) $1,260.1
Income tax provision............................ 23.2
Net income...................................... 36.1
In a separate, but related transaction, Hughes also sold to Boeing its 50%
interest in HRL Laboratories LLC ("HRL") for $38.5 million, which represented
the net book value of Hughes' interest in HRL at October 6, 2000.
DIRECTV Japan
On March 1, 2000, Hughes announced that the operations of DIRECTV Japan would be
discontinued. Pursuant to an agreement with Japan Digital Broadcasting Services
Inc. (now named Sky Perfect), qualified subscribers to the DIRECTV Japan service
were offered the opportunity to migrate to the Sky Perfect service. DIRECTV
Japan was paid a commission for each subscriber who actually migrated. Hughes
also acquired a 6.6% interest in Sky Perfect. As a result, Hughes wrote-off its
net investment in DIRECTV Japan of $164.6 million and accrued exit costs of
$403.7 million and involuntary termination benefits of $14.5 million. Accrued
exit costs consist of claims arising out of contracts with dealers,
manufacturers, programmers and others, satellite transponder and facility and
equipment leases, subscriber migration and termination costs, and professional
service fees and other. The write-off and accrual were partially offset by the
difference between the cost of the Sky Perfect shares acquired and the estimated
fair value of the shares ($428.8 million), as determined by an independent
appraisal, and by $40.2 million for anticipated contributions from other DIRECTV
Japan shareholders. The net effect of the transaction was a charge to "Other,
net" in the Consolidated Statements of Operations and Available Separate
Consolidated Net Income (Loss) of $170.6 million at March 31, 2000.
DIRECTV Japan employed approximately 290 personnel as of March 31, 2000, of
which 244 were terminated during 2000. All remaining personnel were terminated
in the first quarter of 2001.
During 2002, $41.1 million of accrued liabilities related to the exit costs were
reversed upon the resolution of the remaining claims, resulting in a credit
adjustment to "Other, net." In the third quarter of 2001, $32.0 million of
accrued exit costs were reversed as a credit adjustment to "Other, net." In the
fourth quarter of 2000, $106.6 million of accrued exit costs were reversed and
$0.6 million of involuntary termination benefits were added, resulting in a net
credit adjustment to "Other, net" of $106.0 million. The third quarter of 2001
and fourth quarter of 2000 adjustments made to the exit cost accrual were
primarily attributable to earlier than anticipated cessation of the DIRECTV
IV-90
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Japan broadcasting service, greater than anticipated commission payments for
subscriber migration and favorable settlements of various contracts and claims.
In the fourth quarter of 2000, Sky Perfect completed an initial public offering,
at which date the fair value of Hughes' interest (diluted by the public offering
to approximately 5.3%) in Sky Perfect was approximately $343 million. In the
third quarter of 2001 and fourth quarter of 2000, a portion of the decline in
the value of the Sky Perfect investment was determined to be
"other-than-temporary," resulting in a write-down of the carrying value of the
investment by $212 million and $86 million, respectively. At December 31, 2001,
the investment's market value approximated its carrying value. In October 2002,
Hughes sold all of its interest in Sky Perfect for approximately $105 million in
cash, resulting in a pre-tax loss of about $24.5 million.
Note 19: Derivative Financial Instruments and Risk Management
Hughes' cash flows and earnings are subject to fluctuations resulting from
changes in foreign currency exchange rates, interest rates and changes in the
market value of its equity investments. Hughes manages its exposure to these
market risks through internally established policies and procedures and, when
deemed appropriate, through the use of derivative financial instruments. Hughes
enters into derivative instruments only to the extent considered necessary to
meet its risk management objectives, and does not enter into derivative
contracts for speculative purposes.
Hughes generally conducts its business in U.S. dollars with some business
conducted in a variety of foreign currencies and therefore is exposed to
fluctuations in foreign currency exchange rates. Hughes' objective in managing
its exposure to foreign currency changes is to reduce earnings and cash flow
volatility associated with foreign exchange rate fluctuations. Accordingly,
Hughes enters into foreign exchange contracts to mitigate risks associated with
foreign currency denominated assets, liabilities, commitments and anticipated
foreign currency transactions. By policy, Hughes maintains coverage between
minimum and maximum percentages of its anticipated foreign exchange exposures.
The gains and losses on derivative foreign exchange contracts offset changes in
value of the related exposures.
Hughes is exposed to interest rate changes from its outstanding fixed rate and
floating rate borrowings. Hughes manages its fixed to floating rate debt mix to
mitigate the impact of adverse changes in interest rates on earnings and cash
flows and on the market value of its borrowings. In accordance with policy, from
time to time Hughes may enter into interest rate hedging contracts which
effectively convert floating rate borrowings to fixed, or fixed rate borrowings
to floating.
Hughes is exposed to credit risk in the event of non-performance by the
counterparties to its derivative financial instrument contracts. While Hughes
believes this risk is remote, credit risk is managed through the periodic
monitoring and approval of financially sound counterparties.
Note 20: 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 provided land-based DSL services. Satellite Services is
IV-91
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
engaged in the selling, leasing and operating of satellite transponders and
providing services for cable television systems, news companies, Internet
service providers and private business networks. The Network Systems segment is
a provider of satellite-based private business networks and broadband Internet
access, and a supplier of DIRECTV receiving equipment (set-top boxes and
dishes). Other includes the corporate office and other entities.
IV-92
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Selected information for Hughes' operating segments are reported as follows:
Direct-To-Home Satellite Network
Broadcast Services Systems Other Eliminations Total
--------- -------- ------- ----- ------------ -----
(Dollars in Millions)
2002
External Revenues.... $7,170.0 $647.3 $1,065.7 $51.9 -- $8,934.9
Intersegment Revenues.. 23.3 165.0 104.2 0.4 $(292.9) --
------- ----- ------- ---- ----- -------
Total Revenues....... $7,193.3 $812.3 $1,169.9 $52.3 $(292.9) $8,934.9
------- ----- ------- ---- ----- -------
Operating Profit (Loss) $(505.2) $255.9 $(160.7) $3.3 $7.6 $(399.1)
EBITDA(1)............ 160.8 591.6 (87.0) 6.7 (4.1) 668.0
Depreciation and
Amortization....... 666.0 335.7 73.7 3.5 (11.8) 1,067.1
Goodwill, net........ 2,888.5 2,238.7 2.4 645.6 -- 5,775.2
Intangible Assets, net. 623.7 -- -- 21.0 -- 644.7
Segment Assets....... 7,957.2 6,487.7 2,526.9 974.8 (61.5) 17,885.1
Capital Expenditures... 524.1 294.3 400.4 0.1 79.2 1,298.1
------- ------- ------- ----- ---- --------
2001
External Revenues.... $6,285.4 $709.0 $1,229.6 $40.0 -- $8,264.0
Intersegment Revenues.. 21.0 161.1 96.2 0.3 $(278.6) --
---- ----- ------- --- ----- -------
Total Revenues....... $6,306.4 $870.1 $1,325.8 $40.3 $(278.6) $8,264.0
------- ----- ------- ---- ----- -------
Operating Profit (Loss) $(749.9) $165.3 $(171.8) $(34.5) $33.1 $(757.8)
EBITDA(1)............ (74.8) 580.0 (111.8) (11.5) 8.0 389.9
Depreciation and
Amortization....... 675.1 414.7 60.0 23.0 (25.1) 1,147.7
Goodwill, net........ 3,593.3 2,238.7 18.9 645.7 -- 6,496.6
Intangible Assets, net. 656.5 -- -- 3.7 -- 660.2
Segment Assets....... 9,484.1 6,296.8 2,339.1 1,199.0 (108.9) 19,210.1
Capital Expenditures... 734.3 338.2 664.6 0.4 6.0 1,743.5
------- ------- ------- ------- ----- --------
2000
External Revenues.... $5,208.6 $880.2 $1,176.7 $22.1 -- $7,287.6
Intersegment Revenues.. 29.4 143.4 233.1 5.2 $(411.1) --
------- ----- ------- ---- ----- --
Total Revenues....... $5,238.0 $1,023.6 $1,409.8 $27.3 $(411.1) $7,287.6
------- ------- ------- ---- ----- -------
Operating Profit (Loss) $(557.9) $356.6 $(63.5) $(67.9) $(21.4) $(354.1)
EBITDA(1)............ (24.5) 694.0 0.1 (46.7) (28.9) 594.0
Depreciation and
Amortization....... 533.4 337.4 63.6 21.2 (7.5) 948.1
Goodwill, net........ 3,432.4 2,303.6 41.6 663.2 -- 6,440.8
Intangible Assets, net. 707.5 -- -- 3.0 -- 710.5
Segment Assets....... 9,278.3 6,178.4 1,789.9 2,154.0 (121.3) 19,279.3
Capital Expenditures... 913.5 449.5 369.5 0.6 (17.0) 1,716.1
------- ------- ------- ------- ----- --------
(1) EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with
accounting principles generally accepted in the United States of America.
Hughes management uses EBITDA to evaluate the operating performance of
Hughes and its business segments, to allocate resources and capital to its
IV-93
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
business segments and as a measure of performance for incentive compensation
purposes. Hughes believes EBITDA is a measure of performance used by some
investors, equity analysts and others to make informed investment decisions.
EBITDA is used as an analytical indicator of income generated to service debt
and fund capital expenditures. In addition, multiples of current or projected
EBITDA are used to estimate current or prospective enterprise value. Hughes
management believes that EBITDA is a common measure used to compare Hughes'
operating performance and enterprise value to other communications,
entertainment and media service providers. EBITDA does not give effect to
cash used for debt service requirements consisting of interest payments of
$398.0 million, $268.4 million and $312.9 million for the years ended
December 31, 2002, 2001 and 2000, respectively. As a result, EBITDA does not
reflect funds available for investment in the business of Hughes, dividends
or other discretionary uses. EBITDA as presented herein may not be comparable
to similarly titled measures reported by other companies.
The following represents a reconciliation of EBITDA to reported net income
(loss) on the Consolidated Statements of Operations and Available Separate
Consolidated Net Income (Loss):
Years Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
(Dollars in Millions)
EBITDA....................................... $668.0 $389.9 $594.0
Depreciation and amortization................(1,067.1) (1,147.7) (948.1)
------- ------- -----
Operating loss............................... (399.1) (757.8) (354.1)
Interest income.............................. 24.5 56.7 49.3
Interest expense............................. (336.2) (195.9) (218.2)
Other, net................................... 425.5 (92.7) (292.6)
----- ----- -----
Loss from continuing operations before
income taxes, minority interest and
cumulative effect of accounting changes.... (285.3) (989.7) (815.6)
Income tax benefit........................... 94.4 325.6 406.1
Minority interests in net (earnings)
losses of subsidiaries..................... (21.6) 49.9 54.1
---- ----- -----
Loss from continuing operations
before cumulative effect of
accounting changes......................... (212.5) (614.2) (355.4)
Income from discontinued operations,
net of taxes............................... -- -- 36.1
Gain on sale of discontinued operations,
net of taxes............................... -- -- 1,132.3
Cumulative effect of accounting changes,
net of taxes................................ (681.3) (7.4) --
----- --- -------
Net income (loss)............................ $(893.8) $(621.6) $813.0
===== ===== =====
IV-94
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The following table presents revenues earned from customers located in different
geographic areas. Property is grouped by its physical location. All satellites
are reported as United States assets.
2002 2001 2000
---------------------- ----------------------- -----------------------
Total Net Property Total Net Property Total Net Property
Revenues & Satellites Revenues & Satellites Revenues & Satellites
-------- ------------ -------- ------------ -------- ------------
(Dollars in Millions)
North America
United States........... $7,549.1 $6,401.0 $6,688.7 $6,331.2 $6,008.2 $5,577.3
Canada and Mexico....... 208.5 196.7 206.8 207.4 198.8 89.3
------- ------- ------- ------- ------- -------
Total North America... 7,757.6 6,597.7 6,895.5 6,538.6 6,207.0 5,666.6
------- ------- ------- ------- ------- -------
Europe
United Kingdom.......... 167.9 7.3 143.2 8.3 114.7 5.6
Other................... 21.4 0.3 64.3 0.4 19.7 0.4
---- --- ----- --- ---- ---
Total Europe.......... 189.3 7.6 207.5 8.7 134.4 6.0
----- --- ----- --- ----- ---
South America and the
Caribbean
Brazil.................. 207.9 149.9 247.0 220.0 285.4 234.3
Argentina............... 88.8 126.5 156.2 171.2 97.6 3.8
Other................... 340.1 28.3 321.3 34.2 184.7 8.3
----- ---- ----- ---- ----- -----
Total South America and
the Caribbean....... 636.8 304.7 724.5 425.4 567.7 246.4
----- ----- ----- ----- ----- -----
Asia
Japan................... 13.7 -- 21.1 0.5 34.5 0.6
India................... 76.5 27.3 93.5 29.3 81.1 16.4
China................... 21.2 1.2 32.7 0.5 35.1 0.7
Other................... 140.6 1.4 141.4 0.9 139.4 0.9
----- --- ----- --- ----- ---
Total Asia............ 252.0 29.9 288.7 31.2 290.1 18.6
----- ---- ----- ---- ----- ----
Total Middle East........ 21.2 -- 24.0 0.1 14.0 --
Total Africa............. 78.0 0.1 123.8 0.4 74.4 0.2
---- --- ----- --- ---- ---
Total................. $8,934.9 $6,940.0 $8,264.0 $7,004.4 $7,287.6 $5,937.8
======= ======= ======= ======= ======= =======
Note 21: Commitments and Contingencies
Litigation
In connection with the 2000 sale by Hughes of its satellite systems
manufacturing businesses to Boeing, the stock purchase agreement provides for
potential adjustment to the purchase price based upon the final closing date
financial statements of the satellite systems manufacturing businesses. The
stock purchase agreement also provides for a dispute resolution process to
resolve any disputes that arise in determining the purchase price adjustment.
Based upon the final closing date financial statements of the satellite systems
manufacturing businesses that were prepared by Hughes, Boeing is owed a purchase
price adjustment of $164 million plus interest at a rate of 9.5% from the date
of sale, the total amount of which has been provided for in Hughes' consolidated
financial statements. However, Boeing has submitted additional proposed
adjustments, which are being resolved through
IV-95
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
the dispute resolution process. As of December 31, 2002, approximately $670
million of proposed adjustments remain unresolved. Hughes is contesting the
matter in the arbitration process, which will result in a binding decision
unless the matter is otherwise settled. Although Hughes believes it has
adequately provided for the disposition of this matter, the impact of its
disposition cannot be determined at this time. 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 results of operations and
financial position.
As previously reported, Hughes Communications Galaxy, Inc. ("HCGI") filed a
lawsuit on March 22, 1991 against the United States 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 and in April 2002, the United
States government paid to Hughes 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.
With respect to the previously reported dispute between General Electric Capital
Corporation ("GECC") and DIRECTV arising out of a contract entered into between
the parties on July 31, 1995, the parties executed an agreement on June 4, 2002
to settle the matter for $180 million. The settlement resulted in DIRECTV
recording a second quarter 2002 pre-tax charge of $47 million to "Interest
expense." In the first quarter of 2002, DIRECTV increased its provision for loss
related to this matter by $83 million, of which $56 million was recorded as a
charge to "Selling, general and administrative expenses" and $27 million was
recorded as a charge to "Interest expense." Previously, DIRECTV had accrued $50
million as of December 31, 1999 associated with the expected settlement of this
claim. The $180 million settlement was paid to GECC in June 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
December 31, 2002. After discussion with counsel representing Hughes in those
actions, it is the opinion of management that such liability is not expected to
have a material adverse effect on Hughes' consolidated results of operations and
financial position.
Other
The in-orbit satellites of Hughes and its subsidiaries are subject to the risk
of failing prematurely due to, among other things, mechanical failure, collision
with objects in space or an inability to maintain proper orbit. Satellites are
subject to the risk of launch delay and failure, destruction and damage while on
the ground or during launch and failure to become fully operational once
launched. Delays in the production or launch of a satellite or the complete or
partial loss of a satellite, in-orbit or during launch, could have a material
adverse impact on the operation of Hughes' businesses. Hughes has, in the past,
experienced technical anomalies on some of its satellites. Service interruptions
caused by anomalies, depending on their severity, could result in claims by
affected customers for termination of their transponder agreements, cancellation
of other service contracts or the loss of other customers.
IV-96
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
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
$563.5 million and the book value of the satellites that were not insured was
$1,049.7 million at December 31, 2002.
PanAmSat and the manufacturer of the Galaxy VIII-iR satellite have agreed in
principle to terminate the Galaxy VIII-iR satellite construction contract. The
agreement is subject to the execution of mutually acceptable documentation, but
there can be no assurance that this will occur. In connection with the
termination of the contract, as of December 31, 2002, PanAmSat had a receivable
due from the satellite manufacturer of $72.0 million, which represents amounts
previously paid to the manufacturer (of approximately $58.8 million), liquidated
damages and interest owed under the construction agreement. PanAmSat expects
that it will collect substantially all of this receivable and does not
anticipate recording a charge to earnings related to this receivable. In
addition, PanAmSat has agreed with the Galaxy VIII-iR launch vehicle provider to
defer use of the launch to a future satellite. PanAmSat had intended to locate
the Galaxy VIII-iR satellite at 95 degrees west longitude. However, with the
successful launch and commencement of service on the Galaxy IIIC satellite at
this same orbital location in September 2002, PanAmSat believes it has
sufficient capacity to meet customer demand for services at this location.
Hughes is contingently liable under standby letters of credit and bonds in the
aggregate amount of $65.1 million which were undrawn at December 31, 2002 and
DLA has guaranteed $3.0 million of bank debt related to non-consolidated DLA
local operating companies, which is due in varying amounts through 2005.
Additionally, as described in Note 18, DLA may be required to repurchase
Clarin's 3.98% interest in DLA for $195 million in November 2003. In the first
quarter of 2003, Clarin notified DLA that it believes that DLA's decision to
initiate discussions with Clarin and certain other programmers, suppliers and
business associates to address DLA's financial and operational challenges has
caused DLA to be responsible immediately to purchase Clarin's equity interest in
DLA. See Note 22 for further discussion of this matter.
The Hughes Board of Directors has approved several benefit plans designed to
provide benefits for the retention of about 205 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 $105 million for retention
benefits will be paid, with approximately 50% paid at the time of a
change-in-control and 50% paid up to 12 months following the date of a
change-in-control. The amount of severance benefits to be paid will be based
upon decisions that will be made relating to employee layoffs, if any, following
the date of a change-in-control. In addition, as of December 31, 2002,
approximately 30.5 million employee stock options to purchase shares of GM Class
H common stock will vest upon a qualifying change-in-control and up to an
additional 8.4 million employee stock options could vest if employees are laid
off within one year of a change-in-control.
IV-97
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
At December 31, 2002, minimum future commitments under noncancelable operating
leases having lease terms in excess of one year were primarily for real property
and aggregated $769.4 million, payable as follows: $252.5 million in 2003,
$210.6 million in 2004, $107.6 million in 2005, $52.3 million in 2006, $46.1
million in 2007, and $100.3 million thereafter. Certain of these leases contain
escalation clauses and renewal or purchase options. Rental expenses under
operating leases, net of sublease rental income, were $68.0 million in 2002,
$59.7 million in 2001 and $55.9 million in 2000.
Hughes has minimum commitments under noncancelable satellite construction and
launch contracts and programming agreements. Minimum payments over the terms of
applicable contracts are anticipated to be approximately $3,461.5 million,
payable as follows: $825.1 million in 2003, $596.8 million in 2004, $437.5
million in 2005, $693.0 million in 2006, $762.1 million in 2007, and $147.0
million thereafter.
Note 22: Subsequent Events
During the first quarter of 2003, Hughes and AOL agreed to terminate their
strategic alliance, which the companies had entered into in June 1999. In
connection with the termination of the alliance, Hughes recorded a pre-tax
charge of $23 million in the fourth quarter of 2002 to "Selling, general and
administrative expenses" and was released from its commitment to spend up to
approximately $1 billion in additional sales, marketing, development and
promotion efforts in support of certain specified products and services. Under
the terms of the agreement, HNS will continue to provide services to current
bundled AOL broadband subscribers using the HNS high-speed Internet satellite
service as the companies develop a transition plan to an unbundled service.
In the first quarter of 2003, Hughes completed a series of financing
transactions to replace the Amended Credit Agreement with a capital structure
that is more long-term in nature. On February 28, 2003, DIRECTV issued $1.4
billion in senior notes due in 2013. The ten-year senior notes are unsecured
indebtedness guaranteed by all of DIRECTV's domestic subsidiaries and bear
interest at 8.375%. In addition, on March 6, 2003, DIRECTV entered into a new
senior secured credit facility with total term loan and revolving loan
commitments of $1.675 billion. The new senior secured credit facility is
comprised of a $375.0 million Tranche A Term Loan, $200.0 million of which was
undrawn at March 6, 2003, a $1,050.0 million Tranche B Term Loan and a $250.0
million revolving credit facility which was undrawn at March 6, 2003. The new
senior secured credit facility has a term of five to seven years and is secured
by substantially all of DIRECTV's assets and guaranteed by all of DIRECTV's
domestic subsidiaries. The revolving credit facility and term loans bear
interest at LIBOR plus 3.50%. DIRECTV distributed to Hughes the net proceeds
from the senior secured credit facility and the sale of the senior notes
totaling $2.56 billion. The $200 million undrawn portion of the Tranche A Term
Loan is expected to be drawn by December 31, 2003 with the net proceeds
distributed to Hughes. The revolving portion of the senior secured credit
facility will be available to DIRECTV to fund working capital and other
requirements. The above distribution enabled Hughes to repay all amounts
outstanding under its existing Amended Credit Agreement, which was terminated on
February 28, 2003, and is expected to provide sufficient liquidity to fund
Hughes' business plan through projected cash flow breakeven and for Hughes'
other corporate purposes.
DLA has endured subscriber losses and revenue declines as a result of economic
and political instability affecting various countries in which DLA provides
service. As a result, in January 2003, DLA announced the commencement of
discussions with certain programmers, suppliers and business associates to
address DLA's current financial and operational challenges. The agreements which
IV-98
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
DLA is seeking to restructure include certain long-term or exclusive programming
agreements which have resulted in payment obligations substantially in excess of
the current economic value of the programming to DLA. DLA has ceased making
payments under certain of these agreements and has received notices of default
relating to approximately $32 million claimed to be owed to programmers and a
claim that DLA's restructuring had resulted in an acceleration of an obligation
to repurchase a 4% equity interest in DLA for $195 million. DLA does not believe
that the purchase obligation has been accelerated. All such amounts correspond
to agreements that are currently under renegotiation. If DLA does not comply
with its obligations under its programming contracts and is unsuccessful in
reaching a settlement with the relevant programmers, such programmers could seek
to terminate the programming contracts, which would result in a loss of such
programming to DLA. If the discussions do not result in a reasonable agreement
in the near future, DLA has indicated that it would consider other options,
including restructuring the company under Chapter 11 of the U.S. bankruptcy law.
If DLA initiates proceedings under Chapter 11 of the U.S. bankruptcy law, it
could reject some or all of its long-term programming agreements (as well as
other non-essential executory contracts), in which event the programming related
to such rejected agreements would no longer be available to DLA. This could
result in increased churn or reduced demand for the DLA service, which would be
a consideration for DLA in determining which programming contracts to reject in
the event of Chapter 11 bankruptcy proceedings. A filing under Chapter 11 of the
U.S. bankruptcy law could result in a charge in a future period that could be
material to Hughes' consolidated results of operations and financial position.
On February 19, 2003, PanAmSat filed proofs of loss under the insurance policies
for Galaxy XI and PAS-1R for constructive total losses based on degradation of
the solar panels. Service to existing customers has not been affected, and
PanAmSat expects that both of these satellites will continue to serve these
existing customers. The insurance policies for these satellites total
approximately $289 million and $345 million, respectively, and both include a
salvage provision for PanAmSat to share 10% of future revenues from these
satellites with their respective insurers if the proof of loss is accepted. The
availability and use of the proceeds from these insurance claims are restricted
by the agreements governing PanAmSat's debt obligations. No assurances can be
made that the proof of loss with respect to these two satellites will be
accepted by the insurers. PanAmSat is working with the satellite manufacturer to
determine the long-term implications to the satellites and will continue to
assess the operational impact these losses may have. At this time, based upon
all information currently available to PanAmSat, as well as planned
modifications to the operation of the satellites in order to maximize revenue
generation, PanAmSat currently expects to operate these satellites through their
expected economic ends of life, although a portion of the transponder capacity
on these satellites will not be useable during such time. Hughes currently
believes that the net book values of these satellites are fully recoverable and
does not expect a material impact on 2003 revenues as a result of the
difficulties on these two satellites.
On February 28, 2003, GM announced plans to contribute approximately 150 million
shares of GM Class H common stock to certain of its U.S. employee benefit plans.
GM expects to make the contribution during the month of March 2003. The
contribution would increase the amount of GM Class H common stock held by GM's
employee benefit plans to approximately 330 million shares and reduce GM's
retained economic interest in Hughes to approximately 20.0% from 30.7%.
As previously reported, Hughes has had periodic discussions with the United
States Department of State ("State Department") directed at potential settlement
of administrative concerns related to past export activities with China. On
December 26, 2002, the State Department issued a formal charging letter to
Hughes and Boeing Satellite Systems, Inc. ("BSS"). As part of the sale of the
satellite systems
IV-99
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (concluded)
manufacturing businesses to Boeing, Hughes retained liability for certain
possible fines and penalties and certain financial consequences of debarment or
suspension that could be imposed by the State Department in connection with this
matter. Hughes and BSS have now settled this matter through execution of a
Consent Agreement with the State Department and a separate agreement among
Hughes, BSS and Boeing. The Consent Agreement requires the payment of a fine in
the aggregate amount of $20 million ($5 million of which is to be reimbursed to
Hughes by BSS) to be paid in 8 equal installments over 7 years, which has been
provided for in Hughes' consolidated financial statements as of December 31,
2002, a commitment by Hughes to spend $2 million over 5 years on internal export
compliance, and various improvements in Hughes' export program. The State
Department has agreed that there will be no suspension or debarment for either
company as part of the settlement. This resolves all outstanding government
action related to the China matters and all claims among Boeing, BSS and Hughes
related to these matters.
* * *
IV-100
HUGHES ELECTRONICS CORPORATION
SUPPLEMENTAL INFORMATION
Selected Quarterly Data (Unaudited) 1st 2nd 3rd 4th
- ----------------------------------- ------------------------------------
(Dollars in Millions Except Per Share
Amounts) 2002 Quarters
Revenues....................................... $2,038.4 $2,210.0 $2,214.8 $2,471.7
-------- -------- -------- --------
Income (loss) before income taxes,
minority interests and
cumulative effect of accounting change(1).... $(241.5) $(244.5) $(15.3) $216.0
Income tax benefit (expense)................... 91.8 92.9 5.8 (96.1)
Minority interests in net earnings of
subsidiaries................................... (6.7) (3.5) (4.1) (7.3)
Cumulative effect of accounting change,
net of taxes................................. (681.3) -- -- --
----- ---- ---- ----
Net income (loss).............................. (837.7) (155.1) (13.6) 112.6
Earnings (loss) used for
computation of available separate
consolidated net income (loss)............... $(861.8) $(177.9) $(13.6) $112.6
===== ===== ==== =====
Average number of shares of
General Motors Class H
common stock outstanding
(in millions) (Numerator).................... 877.6 884.0 958.1 958.2
Average Class H dividend base
(in millions) (Denominator).................. 1,301.2 1,307.6 1,381.7 1,381.8
Available separate consolidated
net income (loss)............................ $(581.2) $(120.3) $(9.4) $78.1
Stock price range of General Motors
Class H common stock
High........................................ $17.55 $17.00 $11.25 $12.00
Low......................................... $12.50 $8.49 $8.35 $8.00
2001 Quarters
Revenues....................................... $1,893.2 $1,985.4 $2,103.8 $2,281.6
------- ------- ------- -------
Loss before income taxes,
minority interests and
cumulative effect of accounting change....... $(172.1) $(257.7) $(321.2) $(238.7)
Income tax benefit............................. 49.9 74.8 93.1 107.8
Minority interests in net (earnings)
losses of subsidiaries 24.3 26.4 0.9 (1.7)
Cumulative effect of accounting change,
net of taxes................................. (7.4) -- -- --
--- ---- ---- ----
Net loss....................................... (105.3) (156.5) (227.2) (132.6)
Loss used for computation of available separate
consolidated net income (loss)............... $(128.6) $(179.8) $(250.4) $(155.9)
===== ===== ===== =====
Average number of shares of
General Motors Class H
common stock outstanding
(in millions) (Numerator).................... 875.4 875.9 876.8 877.3
Average Class H dividend base
(in millions) (Denominator).................. 1,299.1 1,299.6 1,300.5 1,300.9
Available separate consolidated
net income (loss)............................ $(86.7) $(121.2) $(168.8) $(105.1)
Stock price range of General Motors
Class H common stock
High........................................ $28.00 $25.09 $21.65 $15.80
Low......................................... $17.90 $17.50 $11.50 $12.12
- ----------------------
(1) Included as part of Income (loss) before income taxes, minority
interests and cumulative effect of accounting change for the fourth quarter
of 2002 is a $600 million gain for the settlement on the terminated merger
agreement with EchoStar, partially offset by a $146.3 million write down for
other-than-temporary declines in the fair value of certain equity securities
and a $92.8 million charge related to the shutdown of the DIRECTV Broadband
business.
IV-101
HUGHES ELECTRONICS CORPORATION
CERTIFICATIONS
I, Jack A. Shaw, Director, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Hughes Electronics
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: March 10, 2003
By. /s/ JACK A. SHAW
--------------------------
Jack A. Shaw
Director, President and Chief
Executive Officer
IV-102
HUGHES ELECTRONICS CORPORATION
CERTIFICATIONS
I, Michael J. Gaines, Vice President and Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Hughes Electronics
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: March 10, 2003
By. /s/ MICHAEL J. GAINES
-------------------------
Michael J. Gaines
Vice President and
Chief Financial Officer
IV-103