EXHIBIT 99
HUGHES ELECTRONICS CORPORATION
FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS AND
AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS)
(Unaudited)
Three Months Ended
March 31,
--------------------
2003 2002
-------- --------
(Dollars in Millions)
Revenues
Direct broadcast, leasing and other services.............................. $2,081.8 $1,844.6
Product sales............................................................. 145.5 180.2
-------- --------
Total Revenues........................................................ 2,227.3 2,024.8
-------- --------
Operating Costs and Expenses, Exclusive of Depreciation and Amortization
Expenses Shown Separately Below
Broadcast programming and other costs..................................... 1,061.7 905.7
Cost of products sold..................................................... 143.0 173.0
Selling, general and administrative expenses.............................. 717.6 781.6
Depreciation and amortization............................................. 263.1 252.2
-------- --------
Total Operating Costs and Expenses.................................... 2,185.4 2,112.5
-------- --------
Operating Profit (Loss)...................................................... 41.9 (87.7)
Interest income.............................................................. 6.2 4.3
Interest expense............................................................. (80.5) (76.3)
Reorganization expense....................................................... (6.9) --
Other, net................................................................... (28.1) (41.6)
-------- --------
Loss From Continuing Operations Before Income Taxes, Minority Interests and
Cumulative Effect of Accounting Change..................................... (67.4) (201.3)
Income tax benefit........................................................... 24.2 76.5
Minority interests in net earnings of subsidiaries........................... (7.4) (6.7)
-------- --------
Loss from continuing operations before cumulative effect of accounting change (50.6) (131.5)
Loss from discontinued operations, net of taxes.............................. (0.3) (24.9)
-------- --------
Loss before cumulative effect of accounting change........................... (50.9) (156.4)
Cumulative effect of accounting change, net of taxes......................... -- (681.3)
-------- --------
Net Loss..................................................................... (50.9) (837.7)
Preferred stock dividends.................................................... -- (24.1)
-------- --------
Loss Used for Computation of Available Separate Consolidated Net Income
(Loss)..................................................................... $ (50.9) $ (861.8)
======== ========
Available Separate Consolidated Net Income (Loss)
Average number of shares of General Motors Class H Common Stock
outstanding (in millions) (Numerator)...................................... 989.8 877.6
Average Class H dividend base (in millions) (Denominator).................... 1,381.9 1,301.2
Available Separate Consolidated Net Income (Loss)............................ $ (36.5) $ (581.2)
======== ========
- --------
Reference should be made to the Notes to the Consolidated Financial Statements.
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HUGHES ELECTRONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2003 2002
--------- ------------
(Dollars in Millions)
ASSETS
Current Assets
Cash and cash equivalents............................................. $ 2,962.2 $ 1,128.6
Accounts and notes receivable, net of allowances of $111.4 and $102.4. 1,126.0 1,133.9
Contracts in process.................................................. 123.8 165.9
Inventories........................................................... 290.1 230.3
Deferred income taxes................................................. 84.6 97.7
Prepaid expenses and other............................................ 889.4 900.0
--------- ---------
Total Current Assets.............................................. 5,476.1 3,656.4
Satellites, net.......................................................... 4,912.2 4,922.6
Property, net............................................................ 1,966.4 2,017.4
Goodwill, net............................................................ 5,775.2 5,775.2
Intangible Assets, net................................................... 626.2 644.7
Net Investment in Sales-type Leases...................................... 155.8 161.9
Investments and Other Assets............................................. 762.3 706.9
--------- ---------
Total Assets...................................................... $19,674.2 $17,885.1
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable...................................................... $ 1,150.2 $ 1,039.0
Deferred revenues..................................................... 173.2 166.4
Short-term borrowings and current portion of long-term debt........... 45.1 727.8
Accrued liabilities and other......................................... 1,185.6 1,269.9
--------- ---------
Total Current Liabilities......................................... 2,554.1 3,203.1
Long-Term Debt........................................................... 4,969.7 2,390.0
Other Liabilities and Deferred Credits................................... 1,132.3 1,178.4
Deferred Income Taxes.................................................... 530.2 581.2
Commitments and Contingencies
Minority Interests....................................................... 563.7 555.3
Stockholder's Equity
Capital stock and additional paid-in capital.......................... 10,152.4 10,151.8
Convertible preferred stock, Series B................................. 914.1 914.1
Retained earnings (deficit)........................................... (1,078.0) (1,027.1)
--------- ---------
Subtotal Stockholder's Equity......................................... 9,988.5 10,038.8
--------- ---------
Accumulated Other Comprehensive Loss
Minimum pension liability adjustment................................ (32.3) (32.3)
Accumulated unrealized losses on securities and derivatives......... (4.7) (3.3)
Accumulated foreign currency translation adjustments................ (27.3) (26.1)
--------- ---------
Accumulated other comprehensive loss.................................. (64.3) (61.7)
--------- ---------
Total Stockholder's Equity........................................ 9,924.2 9,977.1
--------- ---------
Total Liabilities and Stockholder's Equity........................ $19,674.2 $17,885.1
========= =========
- --------
Reference should be made to the Notes to the Consolidated Financial Statements.
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HUGHES ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------
2003 2002
-------- --------
(Dollars in Millions)
Cash Flows From Operating Activities
Net Cash Provided by Operating Activities..... $ 294.3 $ 95.5
-------- --------
Cash Flows From Investing Activities
Investment in companies........................... (10.8) --
Purchase of short-term investments................ (46.5) --
Expenditures for property......................... (74.1) (140.6)
Expenditures for satellites....................... (113.4) (205.3)
Proceeds from sale of investments................. 3.8 --
Proceeds from insurance claims.................... -- 173.7
-------- --------
Net Cash Used in Investing Activities......... (241.0) (172.2)
-------- --------
Cash Flows From Financing Activities
Net decrease in short-term borrowings............. (509.9) (877.5)
Long-term debt borrowings......................... 2,625.0 1,800.0
Repayment of long-term debt....................... (218.1) (182.4)
Debt issuance costs............................... (61.8) (54.6)
Stock options exercised........................... 1.1 0.7
Preferred stock dividends paid to General Motors.. -- (23.4)
Payment of Raytheon settlement.................... -- (134.2)
-------- --------
Net Cash Provided by Financing Activities..... 1,836.3 528.6
-------- --------
Net cash provided by continuing operations........... 1,889.6 451.9
Net cash used in discontinued operations............. (56.0) (38.2)
-------- --------
Net increase in cash and cash equivalents............ 1,833.6 413.7
Cash and cash equivalents at beginning of the period. 1,128.6 700.1
-------- --------
Cash and cash equivalents at end of the period....... $2,962.2 $1,113.8
======== ========
Supplemental Cash Flow Information
Interest paid..................................... $ 94.3 $ 69.7
Income taxes paid (refunded)...................... 1.1 (4.6)
- --------
Reference should be made to the Notes to the Consolidated Financial Statements.
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HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
Hughes Electronics Corporation ("Hughes") is a wholly-owned subsidiary of
General Motors Corporation ("GM"). GM Class H common stock tracks the financial
performance of Hughes.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial reporting. In the opinion of
management, all adjustments (consisting only of normal recurring items) which
are necessary for a fair presentation have been included. The results for
interim periods are not necessarily indicative of results that may be expected
for any other interim period or for the full year. For further information,
refer to the consolidated financial statements and footnotes thereto included
in Hughes' Annual Report on Form 10-K for the year ended December 31, 2002
filed with the Securities and Exchange Commission ("SEC") on March 11, 2003 and
all other Hughes filings, including Current Reports on Form 8-K, filed with the
SEC through the date of this report.
Beginning in the third quarter of 2002, Hughes changed the classification of
certain subscriber acquisition costs. The costs of free programming and the
costs of installation and hardware subsidies for subscribers added through
DIRECTV's direct sales program are now included as part of "Broadcast
programming and other costs" in the Consolidated Statements of Operations and
Available Separate Consolidated Net Income (Loss) rather than in "Selling,
general and administrative expenses" where they had previously been reported.
Prior period amounts have been reclassified to conform to the current period
presentation.
Beginning in the first quarter of 2003, Hughes no longer allocates general
corporate expenses to its subsidiaries. Prior period segment information has
been reclassified to conform to the current period presentation.
Note 2. Accounting Changes and New Accounting Standards
Stock-Based Compensation
Beginning in the first quarter of 2003, Hughes adopted the fair value based
method of accounting for stock-based employee compensation of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" and the disclosure requirements of SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS No.
123." Hughes elected to follow the prospective method of adoption, which will
result in the recognition of fair value based compensation cost in the
consolidated statements of operations for stock options and other stock-based
awards granted to employees on or after January 1, 2003. Stock options and
other stock-based awards granted prior to January 1, 2003 continue to be
accounted for under the intrinsic value method of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" in the consolidated
statements of operations.
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HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The following table presents the effect on earnings of recognizing
compensation cost as if the fair value based method had been applied to all
outstanding and unvested stock options and other stock-based awards:
Three Months
Ended March 31,
--------------------
2003 2002
------ -------
(Dollars in Millions)
Loss used for computation of available separate consolidated net income (loss), as
reported........................................................................ $(50.9) $(861.8)
Less: Stock compensation cost, net of taxes, included above....................... 0.8 1.0
Add: Assumed stock compensation costs, net of taxes, under the fair value based
method.......................................................................... (32.9) (58.1)
------ -------
Pro forma loss used for computation of available separate consolidated
net income (loss)............................................................... $(83.0) $(918.9)
====== =======
The pro forma amounts for compensation cost are not necessarily indicative
of the amounts that would be reported in future periods.
Variable Interest Entities
On February 1, 2003, Hughes adopted Financial Accounting Standards Board
("FASB") Interpretation No. 46, "Consolidation of Variable Interest
Entities--an interpretation of ARB No. 51" ("FIN 46"). FIN 46 requires the
consolidation of a variable interest entity ("VIE") where an equity investor
achieves a controlling financial interest through arrangements other than
voting interests, and it is determined that the investor will absorb a majority
of the expected losses and/or receive the majority of residual returns of the
VIE. An entity is deemed a VIE, if by intention, the equity investment at risk
by the investor is insufficient to permit the VIE to finance its activities
without additional subordinated financial support, and under certain other
circumstances. The determination as to whether an investment is an investment
in a VIE is based on the circumstances on the date of investment or when
certain events occur that would indicate a potential change in a previous
determination.
For investments in VIEs made before February 1, 2003, Hughes will follow the
provisions of FIN 46, as required, beginning on July 1, 2003. The application
of this standard on July 1, 2003 could result in the consolidation of certain
affiliates which were previously accounted for under the equity method of
accounting. Hughes has identified the partially-owned local operating companies
("LOC's") providing DIRECTV(R) programming services in Venezuela and Puerto
Rico, of which Hughes owns 19.5% and 40.0%, respectively, as potential VIEs.
Hughes currently accounts for these investments under the equity method of
accounting and reflects approximately 75.0% of their net income or loss in
Hughes' consolidated statements of operations due to the accumulation of net
losses in excess of the other investors' investments. If consolidation of these
LOC's occur as described above, such application of FIN 46 would be reflected
as a cumulative effect of accounting change in the consolidated statements of
operations. Hughes has not yet determined the impact this standard will have on
its consolidated results of operations or financial position, if any.
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HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Accounting for Costs Associated with Exit or Disposal Activities
Hughes adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," on January 1, 2003. SFAS No. 146 generally requires the
recognition of costs associated with exit or disposal activities when incurred
rather than at the date of a commitment to an exit or disposal plan. SFAS No.
146 replaces previous accounting guidance provided by Emerging Issues Task
Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The adoption of this standard did not have
a significant impact on Hughes' consolidated results of operations or financial
position.
Goodwill and Other Intangible Assets
Hughes adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on
January 1, 2002. SFAS No. 142 required that Hughes perform step one of a
two-part transitional impairment test to compare the fair value of each
reportable unit with its respective carrying value, including goodwill. If the
carrying value exceeded the fair value, step two of the transitional impairment
test was required to measure the amount of the impairment loss, if any. SFAS
No. 142 also required that intangible assets be reviewed as of the date of
adoption to determine if they continue to qualify as intangible assets under
the criteria established under SFAS No. 141, "Business Combinations," and to
the extent previously recorded intangible assets do not meet the criteria that
they be reclassified to goodwill.
In the first quarter of 2002, Hughes completed the required transitional
impairment test for intangible assets with indefinite lives, which consisted of
Federal Communications Commission licenses for direct-to-home broadcasting
frequencies ("Orbital Slots"), and determined that no impairment existed
because the fair value of these assets exceeded the carrying value as of
January 1, 2002.
In the second quarter of 2002, with the assistance of an independent
valuation firm, Hughes completed step one of the transitional impairment test
to determine whether a potential impairment existed for goodwill recorded at
January 1, 2002. Primarily based on the present value of expected future cash
flows, it was determined that the carrying values of the DIRECTV Latin America
businesses ("DLA") and DIRECTV Broadband, Inc. ("DIRECTV Broadband") exceeded
their fair values, therefore requiring step two of the impairment test be
performed.
Hughes completed step two of the impairment test for DLA and DIRECTV
Broadband in the fourth quarter of 2002 as required by SFAS No. 142. Step two
of the transitional test required the comparison of the fair value of the
reporting unit goodwill with the carrying value of that goodwill. As a result
of completing step two, Hughes determined that the carrying value of reporting
unit goodwill exceeded the fair value of that goodwill and that $631.8 million
and $107.9 million representing all of the goodwill recorded at DLA and DIRECTV
Broadband, respectively, was impaired. Hughes also recorded a $16.0 million
charge representing its share of the goodwill impairment of an equity method
investee. Therefore, Hughes recorded a cumulative effect of accounting change,
net of taxes, of $681.3 million ($755.7 million pre-tax) as of January 1, 2002
in the Consolidated Statements of Operations and Available Separate
Consolidated Net Income (Loss).
Other
Hughes adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13 and Technical Corrections," on January
1, 2003. SFAS No. 145 eliminates
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HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
the requirement to present gains and losses on the early extinguishment of debt
as an extraordinary item, and resolves accounting inconsistencies for certain
lease modifications. The adoption of this standard had no impact on Hughes'
consolidated results of operations or financial position.
New Accounting Standard
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue
No. 00-21 addresses determination of whether an arrangement involving more than
one deliverable contains more than one unit of accounting and how the related
revenues should be measured and allocated to the separate units of accounting.
EITF Issue No. 00-21 will apply to revenue arrangements entered into after June
30, 2003; however, upon adoption, the EITF allows the guidance to be applied on
a retroactive basis, with the change, if any, reported as a cumulative effect
of accounting change in the consolidated statements of operations. Hughes has
not yet determined the impact this new EITF issue will have on its consolidated
results of operations or financial position, if any.
Note 3. Inventories
Major Classes of Inventories
March 31, December 31,
2003 2002
--------- ------------
(Dollars in Millions)
Productive material and supplies.......... $ 32.8 $ 34.7
Work in process........................... 171.5 111.2
Finished goods............................ 120.4 118.9
Provision for excess or obsolete inventory (34.6) (34.5)
------ ------
Total.................................. $290.1 $230.3
====== ======
Note 4. Intangible Assets
Hughes had $626.2 million and $644.7 million of intangible assets at March
31, 2003 and December 31, 2002, respectively, net of accumulated amortization
of $213.6 million and $195.1 million at March 31, 2003 and December 31, 2002,
respectively. Intangible assets at March 31, 2003, primarily consisted of
$432.3 million, net of $30.6 million of accumulated amortization, of Orbital
Slots which have indefinite useful lives, and $172.8 million, net of $183.0
million of accumulated amortization, of dealer network and subscriber base
intangible assets which are being amortized over their estimated remaining
useful lives of 2 and 12 years, respectively.
Amortization expense for dealer network and subscriber base intangible
assets at the Direct-To-Home Broadcast segment was $2.3 million and $16.2
million, respectively, for the three months ended March 31, 2003. Amortization
expense in total was $1.2 million for the three months ended March 31, 2002.
Estimated amortization expense in each of the next five years is as follows:
$55.5 million in the remainder of 2003; $31.1 million in 2004; $9.2 million in
2005; $9.2 million in 2006; $9.2 million in 2007; and $58.6 million thereafter.
The increase in amortization expense in the first quarter of 2003 compared to
the first quarter of 2002 is due to the reinstatement of subscriber base and
dealer network intangible asset amortization as a result of the issuance of
EITF Issue No. 02-17, "Recognition of Customer Relationship Intangible Assets
Acquired in a Business Combination" in the fourth quarter of 2002. Prior to the
issuance of EITF No. 02-17 in October 2002, Hughes had reclassified its dealer
network and subscriber based intangible assets to goodwill as part of the 2002
implementation of SFAS No. 142 and therefore no amortization expense was
recorded in the first three quarters of 2002 for these assets.
- 38 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Note 5. Short-Term Borrowings and Long-Term Debt
Short-Term Borrowings and Current Portion of Long-Term Debt
Interest Rates at March 31, December 31,
March 31, 2003 2003 2002
----------------- --------- ------------
(Dollars in Millions)
Short-term borrowings................................. 4.31%--16.00% $17.9 $ 21.5
Current portion of long-term debt..................... 4.31%-- 4.83% 27.2 706.3
----- ------
Total short-term borrowings and current portion of
long-term debt................................... $45.1 $727.8
===== ======
Long-Term Debt
Interest Rates at March 31, December 31,
March 31, 2003 2003 2002
----------------- --------- ------------
(Dollars in Millions)
Notes payable........... 6.13%--8.50% $2,750.0 $1,550.0
Credit facilities....... 4.31%--5.07% 2,225.0 1,506.3
Other debt.............. 5.03%--12.37% 21.9 40.0
-------- --------
Total debt........... 4,996.9 3,096.3
Less current portion. 27.2 706.3
-------- --------
Total long-term debt. $4,969.7 $2,390.0
======== ========
Notes Payable and Credit Facilities
Notes Payable. On February 28, 2003, DIRECTV Holdings LLC ("DIRECTV"), a
wholly-owned subsidiary of Hughes, issued $1.4 billion in senior notes due in
2013 in a Rule 144A private placement transaction. The ten-year senior notes
are unsecured indebtedness guaranteed by all of DIRECTV's domestic subsidiaries
and bear interest at 8.375%. Principal on the notes is payable upon maturity,
while interest is payable semi-annually beginning September 15, 2003.
In February 2002, PanAmSat Corporation ("PanAmSat"), an approximately 81%
owned subsidiary of Hughes, completed an $800.0 million Rule 144A private
placement notes offering, which were exchanged for registered notes in November
2002. These unsecured notes bear interest at an annual rate of 8.5%, payable
semi-annually and mature in 2012.
PanAmSat issued five, seven, ten and thirty-year fixed rate notes totaling
$750.0 million in January 1998. The $200.0 million five-year notes were repaid
in January 2003. The outstanding principal balances and interest rates for the
seven, ten, and thirty-year notes as of March 31, 2003 were $275.0 million at
6.125%, $150.0 million at 6.375% and $125.0 million at 6.875%, respectively.
Principal on the notes is payable at maturity, while interest is payable
semi-annually. In connection with a new secured bank facility entered into by
PanAmSat in February 2002, described below, these notes were ratably secured
with the new bank facility by substantially all of PanAmSat's assets, including
its satellites.
Credit Facilities. On March 6, 2003, DIRECTV entered into a $1,675.0
million senior secured credit facility. The senior secured credit facility is
comprised of a $375.0 million Term Loan A,
- 39 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
of which $175.0 million was outstanding at March 31, 2003, a $1,050.0 million
Term Loan B, which was fully drawn as of March 31, 2003, and a $250.0 million
revolving credit facility, which was undrawn at March 31, 2003. The senior
secured credit facility is secured by substantially all of DIRECTV's assets and
guaranteed by all of DIRECTV's domestic subsidiaries. All borrowings under the
senior secured credit facility initially bear interest at a rate per annum
equal to the London Interbank Offered Rate ("LIBOR") plus 3.50% (4.83% at March
31, 2003). The revolving credit facility and the Term Loan A each have terms of
five years and the Term Loan B matures in 2010. Principal payments under the
Term Loan A are due in varying amounts from 2004 to 2008. Principal payments
under the Term Loan B are due primarily in 2008 to 2010. DIRECTV distributed to
Hughes $2.56 billion of net proceeds from the senior secured credit facility
and the sale of senior notes, described above. That distribution enabled Hughes
to repay the $506.3 million outstanding principal balance plus accrued interest
under a prior credit agreement, which was then terminated. The $200.0 million
undrawn portion of the Term Loan A is expected to be drawn by DIRECTV by
December 2003, and those proceeds may be distributed to Hughes as well. The
revolving portion of the senior secured credit facility is available to DIRECTV
to fund working capital and other requirements.
In February 2002, PanAmSat entered into a bank facility in the amount of
$1,250.0 million. The bank facility is comprised of a $250.0 million revolving
credit facility, which was undrawn as of March 31, 2003, a $300.0 million
Tranche A Term Loan and a $700.0 million Tranche B Term Loan, both of which
were fully drawn as of March 31, 2003. This bank facility replaced a previously
existing $500.0 million unsecured multi-year revolving credit facility. The new
revolving credit facility and the Tranche A Term Loan bear interest at LIBOR
plus 3.0%. The Tranche B Term Loan bears interest at LIBOR plus 3.5%. The
revolving credit facility and Tranche A Term Loan interest rates may be
increased or decreased based upon changes in PanAmSat's total leverage ratio,
as defined by the credit agreement. The revolving credit facility and the
Tranche A Term Loan terminate in 2007 and the Tranche B Term Loan matures in
2008. Principal payments under the Tranche A Term Loan are due in varying
amounts from 2004 to 2007. Principal payments under the Tranche B Term Loan are
due primarily at maturity. The facilities are secured ratably by substantially
all of PanAmSat's assets, including its satellites. PanAmSat repaid a $1,725.0
million intercompany loan from Hughes in February 2002, using proceeds from the
bank facility and notes payable described above, as well as existing cash
balances.
PanAmSat's bank facility requires that PanAmSat obtain the consent of the
lenders prior to the consummation of The News Corporation Limited ("News
Corp.") transactions. PanAmSat has initiated the process for obtaining the
consent, however, no assurances can be given that the consent will be obtained.
Failure to obtain the consent would constitute an event of default under the
facility.
Other. $39.8 million in other short-term and long-term debt, related
primarily to DLA and Hughes Network Systems, Inc.'s international subsidiaries,
was outstanding at March 31, 2003, bearing fixed and floating rates of interest
of 4.31% to 16.00%. Principal on these borrowings is due in varying amounts
through 2007.
DIRECTV and PanAmSat are required to maintain certain financial covenants
and are also subject to restrictive covenants under their borrowings. These
covenants limit DIRECTV's and PanAmSat's ability to, among other things: incur
or guarantee additional indebtedness; make restricted payments, including
dividends; create or permit to exist certain liens; enter into business
combinations and asset sale transactions; make investments; enter into
transactions with affiliates; and enter into new businesses. If DIRECTV or
PanAmSat fails to comply with their respective covenants, all or a portion of
their borrowings could become immediately payable. At March 31, 2003, DIRECTV
and PanAmSat were in compliance with all such covenants.
- 40 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
As of March 31, 2003, restricted cash of $45.7 million was included as part
of "Prepaid expenses and other" on the Consolidated Balance Sheets. This cash
was deposited to secure certain letters of credit and obligations of Hughes'
majority-owned foreign subsidiaries. Restrictions on the cash will be removed
as the letters of credit expire and the foreign subsidiaries' obligations are
satisfied or terminated.
Hughes' notes payable and credit facilities mature as follows: $17.9 million
in the remainder of 2003; $94.9 million in 2004; $407.7 million in 2005; $138.6
million in 2006; $184.2 million in 2007; and $4,171.5 million thereafter.
Note 6. Comprehensive Income (Loss)
Hughes' total comprehensive loss was as follows:
Three Months Ended
March 31,
-----------------
2003 2002
------ -------
(Dollars in Millions)
Net loss.................................................................... $(50.9) $(837.7)
Other comprehensive loss:
Foreign currency translation adjustments................................... (1.2) (1.4)
Unrealized losses on securities and derivatives:
Unrealized holding losses................................................ (1.1) (16.2)
Less: reclassification adjustment for gains recognized during the period. (0.3) --
------ -------
Other comprehensive loss................................................. (2.6) (17.6)
------ -------
Total comprehensive loss............................................... $(53.5) $(855.3)
====== =======
Note 7. Available Separate Consolidated Net Income (Loss)
GM Class H common stock is a "tracking stock" of GM designed to provide
holders with financial returns based on the financial performance of Hughes.
Holders of GM Class H common stock have no direct rights in the equity or
assets of Hughes, but rather have rights in the equity and assets of GM (which
includes 100% of the stock of Hughes).
Amounts available for the payment of dividends on GM Class H common stock
are based on the Available Separate Consolidated Net Income (Loss) ("ASCNI") of
Hughes. The ASCNI of Hughes is determined quarterly and is equal to the net
income (loss) of Hughes, excluding the effects of the GM purchase accounting
adjustment arising from GM's acquisition of Hughes and reduced by the effects
of preferred stock dividends paid and/or payable to GM (earnings (loss) used
for computation of ASCNI),
- 41 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
multiplied by a fraction, the numerator of which is equal to the
weighted-average number of shares of GM Class H common stock outstanding during
the period and the denominator of which is a number equal to the
weighted-average number of shares of GM Class H common stock which, if issued
and outstanding, would represent 100% of the tracking stock interest in the
earnings of Hughes (Average Class H dividend base).
In addition, the denominator used in determining the ASCNI of Hughes may be
adjusted from time to time as deemed appropriate by the GM Board of Directors
("GM Board") under the GM Restated Certificate of Incorporation, as amended, to
reflect the following: (i) subdivisions and combinations of the GM Class H
common stock and stock dividends payable in shares of GM Class H common stock
to holders of GM Class H common stock; (ii) the fair market value of
contributions of cash or property by GM to Hughes, or of cash or property of GM
to or for the benefit of employees of Hughes for employee benefit plans or
arrangements of GM, Hughes or other GM subsidiaries; (iii) the contribution of
shares of capital stock of GM to or for the benefit of employees of Hughes or
its subsidiaries for benefit plans or arrangements of GM, Hughes or other GM
subsidiaries; (iv) payments made by Hughes to GM of amounts applied to the
repurchase by GM of shares of GM Class H common stock, so long as the GM Board
has approved the repurchase and GM applied the payment to the repurchase; and
(v) the repurchase by Hughes of shares of GM Class H common stock that are no
longer outstanding, so long as the GM Board approved the repurchase.
Shares of Class H common stock delivered by GM in connection with the award
of such shares to employees and the exercise of stock options by employees of
Hughes increase the numerator and denominator of the fraction referred to
above. From time to time, in anticipation of exercises of stock options, Hughes
may purchase Class H common stock on the open market. Upon purchase, these
shares are retired and therefore decrease the numerator and denominator of the
fraction referred to above.
On March 12, 2003, GM contributed 149.2 million shares of GM Class H common
stock to certain of its U.S. employee benefit plans, increasing the number of
shares of GM Class H common stock outstanding. The contribution increased the
amount of GM Class H common stock held by GM's employee benefit plans to
approximately 331 million shares, and reduced GM's retained economic interest
in Hughes to approximately 19.9% from 30.7%.
- 42 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The following table sets forth comparative information regarding GM Class H
common stock and the GM Class H dividend base for the three months ended March
31:
2003 2002
------- -------
(Shares in Millions)
GM Class H Common Stock Outstanding
Shares at January 1..................................................... 958.3 877.5
Shares issued for stock options exercised............................... -- 0.3
Shares contributed by GM to certain of its U.S. employee benefit plans.. 149.2 --
------- -------
Shares at March 31...................................................... 1,107.5 877.8
======= =======
Weighted average number of shares of GM Class H common stock outstanding
(Numerator)........................................................... 989.8 877.6
======= =======
GM Class H Dividend Base
GM Class H dividend base at January 1................................... 1,381.9 1,301.1
Increase for stock options exercised.................................... -- 0.3
------- -------
GM Class H dividend base at March 31.................................... 1,381.9 1,301.4
======= =======
Weighted average GM Class H dividend base (Denominator)................. 1,381.9 1,301.2
======= =======
Note 8. DLA LLC Reorganization
On March 18, 2003, DIRECTV Latin America, LLC ("DLA LLC") filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the District of Delaware
("Bankruptcy Court"). The filing does not include any of DLA LLC's operating
companies in Latin America and the Caribbean, which will continue regular
operations. DLA LLC continues to manage its business as a debtor-in-possession
("DIP"). As a DIP, management is authorized to operate the business, but may
not engage in transactions outside the ordinary course of business without
Bankruptcy Court approval. Subsequent to the filing of its Chapter 11 petition,
DLA LLC obtained Bankruptcy Court orders that, among other things, authorized
DLA LLC to pay certain pre-petition obligations related to employee wages and
benefits and to take certain actions where such payments or actions will
benefit its estate or preserve the going concern value of the business
enterprise, thereby enhancing the prospects of reorganization.
Under bankruptcy law, actions by creditors to collect pre-petition
indebtedness owed by DLA LLC at the filing date are stayed and other
pre-petition contractual obligations may not be enforced against DLA LLC. In
addition, DLA LLC has the right, subject to Bankruptcy Court approval and other
conditions, to assume or reject any pre-petition executory contracts and
unexpired leases. Parties to rejected executory contracts may file claims with
the Bankruptcy Court. As of March 31, 2003, the Bankruptcy Court has approved
DLA LLC's rejection of certain programming contracts with estimated remaining
minimum payments totaling $767.8 million at the time of rejection. DLA LLC no
longer broadcasts the programming related to rejected contracts.
Hughes has agreed to provide a senior secured DIP financing facility in an
amount of up to $300 million to supplement DLA LLC's existing cash flow and
help ensure that vendors, programmers, employees and other parties receive
payment for services provided after the filing of DLA LLC's Chapter 11
petition. Pursuant to interim orders, DLA LLC may borrow up to $35 million,
subject to the
- 43 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
terms of the loan documents. Assuming the final approval of the DIP financing,
an additional $265 million of the DIP financing would become available to DLA
LLC, subject to the terms of the loan documents.
Due to material uncertainties, it is not possible to predict the length of
time DLA LLC will operate under Chapter 11 protection, the outcome of the
proceedings in general, whether DLA LLC will continue to operate under its
current organizational structure, or the effect of the proceedings on DLA LLC's
business and the Chapter 11 recovery by creditors and equity holders of DLA LLC.
Hughes' Consolidated Balance Sheets as of March 31, 2003 include liabilities
subject to compromise of DLA LLC of approximately $156.5 million. Additional
liabilities subject to compromise may arise subsequent to the filing date of
the Chapter 11 petition resulting from, among other things, rejection of
executory contracts, including certain programming contracts, and allowance by
the Bankruptcy Court of contingent claims and other disputed amounts. On April
17, 2003, DLA LLC filed with the Bankruptcy Court schedules setting forth DLA
LLC's assets and liabilities as of the date of the petition as reflected in DLA
LLC's records. The amounts of claims filed by DLA LLC's creditors could differ
significantly from the scheduled amounts.
Reorganization expense shown in Hughes' consolidated statements of
operations includes the costs incurred to file the bankruptcy petition, ongoing
related legal and consulting costs, and other charges related to the
reorganization. As DLA LLC estimates allowed claims for amounts not previously
recognized as liabilities subject to compromise, DLA LLC expects to record the
accrual of such amounts as reorganization expense in accordance with SFAS No.
5, "Accounting for Contingencies." Such expense could be material in amount.
Because of the inherent uncertainty of the bankruptcy process, the timing of
the recording of such claims cannot be determined. Adjustments of liabilities
to their reorganization values, as determined by the Bankruptcy Court, will
also be reflected in reorganization expense. Hughes expects to retain control
of DLA LLC upon emergence from Chapter 11 and therefore expects to continue to
consolidate DLA LLC.
For the quarter ended March 31, 2003, DLA LLC had revenues of $101.7 million
and net loss of $118.7 million. Net loss includes reorganization expense of
$6.9 million.
As of March 31, 2003, DLA LLC had approximately $803.8 million in assets,
consisting principally of accounts receivable amounting to $642.7 million
principally from LOC's, net fixed assets of $63.9 million and cash of $7.1
million. Liabilities subject to compromise as of March 31, 2003 totaled
$1,537.8 million, which includes $1,381.3 million of unsecured debt obligations
owed to Hughes.
Note 9. Discontinued Operations
On February 28, 2003, DIRECTV Broadband completed the transition of its
customers to alternative service providers and shut down its high-speed
Internet service business. In the fourth quarter of 2002, Hughes recorded a
charge of $92.8 million related to accruals for employee severance benefits,
contract termination payments and the write-off of customer premise equipment.
Included in the $92.8 million charge were accruals for employee severance
benefits of $21.3 million and contract termination payments of $18.6 million.
During the first quarter of 2003, there were payments and adjustments of $11.5
million and $13.8 million related to employee severance benefits and contract
- 44 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
termination payments, respectively. As of March 31, 2003, $9.8 million related
to accruals for employee severance benefits and $4.8 million related to
contract termination payments were remaining.
Revenues, operating costs and expenses, and other non-operating results for
the discontinued operations of DIRECTV Broadband have been excluded from
Hughes' results from continuing operations for all periods presented herein.
Alternatively, the financial results for DIRECTV Broadband are presented in
Hughes' Consolidated Statements of Operations and Available Separate
Consolidated Net Income (Loss) in a single line item entitled "Loss from
discontinued operations, net of taxes" and the net cash flows are presented in
the Condensed Consolidated Statements of Cash Flows as "Net cash used in
discontinued operations."
Summarized financial information for DIRECTV Broadband is as follows:
Three Months Ended
March 31,
-----------------
2003 2002
----- ------
(Dollars in Millions)
Revenues...................................................................... $ 6.5 $ 13.6
Loss from discontinued operations, net of income tax benefit of $0.2 and $15.3 (0.3) (24.9)
Note 10. Segment Reporting
Hughes' segments, which are differentiated by their products and services,
include Direct-To-Home Broadcast, Satellite Services, and Network Systems.
Direct-To-Home Broadcast is engaged in acquiring, promoting, selling and/or
distributing digital entertainment programming via satellite to residential and
commercial customers. Satellite Services is engaged in the selling, leasing and
operating of satellite transponders and providing services for cable television
systems, news companies, Internet service providers and private business
networks. The Network Systems segment is a provider of satellite-based private
business networks and broadband Internet access, and a supplier of DIRECTV(R)
receiving equipment (set-top boxes and dishes). Other includes the corporate
office and other entities.
- 45 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Selected information for Hughes' operating segments are reported as follows:
Direct-
To-Home Satellite Network
Broadcast Services Systems Other Eliminations Total
--------- --------- ------- ------ ------------ --------
(Dollars in Millions)
For the Three Months Ended:
March 31, 2003
External Revenues................. $1,840.7 $ 165.5 $205.9 $ 15.2 -- $2,227.3
Intersegment Revenues............. 7.2 34.3 41.5 -- $(83.0) --
-------- -------- ------ ------ ------ --------
Total Revenues.................... $1,847.9 $ 199.8 $247.4 $ 15.2 $(83.0) $2,227.3
======== ======== ====== ====== ====== ========
Operating Profit (Loss)........... $ 38.3 $ 76.3 $(39.8) $(31.1) $ (1.8) $ 41.9
Add: Depreciation and amortization 173.0 72.3 17.6 0.8 (0.6) 263.1
-------- -------- ------ ------ ------ --------
EBITDA (1)........................ $ 211.3 $ 148.6 $(22.2) $(30.3) $ (2.4) $ 305.0
======== ======== ====== ====== ====== ========
March 31, 2002
External Revenues................. $1,626.7 $ 164.3 $225.4 $ 8.4 -- $2,024.8
Intersegment Revenues............. 3.7 42.8 17.4 -- $(63.9) --
-------- -------- ------ ------ ------ --------
Total Revenues.................... $1,630.4 $ 207.1 $242.8 $ 8.4 $(63.9) $2,024.8
======== ======== ====== ====== ====== ========
Operating Profit (Loss)........... $ (164.0) $ 57.1 $(48.5) $ 65.5 $ 2.2 $ (87.7)
Add: Depreciation and amortization 143.1 94.0 18.0 1.1 (4.0) 252.2
-------- -------- ------ ------ ------ --------
EBITDA (1)........................ $ (20.9) $ 151.1 $(30.5) $ 66.6 $ (1.8) $ 164.5
======== ======== ====== ====== ====== ========
As of:
March 31, 2003
Goodwill, net..................... $2,888.5 $2,238.7 $ 2.4 $645.6 -- $5,775.2
Intangible Assets, net............ 605.2 -- -- 21.0 -- 626.2
December 31, 2002
Goodwill, net..................... $2,888.5 $2,238.7 $ 2.4 $645.6 -- $5,775.2
Intangible Assets, net............ 623.7 -- -- 21.0 -- 644.7
-------- -------- ------ ------ ------ --------
- --------
(1) EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA is not presented as an alternative measure of
operating results or cash flow from operations, as determined in
accordance with accounting principles generally accepted in the United
States of America. Hughes management uses EBITDA to evaluate the
operating performance of Hughes and its business segments, to allocate
resources and capital to its business segments and as a measure of
performance for incentive compensation purposes. Hughes believes EBITDA
is a measure of performance used by some investors, equity analysts and
others to make informed investment decisions. Multiples of current or
projected EBITDA are used to estimate current or prospective enterprise
value. Hughes management believes that EBITDA is a common measure used
to compare Hughes' operating performance and enterprise value to other
communications, entertainment and media service providers. EBITDA does
not give effect to cash used for debt service requirements consisting of
interest payments of $94.3 million and $69.7 million for the three
months ended March 31, 2003 and 2002, respectively. As a result, EBITDA
does not reflect funds available for investment in the business of
Hughes, dividends or other discretionary uses. EBITDA as presented
herein may not be comparable to similarly titled measures reported by
other companies.
- 46 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
The following represents a reconciliation of EBITDA to reported Net Loss on
the Consolidated Statements of Operations and Available Separate Consolidated
Net Income (Loss):
Three Months Ended
March 31,
-----------------
2003 2002
------ -------
(Dollars in Millions)
EBITDA....................................................................... $305.0 $ 164.5
Depreciation and amortization................................................ 263.1 252.2
------ -------
Operating Profit (Loss)...................................................... 41.9 (87.7)
Interest income.............................................................. 6.2 4.3
Interest expense............................................................. (80.5) (76.3)
Reorganization expense....................................................... (6.9) --
Other, net................................................................... (28.1) (41.6)
------ -------
Loss From Continuing Operations Before Income Taxes, Minority Interests and
Cumulative Effect of Accounting Change..................................... (67.4) (201.3)
Income tax benefit........................................................... 24.2 76.5
Minority interest in net earnings of subsidiaries............................ (7.4) (6.7)
------ -------
Loss from continuing operations before cumulative effect of accounting change (50.6) (131.5)
Loss from discontinued operations, net of taxes.............................. (0.3) (24.9)
------ -------
Loss before cumulative effect of accounting change........................... (50.9) (156.4)
Cumulative effect of accounting change, net of taxes......................... -- (681.3)
------ -------
Net Loss..................................................................... $(50.9) $(837.7)
====== =======
Note 11. Contingencies
Litigation
In connection with the 2000 sale by Hughes of its satellite systems
manufacturing businesses to The Boeing Company ("Boeing"), the stock purchase
agreement provides for potential adjustment to the purchase price based upon
the final closing date financial statements of the satellite systems
manufacturing businesses. The stock purchase agreement also provides for a
dispute resolution process to resolve any disputes that arise in determining
the purchase price adjustment. Based upon the final closing date financial
statements of the satellite systems manufacturing businesses that were prepared
by Hughes, Boeing is owed a purchase price adjustment of $164 million plus
interest at a rate of 9.5% from the date of sale, the total amount of which has
been provided for in Hughes' consolidated financial statements. However, Boeing
has submitted additional proposed adjustments, which are being resolved through
the dispute resolution process. As of March 31, 2003, approximately $670
million of proposed adjustments remain unresolved. Hughes is contesting the
matter in the arbitration process, which will result in a binding decision
unless the matter is otherwise settled. Although Hughes believes it has
adequately provided for the disposition of this matter, the impact of its
disposition cannot be determined at this time. The final resolution of this
matter could result in Hughes making a cash payment to Boeing that would be
material to Hughes' consolidated results of operations and financial position.
Litigation is subject to uncertainties and the outcome of individual
litigated matters is not predictable with assurance. In addition to the above
items, various legal actions, claims, and
- 47 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
proceedings are pending against Hughes arising in the ordinary course of
business. Hughes has established loss provisions for matters in which losses
are probable and can be reasonably estimated. Some of the matters may involve
compensatory, punitive, or treble damage claims, or sanctions, that if granted,
could require Hughes to pay damages or make other expenditures in amounts that
could not be estimated at March 31, 2003. After discussion with counsel
representing Hughes in those actions, it is the opinion of management that such
liability is not expected to have a material adverse effect on Hughes'
consolidated results of operations and financial position.
Other Contingencies
The in-orbit satellites of Hughes and its subsidiaries are subject to the
risk of failing prematurely due to, among other things, mechanical failure,
collision with objects in space or an inability to maintain proper orbit.
Satellites are subject to the risk of launch delay and failure, destruction and
damage while on the ground or during launch and failure to become fully
operational once launched. Delays in the production or launch of a satellite or
the complete or partial loss of a satellite, in-orbit or during launch, could
have a material adverse impact on the operation of Hughes' businesses. Hughes
has, in the past, experienced technical anomalies on some of its satellites.
Service interruptions caused by anomalies, depending on their severity, could
result in claims by affected customers for termination of their transponder
agreements, cancellation of other service contracts or the loss of other
customers.
Hughes uses in-orbit and launch insurance to mitigate the potential
financial impact of satellite fleet in-orbit and launch failures unless the
premium costs are considered uneconomic relative to the risk of satellite
failure. The insurance generally covers the unamortized book value of covered
satellites and does not compensate for business interruption or loss of future
revenues or customers. Hughes relies on in-orbit spare satellites and excess
transponder capacity at key orbital slots to mitigate the effects of satellite
failure on its ability to provide service. Where insurance costs related to
known satellite anomalies are prohibitive, Hughes' insurance policies contain
coverage exclusions and Hughes is not insured for certain other satellites. The
book value of satellites that were insured with coverage exclusions amounted to
$539.5 million and the book value of the satellites that were not insured was
$1,022.4 million at March 31, 2003.
In May 2003, the insurance policies covering nine of PanAmSat's satellites
will expire. PanAmSat is currently negotiating renewal policies for these
satellites. Upon the expiration of the existing insurance policies, there can
be no assurance that PanAmSat will be able to procure new insurance for its
satellites. In addition, new satellite insurance may only be available with
higher premiums, higher deductibles, shorter coverage periods, higher loss
percentages required for constructive total loss claims, additional satellite
health-related policy exclusions, or other terms which may make such insurance
commercially unreasonable. Accordingly, PanAmSat may elect to discontinue
insuring certain satellites. An uninsured failure of one or more of PanAmSat's
satellites could have a material adverse effect on Hughes' consolidated results
of operations and financial position. In addition, higher premiums on insurance
policies will increase costs, thereby reducing operating income by the amount
of such increased premiums.
On February 19, 2003, PanAmSat filed proofs of loss under the insurance
policies for Galaxy XI and PAS-1R for constructive total losses based on
degradation of the solar panels. Service to existing customers has not been
affected, and PanAmSat expects that both of these satellites will continue to
serve these customers. The insurance policies for these satellites total
approximately $289 million and $345 million, respectively, and both include a
salvage provision for PanAmSat to share 10% of future
- 48 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
revenues from these satellites with their respective insurers if the proof of
loss is accepted. The availability and use of the proceeds from these insurance
claims are restricted by the agreements governing PanAmSat's debt obligations.
No assurances can be made that the proof of loss with respect to these two
satellites will be accepted by the insurers. PanAmSat is working with the
satellite manufacturer to determine the long-term implications to the
satellites and will continue to assess the operational impact these losses may
have. At this time, based upon all information currently available to PanAmSat,
as well as planned modifications to the operation of the satellites in order to
maximize revenue generation, PanAmSat currently expects to operate these
satellites for the duration of their estimated useful lives, although a portion
of the transponder capacity on these satellites will not be useable during such
time. Hughes currently believes that the net book values of these satellites
are fully recoverable and does not expect a material impact on 2003 revenues as
a result of the difficulties on these two satellites.
In the first quarter of 2003, PanAmSat and the manufacturer of the Galaxy
VIII-iR satellite terminated the Galaxy VIII-iR satellite construction contract
by mutual agreement. As of March 31, 2003, PanAmSat had a receivable due from
the satellite manufacturer of $69.5 million. PanAmSat expects to collect this
receivable in December 2003. In addition, PanAmSat has agreed with the Galaxy
VIII-iR launch vehicle provider to defer the use of the launch to a future
satellite.
Hughes is contingently liable under letters of credit and bonds in the
aggregate amount of $60.7 million which were undrawn at March 31, 2003, and DLA
LLC has guaranteed $3.0 million of bank debt related to non-consolidated LOC's,
which is due in varying amounts through 2005. Additionally, DLA LLC may be
required to repurchase Grupo Clarin S.A.'s ("Clarin") 3.98% interest in DLA LLC
for $195 million in November 2003. In the first quarter of 2003, Clarin
notified DLA LLC that it believes that DLA LLC's decision to initiate
discussions to address DLA LLC's financial and operational challenges has
caused DLA LLC to be responsible immediately to purchase Clarin's equity
interest in DLA LLC. DLA LLC has filed a motion to reject its obligation under
this contract as part of its reorganization proceedings. See Note 8 for
additional information regarding DLA LLC's reorganization.
The Hughes Board of Directors has approved several benefit plans designed to
provide benefits for the retention of about 217 key employees and also provide
benefits in the event of employee lay-offs. Generally, these benefits are only
available if a qualified change-in-control of Hughes occurs. Upon a
change-in-control, the retention benefits will be accrued and expensed when
earned and the severance benefits will be accrued and expensed if an employee
is identified for termination. A total of up to about $107 million for
retention benefits will be paid, with approximately 50% paid at the time of a
change-in-control and 50% paid up to 12 months following the date of a
change-in-control. The amount of severance benefits to be paid will be based
upon decisions that will be made relating to employee layoffs, if any,
following the date of a change-in-control. In addition, as of March 31, 2003,
approximately 21.2 million employee stock options to purchase shares of GM
Class H common stock will vest upon a qualifying change-in-control and up to an
additional 8.4 million employee stock options could vest if employees are laid
off within one year of a change-in-control. The successful completion of the
News Corp. transactions would be considered a change-in-control for purposes of
these benefits.
- 49 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
Note 12. Subsequent Events
News Corporation Transactions
On April 9, 2003, GM, Hughes and News Corp. announced the signing of
definitive agreements that provide for, among other things, the split-off of
Hughes from GM and the simultaneous sale of GM's approximately 19.9% economic
interest in Hughes to News Corp. for $14 per share, or approximately $3.8
billion. GM would receive at least $3.1 billion in cash with the remainder
payable in News Corp. preferred American Depositary Shares ("News Corp. ADSs")
and/or cash at News Corp.'s election. News Corp. would acquire an additional
14.1% stake in Hughes from the holders of GM Class H common stock through a
mandatory exchange of a portion of their Hughes common stock received in the
split-off, which would provide News Corp. with a total of 34% of the
outstanding capital stock of Hughes. In addition, GM would receive a cash
dividend from Hughes of $275 million in connection with the transactions.
Hughes expects to pay this dividend using available cash balances.
Under the terms of the proposed transactions, holders of GM Class H common
stock would first exchange their shares for Hughes common stock on a
share-for-share basis in the split-off, followed immediately by an exchange of
approximately 17.6% of the Hughes common stock they receive in the split-off
for approximately $14 per share in News Corp. ADSs and/or cash. The number of
News Corp. ADSs payable to GM and Hughes common stockholders, based on a
fixed-price of $14 per Hughes share, will be adjusted within a collar range of
20% above or below the News Corp. ADS price of $22.40. This mandatory exchange
of about 17.6% of the shares of Hughes common stock for News Corp. ADSs and/or
cash would be taxable to the Hughes common stockholders at the time. The
transactions are structured in a manner that will not result in the
recapitalization of GM Class H common stock into GM $1-2/3 par value common
stock at a 120% exchange ratio, as currently provided for under certain
circumstances in the General Motors Restated Certificate of Incorporation, as
amended.
Hughes will cease to be a member of the GM consolidated group for federal
income tax purposes upon the completion of the Hughes split-off. Pursuant to
the amended income tax allocation agreement between GM and Hughes, Hughes will
carry forward its federal income tax attributes that have not been utilized by
the GM consolidated group to the extent permitted by the Internal Revenue Code.
Hughes will be compensated by GM for its net operating losses, if any, at a
rate of 24%. To the extent Hughes' federal income tax attributes, including net
operating losses, have been utilized by the GM consolidated group, Hughes will
be compensated by GM following separation with the maximum compensation from GM
limited to approximately $75 million.
If the transactions are completed, Rupert Murdoch, chairman and chief
executive officer of News Corp., would become chairman of Hughes, and Chase
Carey, who is currently serving as an advisor to News Corp., would become
president and chief executive officer of Hughes. Eddy Hartenstein, Hughes'
senior executive vice president, would be named vice chairman of Hughes. Hughes
would have 11 directors, the majority of whom would be independent directors.
The transactions are subject to a number of conditions, including, among
other things, obtaining U.S. antitrust and Federal Communications Commission
approvals, approval by a majority of each class of GM stockholders--GM $1- 2/3
and GM Class H--voting both as separate classes and together as a single class
and a favorable ruling from the Internal Revenue Service that the split-off of
Hughes from GM would be tax-free to GM and its stockholders for U.S. federal
income tax purposes. No assurances can be given that the approvals will be
obtained or the transactions will be completed. The
- 50 -
HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (concluded)
financial and other information regarding Hughes contained in this Quarterly
Report do not give any effect to or make any adjustment for the anticipated
completion of the transactions.
In response to the announcement of the transactions, the customers and
strategic partners of Hughes may delay or defer decisions, which could have a
material adverse effect on Hughes' businesses, regardless of whether the
transactions are ultimately completed. Similarly, current and prospective
employees of Hughes may experience uncertainty about their future roles with
Hughes upon completion of the transactions, which may materially adversely
affect Hughes' ability to attract and retain key management, sales, marketing
and technical personnel.
Hughes Equity Recapitalization
During April 2003, the Hughes Board of Directors approved the
reclassification of the outstanding Hughes Series B convertible preferred stock
into Hughes Class B common stock of equivalent value, and a subsequent stock
split of Hughes common stock and Hughes Class B common stock through dividends
of additional shares. GM, in its capacity as the holder of all outstanding
Hughes capital stock, approved the reclassification. Shortly thereafter, GM
converted some of its Hughes common stock into an equivalent number of shares
of Hughes Class B common stock. As a result of these transactions, Hughes
currently has 1,207,518,237 shares of Hughes common stock and 274,373,316
shares of Hughes Class B common stock issued and outstanding, all of which are
owned by GM. The terms of the Hughes common stock and Hughes Class B common
stock are identical in all respects (with the exception of provisions regarding
stock-on-stock dividends) and, at the option of the holder, the Hughes common
stock may be converted at any time into Hughes Class B common stock and vice
versa. These transactions had no impact on the outstanding number of shares of
GM Class H common stock or the Class H dividend base. In connection with the
News Corp. transactions, GM Class H common stock will be exchanged for Hughes
common stock, and the Hughes Class B common stock will be sold by GM to News
Corp. Immediately after the completion of the News Corp. transactions, all of
the shares of Hughes Class B common stock held by News Corp. will be converted
into Hughes common stock.
* * *
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUMMARY DATA
Three Months Ended
March 31,
-----------------------
2003 2002
----------- ------------
(Dollars in Millions)
(Unaudited)
Consolidated Statements of Operations Data:
Total revenues......................................................... $ 2,227.3 $ 2,024.8
Total operating costs and expenses..................................... 2,185.4 2,112.5
--------- ---------
Operating profit (loss)................................................ 41.9 (87.7)
Other expenses, net.................................................... (109.3) (113.6)
Income tax benefit..................................................... 24.2 76.5
Minority interests in net earnings of subsidiaries..................... (7.4) (6.7)
--------- ---------
Loss from continuing operations before cumulative effect of accounting
change............................................................... (50.6) (131.5)
Loss from discontinued operations, net of taxes........................ (0.3) (24.9)
--------- ---------
Loss before cumulative effect of accounting change..................... (50.9) (156.4)
Cumulative effect of accounting change, net of taxes................... -- (681.3)
--------- ---------
Net loss............................................................... (50.9) (837.7)
Preferred stock dividends.............................................. -- (24.1)
--------- ---------
Loss Used for Computation of Available Separate Consolidated Net Income
(Loss)............................................................... $ (50.9) $ (861.8)
========= =========
March 31,
2003 December 31,
(Unaudited) 2002
----------- ------------
(Dollars in Millions)
Consolidated Balance Sheet Data:
Cash and cash equivalents.............................................. $ 2,962.2 $ 1,128.6
Total current assets................................................... 5,476.1 3,656.4
Total assets........................................................... 19,674.2 17,885.1
Total current liabilities.............................................. 2,554.1 3,203.1
Long-term debt......................................................... 4,969.7 2,390.0
Minority interests..................................................... 563.7 555.3
Convertible preferred stock, Series B.................................. 914.1 914.1
Total stockholder's equity............................................. 9,924.2 9,977.1
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HUGHES ELECTRONICS CORPORATION
SUMMARY DATA -- (continued)
Three Months Ended
March 31,
--------------------
2003 2002
-------- -------
(Dollars in Millions)
(Unaudited)
Other Data:
Operating Profit (Loss)............. $ 41.9 $ (87.7)
Add: Depreciation and amortization.. 263.1 252.2
-------- -------
EBITDA(1)........................... $ 305.0 $ 164.5
======== =======
Operating Profit Margin............. 1.9 % N/A
EBITDA Margin(1).................... 13.7 % 8.1 %
Capital expenditures................ $ 187.5 $ 345.9
Cash flows from operating activities 294.3 95.5
Cash flows from investing activities (241.0) (172.2)
Cash flows from financing activities 1,836.3 528.6
- --------
(1) EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA margin is calculated by dividing EBITDA by total
revenues. EBITDA is not presented as an alternative measure of operating
results or cash flow from operations, as determined in accordance with
accounting principles generally accepted in the United States of America.
Hughes management uses EBITDA to evaluate the operating performance of
Hughes and its business segments, to allocate resources and capital to its
business segments and as a measure of performance for incentive
compensation purposes. Hughes believes EBITDA is a measure of performance
used by some investors, equity analysts and others to make informed
investment decisions. Multiples of current or projected EBITDA are used to
estimate current or prospective enterprise value. Hughes management
believes that EBITDA is a common measure used to compare Hughes' operating
performance and enterprise value to other communications, entertainment and
media service providers. EBITDA does not give effect to cash used for debt
service requirements consisting of interest payments of $94.3 million and
$69.7 million for the three months ended March 31, 2003 and 2002,
respectively. As a result, EBITDA does not reflect funds available for
investment in the business of Hughes, dividends or other discretionary
uses. EBITDA and EBITDA margin as presented herein may not be comparable to
similarly titled measures reported by other companies.
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HUGHES ELECTRONICS CORPORATION
SUMMARY DATA -- (concluded)
Selected Segment Data
Direct-To-Home Satellite Network Eliminations
Broadcast Services Systems and Other Total
-------------- --------- ------- ------------ --------
(Dollars in Millions)
For the Three Months Ended:
March 31, 2003
Total Revenues.................... $1,847.9 $199.8 $247.4 $(67.8) $2,227.3
% of Total Revenue................ 83.0 % 9.0 % 11.1% (3.1%) 100.0 %
Operating Profit (Loss)........... $ 38.3 $ 76.3 $(39.8) $(32.9) $ 41.9
Add: Depreciation and amortization 173.0 72.3 17.6 0.2 263.1
-------- ------ ------ ------ --------
EBITDA............................ $ 211.3 $148.6 $(22.2) $(32.7) $ 305.0
======== ====== ====== ====== ========
Operating Profit Margin........... 2.1 % 38.2% N/A N/A 1.9 %
EBITDA Margin..................... 11.4 % 74.4% N/A N/A 13.7 %
Capital Expenditures.............. $ 73.2 $ 33.1 $ 54.1 $ 27.1 $ 187.5
March 31, 2002
Total Revenues.................... $1,630.4 $207.1 $242.8 $(55.5) $2,024.8
% of Total Revenue................ 80.5 % 10.2% 12.0% (2.7%) 100.0 %
Operating Profit (Loss)........... $ (164.0) $ 57.1 $(48.5) $ 67.7 $ (87.7)
Add: Depreciation and amortization 143.1 94.0 18.0 (2.9) 252.2
-------- ------ ------ ------ --------
EBITDA............................ $ (20.9) $151.1 $(30.5) $ 64.8 $ 164.5
======== ====== ====== ====== ========
Operating Profit Margin........... N/A 27.6% N/A N/A N/A
EBITDA Margin..................... N/A 73.0% N/A N/A 8.1 %
Capital Expenditures.............. $ 124.6 $ 74.0 $128.3 $ 19.0 $ 345.9
- 54 -
HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The following management's discussion and analysis should be read in
conjunction with the Hughes Electronics Corporation ("Hughes") management's
discussion and analysis included in Hughes' Annual Report on Form 10-K for the
year ended December 31, 2002 filed with the Securities and Exchange Commission
("SEC") on March 11, 2003 and all other Hughes filings, including Current
Reports on Form 8-K, filed with the SEC through the date of this report.
This Quarterly Report may contain certain statements that Hughes believes
are, or may be considered to be, "forward-looking statements," within the
meaning of various provisions of the Securities Act of 1933 and of the
Securities Exchange Act of 1934. These forward-looking statements generally can
be identified by use of statements that include phrases such as we "believe,"
"expect," "anticipate," "intend," "plan," "foresee" or other similar words or
phrases. Similarly, statements that describe our objectives, plans or goals
also are forward-looking statements. All of these forward-looking statements
are subject to certain risks and uncertainties that could cause Hughes' actual
results to differ materially from historical results or from those expressed or
implied by the relevant forward-looking statement. Risk factors which could
cause actual performance and future actions to differ materially from
forward-looking statements made herein include, but are not limited to,
economic conditions, product demand and market acceptance, government action,
local political or economic developments in or affecting countries where Hughes
has operations, including political, economic and social uncertainties in many
Latin American countries in which the Latin America DIRECTV businesses ("DLA")
operate, potential adverse effects of the DIRECTV Latin America, LLC ("DLA
LLC") Chapter 11 bankruptcy proceedings, foreign currency exchange rates,
ability to obtain export licenses, competition, the outcome of legal
proceedings, ability to achieve cost reductions, ability to timely perform
material contracts, ability to renew programming contracts under favorable
terms, technological risk, limitations on access to distribution channels, the
success and timeliness of satellite launches, in-orbit performance of
satellites, loss of uninsured satellites, ability of customers to obtain
financing, Hughes' ability to access capital to maintain its financial
flexibility and the effects of the strategic transactions that General Motors
Corporation ("GM") and Hughes have entered into as discussed below.
Readers are urged to consider these factors carefully in evaluating the
forward-looking statements. The forward-looking statements included in this
Quarterly Report are made only as of the date of this Quarterly Report and
Hughes undertakes no obligation to publicly update these forward-looking
statements to reflect subsequent events or circumstances.
News Corporation Transactions
On April 9, 2003, GM, Hughes and The News Corporation Limited ("News Corp.")
announced the signing of definitive agreements that provide for, among other
things, the split-off of Hughes from GM and the simultaneous sale of GM's
approximately 19.9% economic interest in Hughes to News Corp. for $14 per
share, or approximately $3.8 billion. GM would receive at least $3.1 billion in
cash with the remainder payable in News Corp. preferred American Depositary
Shares ("News Corp. ADSs") and/or cash at News Corp.'s election. News Corp.
would acquire an additional 14.1% stake in Hughes from the holders of GM Class
H common stock through a mandatory exchange of a portion of their Hughes common
stock received in the split-off, which would provide News Corp. with a total of
34% of the outstanding capital stock of Hughes. In addition, GM would receive a
cash dividend from Hughes of $275 million in connection with the transactions.
Hughes expects to pay this dividend using available cash balances.
Under the terms of the proposed transactions, holders of GM Class H common
stock would first exchange their shares for Hughes common stock on a
share-for-share basis in the split-off, followed immediately by an exchange of
approximately 17.6% of the Hughes common stock they receive in the
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
split-off for approximately $14 per share in News Corp. ADSs and/or cash. The
number of News Corp. ADSs payable to GM and Hughes common stockholders, based
on a fixed-price of $14 per Hughes share, will be adjusted within a collar
range of 20% above or below the News Corp. ADS price of $22.40. This mandatory
exchange of about 17.6% of the shares of Hughes common stock for News Corp.
ADSs and/or cash would be taxable to the Hughes common stockholders at the
time. The transactions are structured in a manner that will not result in the
recapitalization of GM Class H common stock into GM $1-2/3 par value common
stock at a 120% exchange ratio, as currently provided for under certain
circumstances in the General Motors Restated Certificate of Incorporation, as
amended.
Hughes will cease to be a member of the GM consolidated group for federal
income tax purposes upon the completion of the Hughes split-off. Pursuant to
the amended income tax allocation agreement between GM and Hughes, Hughes will
carry forward its federal income tax attributes that have not been utilized by
the GM consolidated group to the extent permitted by the Internal Revenue Code.
Hughes will be compensated by GM for its net operating losses, if any, at a
rate of 24%. To the extent Hughes' federal income tax attributes, including net
operating losses, have been utilized by the GM consolidated group, Hughes will
be compensated by GM following separation with the maximum compensation from GM
limited to approximately $75 million.
If the transactions are completed, Rupert Murdoch, chairman and chief
executive officer of News Corp., would become chairman of Hughes, and Chase
Carey, who is currently serving as an advisor to News Corp., would become
president and chief executive officer of Hughes. Eddy Hartenstein, Hughes'
senior executive vice president, would be named vice chairman of Hughes. Hughes
would have 11 directors, the majority of whom would be independent directors.
The transactions are subject to a number of conditions, including, among
other things, obtaining U.S. antitrust and Federal Communications Commission
approvals, approval by a majority of each class of GM stockholders--GM $1- 2/3
and GM Class H--voting both as separate classes and together as a single class
and a favorable ruling from the Internal Revenue Service that the split-off of
Hughes from GM would be tax-free to GM and its stockholders for U.S. federal
income tax purposes. No assurances can be given that the approvals will be
obtained or the transactions will be completed. The financial and other
information regarding Hughes contained in this Quarterly Report do not give any
effect to or make any adjustment for the anticipated completion of the
transactions.
In response to the announcement of the transactions, the customers and
strategic partners of Hughes may delay or defer decisions, which could have a
material adverse effect on Hughes' businesses, regardless of whether the
transactions are ultimately completed. Similarly, current and prospective
employees of Hughes may experience uncertainty about their future roles with
Hughes upon completion of the transactions, which may materially adversely
affect Hughes' ability to attract and retain key management, sales, marketing
and technical personnel.
General
Business Overview
The continuing operations of Hughes are comprised of the following segments:
Direct-To-Home Broadcast, Satellite Services and Network Systems. Hughes'
business segments are described in more detail below, including a discussion of
significant transactions affecting the comparability of operating results for
the three months ended March 31, 2003 and 2002.
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
On February 28, 2003, DIRECTV Broadband, Inc. ("DIRECTV Broadband")
completed the transition of its customers to alternative service providers and
shut down its high-speed Internet service business. Revenues, operating costs
and expenses, and other non-operating results for the discontinued operations
of DIRECTV Broadband have been excluded from Hughes' results from continuing
operations for all periods presented herein. Alternatively, the financial
results for DIRECTV Broadband are presented in Hughes' Consolidated Statements
of Operations and Available Separate Consolidated Net Income (Loss) in a single
line item entitled "Loss from discontinued operations, net of taxes" and the
net cash flows are presented in the Condensed Consolidated Statements of Cash
Flows as "Net cash used in discontinued operations." See further discussion of
this item in "Discontinued Operations" below.
Direct-To-Home Broadcast Segment
The Direct-To-Home Broadcast segment consists primarily of the DIRECTV(R)
digital satellite direct-to-home television services located in the United
States and Latin America.
The DIRECTV U.S. business represents the results of DIRECTV Holdings LLC and
its consolidated subsidiaries. DIRECTV U.S. is the largest provider of direct
broadcast satellite television services in the United States, with 11.4 million
subscribers as of March 31, 2003.
On June 4, 2002, DIRECTV, Inc., a wholly-owned subsidiary of DIRECTV
Holdings LLC, and General Electric Capital Corporation ("GECC") executed an
agreement to settle, for $180 million, a claim arising from a contractual
arrangement whereby GECC managed a credit program for consumers who purchased
DIRECTV programming and related hardware. As a result, in 2002 DIRECTV, Inc.
increased its provision for loss related to this matter by $130 million, of
which $56 million was recorded as a charge to "Selling, general and
administrative expenses" in the first quarter of 2002 and $74 million ($27
million in the first quarter of 2002 and $47 million in the second quarter of
2002) was recorded as a charge to "Interest expense."
The Direct-To-Home Broadcast segment also includes the operating results of
DLA. DLA includes DLA LLC, Hughes' 74.7% owned subsidiary that provides DIRECTV
programming to local operating companies ("LOC's") located in Latin America and
the Caribbean basin. DLA also includes the LOC's that are the exclusive
distributors of DIRECTV in Mexico, Brazil, Argentina, Colombia, Trinidad and
Tobago and Uruguay; and SurFin Ltd., a company that provides financing of
subscriber receiver equipment to certain DLA LOC's. The non-operating results
of DLA include Hughes' share of the results of unconsolidated LOC's that are
the exclusive distributors of DIRECTV in Venezuela and Puerto Rico and are
included in "Other, net." Hughes records 100% of the net losses incurred by DLA
LLC and certain other consolidated LOC's due to the accumulation of net losses
in excess of the minority investors' investment and Hughes' continued funding
of those businesses.
On March 18, 2003, DLA LLC filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware ("Bankruptcy Court") in order to
address its financial and operational challenges. The filing does not include
any of DLA LLC's operating companies in Latin America and the Caribbean, which
will continue regular operations. See "DLA LLC Reorganization" below for
additional information.
Satellite Services Segment
The Satellite Services segment represents the results of PanAmSat
Corporation ("PanAmSat"), Hughes' approximately 81% owned subsidiary. PanAmSat
is a leading provider of video, broadcasting and network services via
satellite. PanAmSat leases transponder capacity on its satellites, and is the
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
distribution platform for the delivery of entertainment and information to
cable television systems, television broadcast affiliates, direct-to-home
television operators, Internet service providers, telecommunications companies
and other corporations and governments. PanAmSat provides satellite services to
its customers primarily through long-term operating lease contracts for the
full or partial use of satellite transponder capacity. From time to time, and
in response to customer demand, PanAmSat sells transponders to customers
through outright sales and sales-type lease transactions.
In October 2001, PanAmSat filed a proof of loss under an insurance policy on
PAS-7 related to circuit failures, which occurred in September 2001 and
resulted in a reduction of 28.9% of the satellite's total power available for
communications. During 2002, PanAmSat's insurers settled the claim by payment
to PanAmSat of $215.0 million. PanAmSat recorded a net gain of approximately
$40.1 million related to this insurance claim in the first quarter of 2002.
Network Systems Segment
The Network Systems segment represents the results of Hughes Network
Systems, Inc. ("HNS"), which is a leading supplier of broadband satellite
services and products to both enterprises and consumers through its DIRECWAY(R)
services. HNS designs, manufactures and installs advanced networking solutions
for businesses worldwide using very small aperture terminals. HNS is also a
leading supplier of DIRECTV(R) receiving equipment (set-top boxes and dishes).
As a result of operating losses incurred over the last several years and the
high cash requirements for subscriber acquisition costs, HNS does not currently
intend to increase the subscriber base aggressively for the DIRECWAY consumer
business.
Other
During the first quarter of 2002, Hughes recorded a $95 million gain, net of
legal costs, as an offset to "Selling, general and administrative expenses" as
a result of the favorable resolution of a lawsuit filed against the United
States Government on March 22, 1991. The lawsuit was based upon the National
Aeronautics and Space Administration's ("NASA") breach of contract to launch
ten satellites on the Space Shuttle.
Beginning in the third quarter of 2002, Hughes changed the classification of
certain subscriber acquisition costs. The costs of free programming and the
costs of installation and hardware subsidies for subscribers added through
DIRECTV's direct sales program are now included as part of "Broadcast
programming and other costs" in the Consolidated Statements of Operations and
Available Separate Consolidated Net Income (Loss) rather than in "Selling,
general and administrative expenses" where they had previously been reported.
Prior period amounts have been reclassified to conform to the current period
presentation.
Beginning in the first quarter of 2003, Hughes no longer allocates general
corporate expenses to its subsidiaries. Prior period segment information has
been reclassified to conform to the current period presentation.
Results of Operations
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Revenues. Revenues for the first quarter of 2003 increased 10.0% to
$2,227.3 million, compared with $2,024.8 million for the first quarter of 2002.
The increase in revenues resulted primarily from
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
$217.5 million of higher revenues in the Direct-To-Home Broadcast segment from
the addition of new DIRECTV subscribers and higher average monthly revenue per
subscriber ("ARPU") in the United States. ARPU represents average monthly
revenue per subscriber and is calculated by dividing average monthly revenues
for the period by average DIRECTV owned and operated subscribers for the period.
Operating Costs and Expenses. Operating costs and expenses increased to
$2,185.4 million for the first quarter of 2003 from $2,112.5 million for the
first quarter of 2002. Broadcast programming and other costs increased by
$156.0 million in the first quarter of 2003 from the same period in 2002 due to
higher costs at the Direct-To-Home Broadcast segment resulting from higher
programming costs associated with the increase in subscribers and programming
rate increases. Costs of products sold decreased by $30.0 million in the first
quarter of 2003 from the first quarter of 2002 primarily due to lower sales in
the Carrier businesses at the Network Systems segment. Selling, general and
administrative expenses decreased by $64.0 million during the first quarter of
2003 compared to the same period in 2002 due primarily to lower expenses
resulting from cost saving initiatives and a $56 million loss recorded for the
GECC dispute in 2002, partially offset by the $95 million net gain recorded in
2002 for the NASA claim. Depreciation and amortization increased by $10.9
million during the first quarter of 2003 compared to the first quarter of 2002.
EBITDA. EBITDA is defined as operating profit (loss), plus depreciation and
amortization. EBITDA margin is calculated by dividing EBITDA by total revenues.
A description of EBITDA and a reconciliation of EBITDA to reported operating
profit (loss), the most directly comparable financial measure under accounting
principles generally accepted in the United States, is provided in the "Summary
Data" above.
EBITDA for the first quarter of 2003 was $305.0 million and EBITDA margin
was 13.7%, compared to EBITDA of $164.5 million and EBITDA margin of 8.1% for
the first quarter of 2002. The increase in EBITDA and EBITDA margin resulted
from the additional profit resulting from the higher revenues at the
Direct-To-Home Broadcast segment, reduced expenses resulting from cost saving
initiatives and the $56 million loss recorded for the GECC dispute in 2002,
partially offset by the $95 million net gain recorded in 2002 for the NASA
claim.
Operating Profit (Loss). The operating profit for the first quarter of 2003
was $41.9 million and operating profit margin was 1.9%, compared to an
operating loss of $87.7 million for the first quarter of 2002. The improvement
in operating profit and operating profit margin resulted from the additional
margins from the higher revenues at the Direct-To-Home Broadcast segment,
reduced expenses resulting from cost saving initiatives and the $56 million
loss recorded for the GECC dispute in 2002, partially offset by the $95 million
net gain recorded in 2002 for the NASA claim.
Interest Income and Expense. Interest income increased to $6.2 million for
the first quarter of 2003 compared to interest income of $4.3 million for the
same period of 2002. Interest expense increased to $80.5 million for the first
quarter of 2003 from $76.3 million for the first quarter of 2002. The increase
in interest expense resulted from higher average outstanding borrowings and a
higher weighted average interest rate in 2003 partially offset by the $27
million of interest recorded in connection with the GECC dispute in the first
quarter of 2002. Changes in cash and cash equivalents and debt are discussed in
more detail below under "Liquidity and Capital Resources."
Reorganization Expense. Reorganization expense for the first quarter of
2003 was $6.9 million. Reorganization expense includes legal and consulting
costs incurred by DLA LLC related to its bankruptcy proceedings. See "DLA LLC
Reorganization" below for additional information.
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Other, Net. Other, net decreased to a loss of $28.1 million for the first
quarter of 2003 from a loss of $41.6 million for the same period of 2002.
Other, net for the first quarter of 2003 resulted primarily from $22.6 million
of equity method investee losses. Other, net for the first quarter of 2002
resulted primarily from a $29.0 million charge recorded for a loan guarantee
obligation related to a Hughes affiliate in India and $10.2 million of equity
method investee losses.
Income Taxes. Hughes recognized an income tax benefit of $24.2 million for
the first quarter of 2003 compared to $76.5 million for the first quarter of
2002. The lower tax benefit for the first quarter of 2003 was primarily due to
lower pre-tax losses.
Loss from Continuing Operations Before Cumulative Effect of Accounting
Change. Hughes reported a loss before cumulative effect of accounting change
of $50.6 million for the first quarter of 2003 compared to $131.5 million for
the same period of 2002.
Loss from Discontinued Operations. On February 28, 2003, Hughes completed
the shut down of DIRECTV Broadband. As a result, DIRECTV Broadband has been
reported as a discontinued operation in the consolidated financial statements,
and its revenues, operating costs and expenses and other non-operating results
are excluded from the continuing operating results of the Direct-To-Home
Broadcast segment for all periods presented herein. The loss from discontinued
operations, net of taxes, was $0.3 million and $24.9 million for the first
quarter of 2003 and 2002, respectively.
Cumulative Effect of Accounting Change. Hughes adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," on January 1, 2002. The adoption of this standard resulted in the
discontinuation of amortization of goodwill and intangible assets with
indefinite lives. In accordance with the transition provisions of SFAS No. 142,
on January 1, 2002 Hughes recorded a one-time after-tax charge of $681.3
million related to the initial impairment test as a cumulative effect of
accounting change. See "Accounting Changes" below for additional information.
Direct-To-Home Broadcast Segment
Direct-To-Home Broadcast segment revenues for the first quarter of 2003
increased 13.3% to $1,847.9 million from $1,630.4 million for the first quarter
of 2002. The Direct-To-Home Broadcast segment had positive EBITDA of $211.3
million for the first quarter of 2003 compared with negative EBITDA of $20.9
million for the first quarter of 2002. The operating profit for the segment was
$38.3 million for first quarter of 2003 compared to an operating loss of $164.0
million for the first quarter of 2002.
United States. Revenues for DIRECTV U.S. grew to $1,708 million of the
first quarter of 2003, a 17% increase over first quarter of 2002 revenues of
$1,466 million. The increase in revenues resulted primarily from the larger
subscriber base in 2003 and an increase in ARPU. As of March 31, 2003, DIRECTV
had approximately 11.4 million subscribers compared to about 10.5 million
subscribers as of March 31, 2002. Excluding subscribers in the National Rural
Telecommunications Cooperative territories, DIRECTV owned and operated
subscribers totaled 9.8 million and 8.8 million at March 31, 2003 and 2002,
respectively. DIRECTV added 275,000 net new owned and operated subscribers for
the first quarter of 2003, compared to 350,000 net new owned and operated
subscribers for the first quarter of 2002. Average monthly subscriber churn
represents the monthly percentage of DIRECTV owned and operated subscribers
whose service is disconnected, and is calculated by dividing the average
monthly number of disconnected DIRECTV owned and operated subscribers during
the period by average DIRECTV owned and operated subscribers for the period.
Average monthly subscriber churn was 1.5% for the first quarter of 2003
compared to 1.6% for the first quarter of 2002. ARPU for
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
DIRECTV U.S. was $59.10 and $56.70 for the quarters ended March 31, 2003 and
2002, respectively. The increased ARPU was due to increased customer purchases
of expanded local channel offerings and higher fees resulting from the
increased number of subscribers with multiple set-top receivers.
EBITDA was $234 million for the first quarter of 2003 compared to EBITDA of
$40 million for the first quarter of 2002. The operating profit for the first
quarter of 2003 was $110 million compared to an operating loss of $45 million
for the first quarter of 2002. The increase in EBITDA was primarily
attributable to the additional profit resulting from the higher revenues
discussed above, lower subscriber acquisition costs due to fewer gross
subscriber acquisitions and the $56 million loss recorded for the GECC dispute
in 2002, partially offset by higher retention, upgrade and other marketing
costs. The change in operating loss was due to the improvement in EBITDA
partially offset by a $21 million increase in depreciation expense associated
with capital expenditures since March 31, 2002 and a $19 million increase in
amortization expense due to the reinstatement of amortization expense related
to intangible assets with indefinite lives in accordance with Emerging Issues
Task Force ("EITF") Issue No. 02-17, "Recognition of Customer Relationship
Assets Acquired in a Business Combination" during the fourth quarter of 2002.
Latin America. Revenues for DLA decreased 15% to $140 million for the first
quarter of 2003 from $165 million for the first quarter of 2002. The change in
revenues resulted from the devaluation of the Brazilian and Venezuelan
currencies and a smaller subscriber base. Subscribers declined from about 1.64
million as of March 31, 2002 to about 1.53 million as of March 31, 2003. DLA
lost approximately 54,000 net subscribers for the first quarter of 2003
compared to 32,000 net new subscriber additions for the first quarter of 2002.
The decline in net subscribers for the first quarter of 2003 was primarily due
to the economic turmoil following the general strike in Venezuela. ARPU was
$30.10 and $33.90 for the quarters ended March 31, 2003 and 2002, respectively.
The decrease in ARPU was primarily the result of the devaluation of the
Brazilian and Venezuelan currencies against the U.S. dollar. Consistent with
DIRECTV U.S., DLA ARPU is now calculated by dividing average monthly revenues
in the period by average subscribers during the period.
EBITDA was a negative $22 million for the first quarter of 2003 compared to
negative EBITDA of $61 million for the first quarter of 2002. The change in
EBITDA was primarily due to the $32 million loss related to currency
devaluation in 2002 and lower 2003 expenses resulting from cost saving
initiatives. These improvements were partially offset by lower gross profit on
the lower revenues mentioned above. DLA incurred an operating loss of $71
million in the first quarter of 2003 compared to an operating loss of $119
million in the first quarter of 2002. The decreased operating loss resulted
from the improvement in EBITDA as well as a decrease in depreciation expense of
$9 million.
Satellite Services Segment
Revenues for the Satellite Services segment for the first quarter of 2003
decreased $7.3 million to $199.8 million from $207.1 million for the same
period in the prior year. This decline was primarily due to a termination fee
received in 2002 from one of PanAmSat's video customers.
EBITDA was $148.6 million for the first quarter of 2003, a 1.7% decrease
over the first quarter 2002 EBITDA of $151.1 million. EBITDA margin for the
first quarter of 2003 was 74.4% compared to 73.0% for the first quarter of
2002. The higher EBITDA margin was principally due to increased operational
efficiencies and lower bad debt expense partially offset by the 2002
termination fee discussed above. The decrease in EBITDA was primarily due to
the termination fee received in 2002. Also impacting the change in EBITDA and
EBITDA margin were several significant items in the first quarter of 2002,
including a $40 million net gain related to the settlement of the PAS-7
insurance claim,
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
net facilities restructuring and severance charges of $13 million and a $19
million charge to operating income for the write-off of receivables due to the
conversion of several sales-type leases to operating leases by one of
PanAmSat's customers. Operating profit was $76.3 million and operating profit
margin was 38.2% for the first quarter of 2003 compared to $57.1 million and
27.6% for the first quarter of 2002. The increase in operating profit and
operating profit margin resulted from lower depreciation expense resulting from
the Galaxy VIII-i satellite reaching full depreciation in July 2002, partially
offset by the decline in EBITDA.
Network Systems Segment
Revenues for the Network Systems segment for the first quarter of 2003
increased $4.6 million to $247.4 million, compared to $242.8 million for the
first quarter of 2002. The increase in revenues resulted from increased sales
of DIRECTV receiving equipment, which totaled about 629,000 units for the first
quarter of 2003 compared to about 430,000 units for the same period of 2002,
and revenues from a larger DIRECWAY subscriber base. These increases were
partially offset by decreased sales in the Carrier businesses. As of March 31,
2003, DIRECWAY had approximately 152,000 subscribers in North America compared
to 111,000 as of March 31, 2002.
The Network Systems segment reported negative EBITDA of $22.2 million for
the first quarter of 2003, compared to negative EBITDA of $30.5 million for the
first quarter of 2002. The Network Systems segment had an operating loss of
$39.8 million for the first quarter of 2003, compared to an operating loss of
$48.5 million for the first quarter of 2002. The improvement in EBITDA and
operating loss resulted from a lower loss in the DIRECWAY business due to
improved efficiencies associated with the larger subscriber base, and a $6
million charge related to severance benefits in the first quarter of 2002.
Eliminations and Other
The elimination of revenues increased to $67.8 million for the first quarter
of 2003 from $55.5 million for the first quarter of 2002. The increase was
primarily due to increased shipments of DIRECTV receiving equipment from the
Network Systems segment to the Direct-To-Home Broadcast segment partially
offset by a decrease in transponder leasing revenues from the Satellite
Services segment to the Direct-To-Home Broadcast segment.
Operating profit (loss) from Eliminations and Other decreased to an
operating loss of $32.9 million for the first quarter of 2003 from an operating
profit of $67.7 million for the first quarter of 2002. The decrease in
operating profit resulted primarily from the $95 million net gain recorded in
2002 for the NASA claim.
Liquidity and Capital Resources
During the first quarter of 2003, Hughes' cash and cash equivalents balance
increased to $2,962.2 million. The increase in cash and cash equivalents
resulted primarily from additional net borrowings of $1,897.0 million and cash
provided by operations of $294.3 million partially offset by expenditures for
satellites and property of $187.5 million, debt issuance costs of $61.8
million, cash used in discontinued operations of $56.0 million and the $46.5
million purchase of short-term investments. Of the $2,962.2 million cash and
cash equivalents balance at March 31, 2003, $273.8 million and $619.2 million
is generally available only to DIRECTV and PanAmSat, respectively.
As a measure of liquidity, the current ratio (ratio of current assets to
current liabilities) at March 31, 2003 and December 31, 2002 was 2.14 and 1.14,
respectively. Working capital increased by $2,468.7
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
million to $2,922.0 million at March 31, 2003 from working capital of $453.3
million at December 31, 2002. The change was principally due to the repayment
of current debt obligations and an increase in cash balances, both of which
were funded by the proceeds received from long-term borrowings that resulted
from the DIRECTV financing transactions described in more detail below.
Hughes expects to have cash requirements for its continuing operations for
the remainder of 2003 of about $250 million. This cash will be used primarily
for capital expenditures for satellites and property, interest expense and
investments in affiliated companies, including DLA. The above cash requirements
do not include non-operational cash requirements such as the $275 million
dividend to GM in connection with the News Corp. transactions, cash required
for the shut down of the DIRECTV Broadband business and a potential purchase
price adjustment payment to The Boeing Company ("Boeing"). For further
discussion of the Boeing purchase price adjustment, see "Commitments and
Contingencies" below. Hughes' cash requirements are expected to be funded from
a combination of existing cash balances, cash provided from operations and
amounts available under credit facilities. The proceeds of the DIRECTV
financing transactions described below are expected to provide sufficient
liquidity to fund Hughes through cash flow breakeven.
Common Stock Dividend Policy. Dividends may be paid on the GM Class H
common stock only when, as, and if declared by GM's Board of Directors in its
sole discretion. The GM Board of Directors has not paid, and does not currently
intend to pay in the foreseeable future, cash dividends on its Class H common
stock. Similarly, Hughes has not paid dividends on its common stock to GM and
does not currently intend to do so in the foreseeable future, with the
exception of the dividend to be paid to GM in connection with the News Corp.
transactions. Future Hughes earnings, if any, are expected to be retained for
the development of the businesses of Hughes.
Hughes Equity Recapitalization. During April 2003, the Hughes Board of
Directors approved the reclassification of the outstanding Hughes Series B
convertible preferred stock into Hughes Class B common stock of equivalent
value, and a subsequent stock split of Hughes common stock and Hughes Class B
common stock through dividends of additional shares. GM, in its capacity as the
holder of all outstanding Hughes capital stock, approved the reclassification.
Shortly thereafter, GM converted some of its Hughes common stock into an
equivalent number of shares of Hughes Class B common stock. As a result of
these transactions, Hughes currently has 1,207,518,237 shares of Hughes common
stock and 274,373,316 shares of Hughes Class B common stock issued and
outstanding, all of which are owned by GM. The terms of the Hughes common stock
and Hughes Class B common stock are identical in all respects (with the
exception of provisions regarding stock-on-stock dividends) and, at the option
of the holder, the Hughes common stock may be converted at any time into Hughes
Class B common stock and vice versa. These transactions had no impact on the
outstanding number of shares of GM Class H common stock or the Class H dividend
base. In connection with the News Corp. transactions, GM Class H common stock
will be exchanged for Hughes common stock, and the Hughes Class B common stock
will be sold by GM to News Corp. Immediately after the completion of the News
Corp. transactions, all of the shares of Hughes Class B common stock held by
News Corp. will be converted into Hughes common stock.
Cash Flow Information. Cash provided by operating activities was $294.3
million for the first quarter of 2003, compared to cash provided by operating
activities of $95.5 million for the first quarter of 2002. The increase in
operating cash flows was primarily the result of the lower net loss from
continuing operations in 2003 and a decrease in working capital during 2003
compared to an increase in working capital during 2002.
Cash used in investing activities was $241.0 million in the three months
ended March 31, 2003, and $172.2 million for the same period in 2002. The
increase in cash used in investing activities in the
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
first quarter of 2003 primarily resulted from $173.7 million of reduced
proceeds from insurance claims and an increase of $46.5 million related to the
purchase of short-term investments, of which $45.7 million represents
restricted cash discussed in further detail below, partially offset by reduced
expenditures for satellites and property.
Cash provided by financing activities was $1,836.3 million for the first
quarter of 2003, compared to $528.6 million for the first quarter of 2002.
Financing activities in 2003 include net borrowings of $1,897.0 million
partially offset by debt issuance costs of $61.8 million. Financing activities
in 2002 include net borrowings of $740.1 million, partially offset by the
$134.2 million final payment of the Raytheon settlement, debt issuance costs of
$54.6 million and the payment of preferred stock dividends to GM.
Cash used in discontinued operations was $56.0 million for the first quarter
of 2003, compared to $38.2 million for the first quarter of 2002.
Notes Payable and Credit Facilities. Notes Payable. On February 28, 2003,
DIRECTV Holdings LLC ("DIRECTV"), a wholly-owned subsidiary of Hughes, issued
$1.4 billion in senior notes due in 2013 in a Rule 144A private placement
transaction. The ten-year senior notes are unsecured indebtedness guaranteed by
all of DIRECTV's domestic subsidiaries and bear interest at 8.375%. Principal
on the notes is payable upon maturity, while interest is payable semi-annually
beginning September 15, 2003.
In February 2002, PanAmSat completed an $800.0 million Rule 144A private
placement notes offering, which were exchanged for registered notes in November
2002. These unsecured notes bear interest at an annual rate of 8.5%, payable
semi-annually and mature in 2012.
PanAmSat issued five, seven, ten and thirty-year fixed rate notes totaling
$750.0 million in January 1998. The $200.0 million five-year notes were repaid
in January 2003. The outstanding principal balances and interest rates for the
seven, ten, and thirty-year notes as of March 31, 2003 were $275.0 million at
6.125%, $150.0 million at 6.375% and $125.0 million at 6.875%, respectively.
Principal on the notes is payable at maturity, while interest is payable
semi-annually. In connection with a new secured bank facility entered into by
PanAmSat in February 2002, described below, these notes were ratably secured
with the new bank facility by substantially all of PanAmSat's assets, including
its satellites.
Credit Facilities. On March 6, 2003, DIRECTV entered into a $1,675.0
million senior secured credit facility. The senior secured credit facility is
comprised of a $375.0 million Term Loan A, of which $175.0 million was
outstanding at March 31, 2003, a $1,050.0 million Term Loan B, which was fully
drawn as of March 31, 2003, and a $250.0 million revolving credit facility,
which was undrawn at March 31, 2003. The senior secured credit facility is
secured by substantially all of DIRECTV's assets and guaranteed by all of
DIRECTV's domestic subsidiaries. All borrowings under the senior secured credit
facility initially bear interest at a rate per annum equal to the London
Interbank Offered Rate ("LIBOR") plus 3.50% (4.83% at March 31, 2003). The
revolving credit facility and the Term Loan A each have terms of five years and
the Term Loan B matures in 2010. Principal payments under the Term Loan A are
due in varying amounts from 2004 to 2008. Principal payments under the Term
Loan B are due primarily in 2008 to 2010. DIRECTV distributed to Hughes $2.56
billion of net proceeds from the senior secured credit facility and the sale of
senior notes, described above. That distribution enabled Hughes to repay the
$506.3 million outstanding principal balance plus accrued interest under a
prior credit agreement, which was then terminated. The $200 million undrawn
portion of the Term Loan A is expected to be drawn by DIRECTV by December 2003,
and those proceeds may be distributed to
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Hughes as well. The revolving portion of the senior secured credit facility is
available to DIRECTV to fund working capital and other requirements.
In February 2002, PanAmSat entered into a bank facility in the amount of
$1,250.0 million. The bank facility is comprised of a $250.0 million revolving
credit facility, which was undrawn as of March 31, 2003, a $300.0 million
Tranche A Term Loan and a $700.0 million Tranche B Term Loan, both of which
were fully drawn as of March 31, 2003. This bank facility replaced a previously
existing $500.0 million unsecured multi-year revolving credit facility. The new
revolving credit facility and the Tranche A Term Loan bear interest at LIBOR
plus 3.0%. The Tranche B Term Loan bears interest at LIBOR plus 3.5%. The
revolving credit facility and Tranche A Term Loan interest rates may be
increased or decreased based upon changes in PanAmSat's total leverage ratio,
as defined by the credit agreement. The revolving credit facility and the
Tranche A Term Loan terminate in 2007 and the Tranche B Term Loan matures in
2008. Principal payments under the Tranche A Term Loan are due in varying
amounts from 2004 to 2007. Principal payments under the Tranche B Term Loan are
due primarily at maturity. The facilities are secured ratably by substantially
all of PanAmSat's assets, including its satellites. PanAmSat repaid a $1,725.0
million intercompany loan from Hughes in February 2002, using proceeds from the
bank facility and notes payable described above, as well as existing cash
balances.
PanAmSat's bank facility requires that PanAmSat obtain the consent of the
lenders prior to the consummation of the News Corp. transactions. PanAmSat has
initiated the process for obtaining the consent, however, no assurances can be
given that the consent will be obtained. Failure to obtain the consent would
constitute an event of default under the facility.
On October 1, 2001, Hughes entered into a $2.0 billion revolving credit
facility with General Motors Acceptance Corporation ("GMAC"). The facility was
subsequently amended in March 2003 and November and February 2002. The March
2003 amendment extended the commitment to March 31, 2004. The November 2002
amendment reduced the size of the facility to $1,500.0 million and provided for
a commitment through August 31, 2003. The amended facility is comprised of a
$1,500.0 million tranche secured by a $1,500.0 million Hughes cash deposit.
Borrowings under the facility bear interest at GMAC's cost of funds plus
0.125%. The $1,500.0 million cash deposit earns interest at a rate equivalent
to GMAC's cost of funds. Hughes has the legal right of setoff with respect to
the $1,500.0 million GMAC cash deposit, and accordingly offsets it against
amounts borrowed from GMAC under the $1,500.0 million tranche in the
consolidated statement of financial position. The facility was fully drawn as
of March 31, 2003.
Other. $39.8 million in other short-term and long-term debt, related
primarily to DLA and HNS' international subsidiaries, was outstanding at March
31, 2003, bearing fixed and floating rates of interest of 4.31% to 16.00%.
Principal on these borrowings is due in varying amounts through 2007.
DIRECTV and PanAmSat are required to maintain certain financial covenants
and are also subject to restrictive covenants under their borrowings. These
covenants limit DIRECTV's and PanAmSat's ability to, among other things: incur
or guarantee additional indebtedness; make restricted payments, including
dividends; create or permit to exist certain liens; enter into business
combinations and asset sale transactions; make investments; enter into
transactions with affiliates; and enter into new businesses. If DIRECTV or
PanAmSat fails to comply with their respective covenants, all or a portion of
their borrowings could become immediately payable. At March 31, 2003, DIRECTV
and PanAmSat were in compliance with all such covenants.
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
As of March 31, 2003, restricted cash of $45.7 million was included as part
of "Prepaid expenses and other" on the Consolidated Balance Sheets. This cash
was deposited to secure certain letters of credit and obligations of Hughes'
majority-owned foreign subsidiaries. Restrictions on the cash will be removed
as the letters of credit expire and the foreign subsidiaries' obligations are
satisfied or terminated.
Hughes' notes payable and credit facilities mature as follows: $17.9 million
in the remainder of 2003; $94.9 million in 2004; $407.7 million in 2005; $138.6
million in 2006; $184.2 million in 2007; and $4,171.5 million thereafter.
Satellite Fleet. As of March 31, 2003, Hughes had a fleet of 29 satellites,
seven owned by DIRECTV and 22 owned and operated by PanAmSat. In April 2003,
PanAmSat launched a new satellite, Galaxy XII. Seven additional satellites are
currently under construction, including one for DIRECTV, three for PanAmSat and
three for the SPACEWAY(R) platform under development by HNS. Capital
expenditures related to satellites totaled $113.4 million and $205.3 million
for the three months ended March 31, 2003 and 2002, respectively.
Commitments and Contingencies
Litigation
In connection with the 2000 sale by Hughes of its satellite systems
manufacturing businesses to Boeing, the stock purchase agreement provides for
potential adjustment to the purchase price based upon the final closing date
financial statements of the satellite systems manufacturing businesses. The
stock purchase agreement also provides for a dispute resolution process to
resolve any disputes that arise in determining the purchase price adjustment.
Based upon the final closing date financial statements of the satellite systems
manufacturing businesses that were prepared by Hughes, Boeing is owed a
purchase price adjustment of $164 million plus interest at a rate of 9.5% from
the date of sale, the total amount of which has been provided for in Hughes'
consolidated financial statements. However, Boeing has submitted additional
proposed adjustments, which are being resolved through the dispute resolution
process. As of March 31, 2003, approximately $670 million of proposed
adjustments remain unresolved. Hughes is contesting the matter in the
arbitration process, which will result in a binding decision unless the matter
is otherwise settled. Although Hughes believes it has adequately provided for
the disposition of this matter, the impact of its disposition cannot be
determined at this time. The final resolution of this matter could result in
Hughes making a cash payment to Boeing that would be material to Hughes'
consolidated results of operations and financial position.
Litigation is subject to uncertainties and the outcome of individual
litigated matters is not predictable with assurance. In addition to the above
items, various legal actions, claims, and proceedings are pending against
Hughes arising in the ordinary course of business. Hughes has established loss
provisions for matters in which losses are probable and can be reasonably
estimated. Some of the matters may involve compensatory, punitive, or treble
damage claims, or sanctions, that if granted, could require Hughes to pay
damages or make other expenditures in amounts that could not be estimated at
March 31, 2003. After discussion with counsel representing Hughes in those
actions, it
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
is the opinion of management that such liability is not expected to have a
material adverse effect on Hughes' consolidated results of operations and
financial position.
Other Contingencies
The in-orbit satellites of Hughes and its subsidiaries are subject to the
risk of failing prematurely due to, among other things, mechanical failure,
collision with objects in space or an inability to maintain proper orbit.
Satellites are subject to the risk of launch delay and failure, destruction and
damage while on the ground or during launch and failure to become fully
operational once launched. Delays in the production or launch of a satellite or
the complete or partial loss of a satellite, in-orbit or during launch, could
have a material adverse impact on the operation of Hughes' businesses. Hughes
has, in the past, experienced technical anomalies on some of its satellites.
Service interruptions caused by anomalies, depending on their severity, could
result in claims by affected customers for termination of their transponder
agreements, cancellation of other service contracts or the loss of other
customers.
Hughes uses in-orbit and launch insurance to mitigate the potential
financial impact of satellite fleet in-orbit and launch failures unless the
premium costs are considered uneconomic relative to the risk of satellite
failure. The insurance generally covers the unamortized book value of covered
satellites and does not compensate for business interruption or loss of future
revenues or customers. Hughes relies on in-orbit spare satellites and excess
transponder capacity at key orbital slots to mitigate the effects of satellite
failure on its ability to provide service. Where insurance costs related to
known satellite anomalies are prohibitive, Hughes' insurance policies contain
coverage exclusions and Hughes is not insured for certain other satellites. The
book value of satellites that were insured with coverage exclusions amounted to
$539.5 million and the book value of the satellites that were not insured was
$1,022.4 million at March 31, 2003.
In May 2003, the insurance policies covering nine of PanAmSat's satellites
will expire. PanAmSat is currently negotiating renewal policies for these
satellites. Upon the expiration of the existing insurance policies, there can
be no assurance that PanAmSat will be able to procure new insurance for its
satellites. In addition, new satellite insurance may only be available with
higher premiums, higher deductibles, shorter coverage periods, higher loss
percentages required for constructive total loss claims, additional satellite
health-related policy exclusions, or other terms which may make such insurance
commercially unreasonable. Accordingly, PanAmSat may elect to discontinue
insuring certain satellites. An uninsured failure of one or more of PanAmSat's
satellites could have a material adverse effect on Hughes' consolidated results
of operations and financial position. In addition, higher premiums on insurance
policies will increase costs, thereby reducing operating income by the amount
of such increased premiums.
On February 19, 2003, PanAmSat filed proofs of loss under the insurance
policies for Galaxy XI and PAS-1R for constructive total losses based on
degradation of the solar panels. Service to existing customers has not been
affected, and PanAmSat expects that both of these satellites will continue to
serve these customers. The insurance policies for these satellites total
approximately $289 million and $345 million, respectively, and both include a
salvage provision for PanAmSat to share 10% of future revenues from these
satellites with their respective insurers if the proof of loss is accepted. The
availability and use of the proceeds from these insurance claims are restricted
by the agreements governing PanAmSat's debt obligations. No assurances can be
made that the proof of loss with respect to these two satellites will be
accepted by the insurers. PanAmSat is working with the satellite manufacturer
to determine the long-term implications to the satellites and will continue to
assess the operational impact these losses may have. At this time, based upon
all information currently available to PanAmSat, as well as planned
modifications to the operation of the satellites in order to maximize
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
revenue generation, PanAmSat currently expects to operate these satellites for
the duration of their estimated useful lives, although a portion of the
transponder capacity on these satellites will not be useable during such time.
Hughes currently believes that the net book values of these satellites are
fully recoverable and does not expect a material impact on 2003 revenues as a
result of the difficulties on these two satellites.
In the first quarter of 2003, PanAmSat and the manufacturer of the Galaxy
VIII-iR satellite terminated the Galaxy VIII-iR satellite construction contract
by mutual agreement. As of March 31, 2003, PanAmSat had a receivable due from
the satellite manufacturer of $69.5 million. PanAmSat expects to collect this
receivable in December 2003. In addition, PanAmSat has agreed with the Galaxy
VIII-iR launch vehicle provider to defer the use of the launch to a future
satellite.
Hughes is contingently liable under letters of credit and bonds in the
aggregate amount of $60.7 million which were undrawn at March 31, 2003, and DLA
LLC has guaranteed $3.0 million of bank debt related to non-consolidated LOC's,
which is due in varying amounts through 2005. Additionally, DLA LLC may be
required to repurchase Grupo Clarin S.A.'s ("Clarin") 3.98% interest in DLA LLC
for $195 million in November 2003. In the first quarter of 2003, Clarin
notified DLA LLC that it believes that DLA LLC's decision to initiate
discussions to address DLA LLC's financial and operational challenges has
caused DLA LLC to be responsible immediately to purchase Clarin's equity
interest in DLA LLC. DLA LLC has filed a motion to reject its obligation under
this contract as part of its reorganization proceedings. See "DLA LLC
Reorganization" below for further discussion.
The Hughes Board of Directors has approved several benefit plans designed to
provide benefits for the retention of about 217 key employees and also provide
benefits in the event of employee lay-offs. Generally, these benefits are only
available if a qualified change-in-control of Hughes occurs. Upon a
change-in-control, the retention benefits will be accrued and expensed when
earned and the severance benefits will be accrued and expensed if an employee
is identified for termination. A total of up to about $107 million for
retention benefits will be paid, with approximately 50% paid at the time of a
change-in-control and 50% paid up to 12 months following the date of a
change-in-control. The amount of severance benefits to be paid will be based
upon decisions that will be made relating to employee layoffs, if any,
following the date of a change-in-control. In addition, as of March 31, 2003,
approximately 21.2 million employee stock options to purchase shares of GM
Class H common stock will vest upon a qualifying change-in-control and up to an
additional 8.4 million employee stock options could vest if employees are laid
off within one year of a change-in-control. The successful completion of the
News Corp. transactions would be considered a change-in-control for purposes of
these benefits.
Commitments
At March 31, 2003, minimum future commitments under noncancelable operating
leases having lease terms in excess of one year were primarily for real
property and aggregated $589.7 million, payable as follows: $214.2 million in
the remainder of 2003, $156.4 million in 2004, $98.5 million in 2005, $49.3
million in 2006, $34.3 million in 2007, and $37.0 million thereafter. Certain
of these leases contain escalation clauses and renewal or purchase options.
Hughes has minimum commitments under noncancelable satellite construction
and launch contracts, programming agreements, manufacturer subsidies
agreements, and telemetry, tracking and control services agreements. As of
March 31, 2003, minimum payments over the terms of applicable contracts are
anticipated to be approximately $3,348.3 million, payable as follows: $603.2
million in the remainder of 2003, $556.3 million in 2004, $442.7 million in
2005, $626.5 million in 2006, $727.4
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
million in 2007, and $392.2 million thereafter. The Bankruptcy Court has
granted DLA LLC's motion to reject certain contracts for programming
commitments with remaining obligations of $767.8 million at March 31, 2003,
included above. See "DLA LLC Reorganization" below for additional information.
DLA LLC Reorganization
On March 18, 2003, DLA LLC filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code in Bankruptcy Court. The
filing does not include any of DLA LLC's operating companies in Latin America
and the Caribbean, which will continue regular operations. DLA LLC continues to
manage its business as a debtor-in-possession ("DIP"). As a DIP, management is
authorized to operate the business, but may not engage in transactions outside
the ordinary course of business without Bankruptcy Court approval. Subsequent
to the filing of its Chapter 11 petition, DLA LLC obtained Bankruptcy Court
orders that, among other things, authorized DLA LLC to pay certain pre-petition
obligations related to employee wages and benefits and to take certain actions
where such payments or actions will benefit its estate or preserve the going
concern value of the business enterprise, thereby enhancing the prospects of
reorganization.
Under bankruptcy law, actions by creditors to collect pre-petition
indebtedness owed by DLA LLC at the filing date are stayed and other
pre-petition contractual obligations may not be enforced against DLA LLC. In
addition, DLA LLC has the right, subject to Bankruptcy Court approval and other
conditions, to assume or reject any pre-petition executory contracts and
unexpired leases. Parties to rejected executory contracts may file claims with
the Bankruptcy Court. As of March 31, 2003, the Bankruptcy Court has approved
DLA LLC's rejection of certain programming contracts with estimated remaining
minimum payments totaling $767.8 million at the time of rejection. DLA LLC no
longer broadcasts the programming related to rejected contracts.
Hughes has agreed to provide a senior secured DIP financing facility in an
amount of up to $300 million to supplement DLA LLC's existing cash flow and
help ensure that vendors, programmers, employees and other parties receive
payment for services provided after the filing of DLA LLC's Chapter 11
petition. Pursuant to interim orders, DLA LLC may borrow up to $35 million,
subject to the terms of the loan documents. Assuming the final approval of the
DIP financing, an additional $265 million of the DIP financing would become
available to DLA LLC, subject to the terms of the loan documents.
Due to material uncertainties, it is not possible to predict the length of
time DLA LLC will operate under Chapter 11 protection, the outcome of the
proceedings in general, whether DLA LLC will continue to operate under its
current organizational structure, or the effect of the proceedings on DLA LLC's
business and the Chapter 11 recovery by creditors and equity holders of DLA LLC.
Hughes' Consolidated Balance Sheets as of March 31, 2003 include liabilities
subject to compromise of DLA LLC of approximately $156.5 million. Additional
liabilities subject to compromise may arise subsequent to the filing date of
the Chapter 11 petition resulting from, among other things, rejection of
executory contracts, including certain programming contracts, and allowance by
the Bankruptcy Court of contingent claims and other disputed amounts. On April
17, 2003, DLA LLC filed with the Bankruptcy Court schedules setting forth DLA
LLC's assets and liabilities as of the date of the petition as reflected in DLA
LLC's records. The amounts of claims filed by DLA LLC's creditors could differ
significantly from the scheduled amounts.
Reorganization expense shown in Hughes' consolidated statements of
operations includes the costs incurred to file the bankruptcy petition, ongoing
related legal and consulting costs, and other
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
charges related to the reorganization. As DLA LLC estimates allowed claims for
amounts not previously recognized as liabilities subject to compromise, DLA LLC
expects to record the accrual of such amounts as reorganization expense in
accordance with SFAS No. 5, "Accounting for Contingencies." Such expense could
be material in amount. Because of the inherent uncertainty of the bankruptcy
process, the timing of the recording of such claims cannot be determined.
Adjustments of liabilities to their reorganization values, as determined by the
Bankruptcy Court, will also be reflected in reorganization expense. Hughes
expects to retain control of DLA LLC upon emergence from Chapter 11 and
therefore expects to continue to consolidate DLA LLC.
Discontinued Operations
On February 28, 2003, DIRECTV Broadband completed the transition of its
customers to alternative service providers and shut down its high-speed
Internet service business. In the fourth quarter of 2002, Hughes recorded a
charge of $92.8 million related to accruals for employee severance benefits,
contract termination payments and the write-off of customer premise equipment.
Included in the $92.8 million charge were accruals for employee severance
benefits of $21.3 million and contract termination payments of $18.6 million.
During the first quarter of 2003, there were payments and adjustments of $11.5
million and $13.8 million related to employee severance benefits and contract
termination payments, respectively. As of March 31, 2003, $9.8 million related
to accruals for employee severance benefits and $4.8 million related to
contract termination payments were remaining.
Use of Estimates in the Preparation of the Consolidated Financial Statements
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates, judgments and assumptions that affect
amounts reported therein. Management bases its estimates, judgments and
assumptions on historical experience and on various other factors that are
believed to be reasonable under the circumstances. Due to the inherent
uncertainty involved in making estimates, actual results reported in future
periods may be affected by changes in those estimates. The following represent
what Hughes believes are the critical accounting policies that may involve a
higher degree of estimation, judgment and complexity. For a summary of all of
Hughes' accounting policies, including those discussed below, see Note 2 to the
Consolidated Financial Statements included in Hughes' Annual Report on Form
10-K for the year ended December 31, 2002 filed with the SEC on March 11, 2003.
Valuation of Long-Lived Assets. Hughes evaluates the carrying value of
long-lived assets to be held and used, other than goodwill and intangible
assets with indefinite lives, when events and circumstances warrant such a
review. The carrying value of a long-lived asset is considered impaired when
the anticipated undiscounted cash flow from such asset is separately
identifiable and is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the long-lived asset. Fair value is determined primarily using the
estimated cash flows associated with the asset under review, discounted at a
rate commensurate with the risk involved. Losses on long-lived assets to be
disposed of are determined in a similar manner, except that fair values are
reduced for the cost of disposal. Changes in estimates of future cash flows
could result in a write-down of the asset in a future period.
Valuation of Goodwill and Intangible Assets with Indefinite Lives. Hughes
evaluates the carrying value of goodwill and intangible assets with indefinite
lives on an annual basis, and when events and circumstances warrant such a
review in accordance with SFAS No. 142, "Goodwill and Other
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Intangible Assets," which is described in "Accounting Changes," below. Hughes
uses estimates of fair value to determine the amount of impairment, if any, of
recorded goodwill and intangible assets with indefinite lives. Fair value is
determined primarily using the estimated future cash flows associated with the
asset under review, discounted at a rate commensurate with the risk involved.
Changes in estimates of discounted cash flows could result in a write-down of
the asset in a future period.
Financial Instruments and Investments. Hughes maintains investments in
equity securities of unaffiliated companies. Hughes continually reviews its
investments to determine whether a decline in fair value below the cost basis
is "other-than-temporary." Hughes considers, among other factors: the magnitude
and duration of the decline; the financial health and business outlook of the
investee, including industry and sector performance, changes in technology, and
operational and financing cash flow factors; and Hughes' intent and ability to
hold the investment. If the decline in fair value is judged to be
other-than-temporary, the cost basis of the security is written-down to fair
value and the amount is recognized in the consolidated statements of operations
as part of "Other, net." Future adverse changes in market conditions or poor
operating results of underlying investments could result in losses or an
inability to recover an investment's carrying value, thereby possibly requiring
a charge in a future period.
Reserves for Doubtful Accounts. Management estimates the amount of required
reserves for the potential non-collectibility of accounts receivable based upon
past experience of collection and consideration of other relevant factors.
However, past experience may not be indicative of future collections and
therefore additional charges could be incurred in the future to reflect
differences between estimated and actual collections.
Contingent Matters. A significant amount of management estimate is required
in determining when, or if, an accrual should be recorded for a contingent
matter and the amount of such accrual, if any. Estimates are developed in
consultation with outside counsel and are based on an analysis of potential
outcomes. Due to the uncertainty of determining the likelihood of a future
event occurring and the potential financial statement impact of such an event,
it is possible that upon further development or resolution of a contingent
matter, a charge could be recorded in a future period that would be material to
Hughes' consolidated results of operations and financial position.
Accounting Changes
Stock-Based Compensation
Beginning in the first quarter of 2003, Hughes adopted the fair value based
method of accounting for stock-based employee compensation of SFAS No. 123,
"Accounting for Stock-Based Compensation" and the disclosure requirements of
SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of SFAS No. 123." Hughes elected to follow the
prospective method of adoption, which will result in the recognition of fair
value based compensation cost in the consolidated statements of operations for
stock options and other stock-based awards granted to employees on or after
January 1, 2003. Stock options and other stock-based awards granted prior to
January 1, 2003 continue to be accounted for under the intrinsic value method
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" in the consolidated statements of operations.
Variable Interest Entities
On February 1, 2003, Hughes adopted Financial Accounting Standards Board
("FASB") Interpretation No. 46, "Consolidation of Variable Interest
Entities--an interpretation of ARB No. 51"
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
("FIN 46"). FIN 46 requires the consolidation of a variable interest entity
("VIE") where an equity investor achieves a controlling financial interest
through arrangements other than voting interests, and it is determined that the
investor will absorb a majority of the expected losses and/or receive the
majority of residual returns of the VIE. An entity is deemed a VIE, if by
intention, the equity investment at risk by the investor is insufficient to
permit the VIE to finance its activities without additional subordinated
financial support, and under certain other circumstances. The determination as
to whether an investment is an investment in a VIE is based on the
circumstances on the date of investment or when certain events occur that would
indicate a potential change in a previous determination.
For investments in VIEs made before February 1, 2003, Hughes will follow the
provisions of FIN 46, as required, beginning on July 1, 2003. The application
of this standard on July 1, 2003 could result in the consolidation of certain
affiliates which were previously accounted for under the equity method of
accounting. Hughes has identified the partially-owned LOC's providing DIRECTV
programming services in Venezuela and Puerto Rico, of which Hughes owns 19.5%
and 40.0%, respectively, as potential VIEs. Hughes currently accounts for these
investments under the equity method of accounting and reflects approximately
75.0% of their net income or loss in Hughes' consolidated statements of
operations due to the accumulation of net losses in excess of the other
investors' investments. If consolidation of these LOC's occur as described
above, such application of FIN 46 would be reflected as a cumulative effect of
accounting change in the consolidated statements of operations. Hughes has not
yet determined the impact this standard will have on its consolidated results
of operations or financial position, if any.
Accounting for Costs Associated with Exit or Disposal Activities
Hughes adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," on January 1, 2003. SFAS No. 146 generally requires the
recognition of costs associated with exit or disposal activities when incurred
rather than at the date of a commitment to an exit or disposal plan. SFAS No.
146 replaces previous accounting guidance provided by EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The adoption of this standard did not have a significant
impact on Hughes' consolidated results of operations or financial position.
Goodwill and Other Intangible Assets
Hughes adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on
January 1, 2002. SFAS No. 142 required that Hughes perform step one of a
two-part transitional impairment test to compare the fair value of each
reportable unit with its respective carrying value, including goodwill. If the
carrying value exceeded the fair value, step two of the transitional impairment
test was required to measure the amount of the impairment loss, if any. SFAS
No. 142 also required that intangible assets be reviewed as of the date of
adoption to determine if they continue to qualify as intangible assets under
the criteria established under SFAS No. 141, "Business Combinations," and to
the extent previously recorded intangible assets do not meet the criteria that
they be reclassified to goodwill.
In the first quarter of 2002, Hughes completed the required transitional
impairment test for intangible assets with indefinite lives, which consisted of
Federal Communications Commission licenses for direct-to-home broadcasting
frequencies ("Orbital Slots"), and determined that no impairment existed
because the fair value of these assets exceeded the carrying value as of
January 1, 2002.
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
In the second quarter of 2002, with the assistance of an independent
valuation firm, Hughes completed step one of the transitional impairment test
to determine whether a potential impairment existed for goodwill recorded at
January 1, 2002. Primarily based on the present value of expected future cash
flows, it was determined that the carrying values of DLA and DIRECTV Broadband
exceeded their fair values, therefore requiring step two of the impairment test
be performed.
Hughes completed step two of the impairment test for DLA and DIRECTV
Broadband in the fourth quarter of 2002 as required by SFAS No. 142. Step two
of the transitional test required the comparison of the fair value of the
reporting unit goodwill with the carrying value of that goodwill. As a result
of completing step two, Hughes determined that the carrying value of reporting
unit goodwill exceeded the fair value of that goodwill and that $631.8 million
and $107.9 million representing all of the goodwill recorded at DLA and DIRECTV
Broadband, respectively, was impaired. Hughes also recorded a $16.0 million
charge representing its share of the goodwill impairment of an equity method
investee. Therefore, Hughes recorded a cumulative effect of accounting change,
net of taxes, of $681.3 million ($755.7 million pre-tax) as of January 1, 2002
in the Consolidated Statements of Operations and Available Separate
Consolidated Net Income (Loss).
Other
Hughes adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13 and Technical Corrections," on January
1, 2003. SFAS No. 145 eliminates the requirement to present gains and losses on
the early extinguishment of debt as an extraordinary item, and resolves
accounting inconsistencies for certain lease modifications. The adoption of
this standard had no impact on Hughes' consolidated results of operations or
financial position.
New Accounting Standard
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue
No. 00-21 addresses determination of whether an arrangement involving more than
one deliverable contains more than one unit of accounting and how the related
revenues should be measured and allocated to the separate units of accounting.
EITF Issue No. 00-21 will apply to revenue arrangements entered into after June
30, 2003; however, upon adoption, the EITF allows the guidance to be applied on
a retroactive basis, with the change, if any, reported as a cumulative effect
of accounting change in the consolidated statements of operations. Hughes has
not yet determined the impact this EITF issue will have on its consolidated
results of operations or financial position, if any.
Security Ratings
Debt ratings by the various rating agencies reflect each agency's opinion of
the ability of issuers to repay debt obligations as they come due. Ratings
below Baa3 and BBB- denote sub-investment grade status for Moody's and S&P,
respectively. Ratings in the Ba/BB range generally indicate moderate protection
of interest and principal payments, potentially outweighed by exposure to
uncertainties or adverse conditions. Ratings in the B range generally indicate
that the obligor currently has financial capacity to meet its financial
commitments but there is limited assurance over any long period of time that
interest and principal payments will be made or that other terms will be
maintained. In general, lower ratings result in higher borrowing costs. A
security rating is not a recommendation to buy, sell, or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization.
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Hughes
On February 28, 2003, Moody's Investor Services ("Moody's") withdrew Hughes'
Ba3 senior secured credit rating after Hughes' prior credit agreement was
repaid and terminated on that date. At that time, Moody's affirmed Hughes' Ba3
senior implied rating. The rating outlook remained stable for Hughes.
On April 9, 2003, Standard & Poor's Ratings Services ("S&P") affirmed its
long-term corporate credit rating on Hughes of B+. At the same time, S&P
revised its Credit Watch implications on Hughes from developing to positive.
The rating action stemmed from the announcement of the News Corp. transactions.
DIRECTV
On April 9, 2003, Moody's affirmed its stable outlook and Ba3 senior implied
rating of DIRECTV. The ratings action followed the announcement of the News
Corp. transactions. The affirmation is based upon Moody's expectation that the
acquisition will not have a material impact on the credit metrics. On February
19, 2003, Moody's assigned to DIRECTV a Ba2 senior secured rating with respect
to its senior secured credit facilities and a B1 senior unsecured rating on the
$1.4 billion of senior unsecured notes. Moody's has also assigned a Ba3 senior
implied and a B2 issuer rating to DIRECTV. Moody's assigned a stable outlook to
DIRECTV's ratings. The rating outlook presumed diminishing capital and
investment requirements, combined with operating profit improvement to generate
eventual free cash flow, and therefore the ratings were considered to be
moderately prospective.
On February 12, 2003, S&P assigned a BB- rating on the senior secured credit
facilities and a B rating on the $1.4 billion of senior unsecured notes. The
ratings were placed on Credit Watch with positive implications, based on S&P's
assessment of the likelihood that Hughes or DIRECTV could be acquired by an
entity with higher credit quality than Hughes.
PanAmSat
On April 9, 2003, Moody's affirmed its stable outlook and Ba3 senior implied
rating of PanAmSat. The ratings action followed the announcement of the News
Corp. transactions.
On April 9, 2003, S&P affirmed its credit ratings for PanAmSat of B+ for
long-term corporate credit rating, BB- for senior secured debt, and B- for
senior unsecured debt. At the same time, S&P revised its Credit Watch
implications on PanAmSat from developing to positive. The rating action stemmed
from the announcement of the News Corp. transactions.
Market Risk Disclosure
The following discussion and the estimated amounts generated from the
sensitivity analyses referred to below include forward-looking statements of
market risk which assume for analytical purposes that certain adverse market
conditions may occur. Actual future market conditions may differ materially
from such assumptions because the amounts noted below are the result of
analyses used for the purpose of assessing possible risks and the mitigation
thereof. Accordingly, the forward-looking statements should not be considered
projections by Hughes of future events or losses.
Interest Rate Risk
Hughes is subject to fluctuating interest rates, which may adversely impact
its consolidated results of operations and cash flows. Hughes had outstanding
debt of $5.0 billion at March 31, 2003 which
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HUGHES ELECTRONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (concluded)
consisted of PanAmSat's fixed rate borrowings of $1,350 million and variable
rate borrowings of $1,000 million, DIRECTV's fixed rate borrowings of $1,400
million and variable rate borrowings of $1,225 million, and various other
floating and fixed rate borrowings, bearing interest at rates ranging from 4.3%
to 16.0%. As of March 31, 2003, the hypothetical impact of a one percentage
point increase in interest rates related to Hughes' outstanding variable rate
debt would be to increase annual interest expense by approximately $22 million.
* * *
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HUGHES ELECTRONICS CORPORATION
CONTROLS AND PROCEDURES
Hughes Electronics Corporation ("Hughes") maintains disclosure controls and
procedures designed to ensure that information required to be disclosed in
reports filed under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the specified time periods.
Within 90 days prior to the date of this report, Hughes' Chief Executive
Officer and Hughes' Chief Financial Officer evaluated, with the participation
of Hughes' management, the effectiveness of Hughes' disclosure controls and
procedures. Based on the evaluation, which disclosed no significant
deficiencies or material weaknesses, Hughes' Chief Executive Officer and
Hughes' Chief Financial Officer concluded that Hughes' disclosure controls and
procedures are effective. There were no significant changes in Hughes' internal
controls or in other factors that could significantly affect internal controls
subsequent to the evaluation.
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HUGHES ELECTRONICS CORPORATION
CERTIFICATIONS
I, Jack A. Shaw, Director, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hughes Electronics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 7, 2003
By /s/ JACK A. SHAW
-----------------------------
Jack A. Shaw
Director, President and Chief
Executive Officer
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HUGHES ELECTRONICS CORPORATION
CERTIFICATIONS
I, Michael J. Gaines, Senior Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hughes Electronics
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 7, 2003
By /s/ MICHAEL J. GAINES
-----------------------------
Michael J. Gaines
Senior Vice President and
Chief Financial Officer
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