General Motors Corp

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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K Annual report pursuant to section 13 and 15(d)

Filing Date: 2003-03-13 | Period of Report: 2002-12-31 SEC Accession No. 0000040730-03-000054

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FILER GENERAL MOTORS CORP Mailing Address Business Address 300 RENAISSANCE CTR 300 RENAISSANCE CTR CIK:40730| IRS No.: 380572515 | State of Incorp.:DE | Fiscal Year End: 1231 MAIL CODE: 482-C34-D71 MAIL CODE: 482-C34-D71 Type: 10-K | Act: 34 | File No.: 001-00143 | Film No.: 03602558 DETROIT MI 48265-3000 DETROIT MI 48265-3000 SIC: 3711 Motor vehicles & passenger car bodies 3135565000

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004 FORM 10-K

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE --- ACT OF 1934 For the fiscal year ended December 31, 2002 ------

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ---- EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-143

GENERAL MOTORS CORPORATION (Exact Name of Registrant as Specified in its Charter)

STATE OF DELAWARE 38-0572515 ------(State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.)

300 Renaissance Center, Detroit, Michigan 48265-3000 ------(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code (313) 556-5000 ------

Securities registered pursuant to Section 12(b) of the Act:

Name of Each Exchange on Title of Each Class Which Registered ------Common, $1-2/3 par value (560,560,818 shares outstanding as of February 28, 2003) New York Stock Exchange, Inc. Class H Common, $0.10 par value (958,299,595 shares outstanding as of February 28, 2003) New York Stock Exchange, Inc.

Note: The $1-2/3 par value common stock of the Registrant is also listed for trading on:

Chicago Stock Exchange, Inc. Chicago, Illinois Pacific Exchange, Inc. San Francisco, California Philadelphia Stock Exchange, Inc. Philadelphia, Pennsylvania Toronto Stock Exchange Toronto, Ontario, Canada Borse Frankfurt am Main Frankfurt on the Main, Germany Borse Dusseldorf Dusseldorf, Germany Bourse de Bruxelles Brussels, Belgium Courtiers en Valeurs Mobilieres Paris, France The London Stock Exchange London, England

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes . No X.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No .

The aggregate market value (based upon the average of the highest and lowest sales prices on the Composite Tape on February 28, 2003) of General Motors Corporation $1-2/3 par value and GM Class H common stocks held by nonaffiliates on February 28, 2003 was approximately $19.0 billion and $9.8 billion, respectively.

GM's Class H common stock is a "tracking stock" designed to provide holders with

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document financial returns based on the financial performance of Hughes Electronics Corporation and Subsidiaries (Hughes). However, in the event of a GM liquidation, insolvency or similar event, GM Class H stockholders would have no direct claim against the assets of Hughes. Rather, GM Class H stockholders would only have rights in the assets of GM as common stockholders of GM.

We determine the earnings per share and the amounts available for the payment of dividends on the GM Class H common stock by a fraction which reflects the portion of Hughes' earnings that is allocated to the GM Class H common stock. We sometimes refer to this fraction as the "Class H fraction." The numerator and denominator of the Class H fraction are determined as follows:

- The numerator of the Class H fraction is the weighted average number of shares of GM Class H common stock outstanding during the applicable period.

- The denominator of the Class H fraction is the notional number of shares of GM Class H common stock which, if outstanding, would represent 100% of the tracking stock interest in the earnings of Hughes.

We sometimes also refer to the denominator of the Class H fraction as the "Average Class H dividend base." It can be adjusted by the GM board of directors in specified circumstances, including to reflect contributions by GM to Hughes.

Documents incorporated by reference are as follows:

Part and Item Number of Form 10-K into Which Document Incorporated ------

General Motors Notice of Annual Meeting of Stockholders and Proxy Statement for the Annual Meeting of Stockholders to be held June 3, 2003 Part III, Items 10 through 13

COVER PAGE

PART I

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

THE CORPORATION

General Motors Corporation, incorporated in 1916 under the laws of the State of Delaware, is hereinafter sometimes referred to as the "Registrant", the "Corporation", "General Motors", or "GM."

ITEM 1. Business

General

The following information is incorporated herein by reference to the indicated pages in Part II:

Item Page(s) ------

Wholesale Sales II-6 Employment and Payrolls II-13 Note 25 of Notes to the GM Consolidated Financial Statements (Segment Reporting) II-63 through II-66

GM presents separate supplemental financial information for the following businesses: (1) Automotive, Communications Services, and Other Operations and

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (2) Financing and Insurance Operations. GM participates in the automotive industry through the activities of its automotive business operating segment General Motors Automotive (GMA) which is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM), and GM Asia Pacific (GMAP). GMNA designs, manufactures, and/or markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, Saturn, and HUMMER. GME, GMLAAM, and GMAP meet the demands of customers outside North America with vehicles designed, manufactured, and/or marketed under the following nameplates: Opel, Vauxhall, Holden, Saab, Buick, Chevrolet, GMC, and Cadillac. GM's automotive regions also have equity ownership in Fiat Auto Holdings (FAH), Fuji Heavy Industries Ltd., Suzuki Motor Corporation (Suzuki), Isuzu Motors Limited, Shanghai General Motors Corporation (SGM), SAIC-GM-Wuling Automobile Company Ltd., and GM Daewoo Auto & Technology Company (GM Daewoo). These investees design, manufacturer and market vehicles under the following name plates: Fiat, Alfa Romeo, Subaru, Suzuki, Isuzu, Buick, Wuling, Daewoo, and commencing in 2003, Chevrolet. GM's communications services relate to Hughes, which includes digital entertainment, information and communications services, and satellite-based private business networks. GM's other operations include the design, manufacturing and marketing of locomotives and heavy-duty transmissions, the elimination of intersegment transactions, certain non-segment specific revenues and expenditures, and certain corporate activities. GM's Financing and Insurance Operations primarily relate to General Motors Acceptance Corporation (GMAC). GMAC provides a broad range of financial services, including consumer vehicle financing, automotive dealership and other commercial financing, residential and commercial mortgage services, automobile service contracts, personal automobile insurance coverage and selected commercial insurance coverage.

Substantially all automotive-related products are marketed through retail dealers and distributors in the United States, Canada, and Mexico, and through distributors and dealers overseas. At December 31, 2002, there were approximately 7,790 GM vehicle dealers in the United States, 800 in Canada, and 210 in Mexico. Additionally, there were a total of approximately 11,800 outlets overseas which include dealers and authorized sales, service, and parts outlets.

Raw Materials and Services

GM purchases materials, parts, supplies, freight transportation, energy, and other services from numerous unaffiliated firms. Interruptions in production or delivery of these goods or services could adversely affect GM.

Backlog of Orders

Shipments of GM automotive products are made as promptly as possible after receipt of firm sales orders; therefore, no significant backlog of unfilled orders accumulates. Hughes had a $5.0 billion and $5.3 billion backlog of commercial contracts relating to its telecommunications business at the end of 2002 and 2001, respectively.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Competitive Position

GM's principal competitors in passenger cars and trucks in the United States and Canada include Ford Motor Company, DaimlerChrysler Corporation, Toyota Corporation (Toyota), Nissan Motor Corporation, Ltd., Honda Motor Company, Ltd., Mazda Motor Corporation, Mitsubishi Motors Corporation, Volkswagen A.G. (Volkswagen), Hyundai Motor Company, Ltd. (Hyundai), and Bayerische Motoren Werke AG (BMW). All but Volkswagen and Hyundai currently operate vehicle manufacturing facilities in the United States or Canada. Toyota and GM operate the New United Motor Manufacturing, Inc. facility in Fremont, California as a joint venture which currently builds passenger cars and light-duty trucks. Suzuki and GM operate CAMI Automotive Inc. in Ingersoll, Ontario as a joint venture which currently builds light-duty trucks. Wholesale unit sales of GM passenger cars and trucks during the three years ended December 31, 2002 are summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II. Total industry new motor vehicle (passenger cars, trucks, and buses) unit sales of domestic and foreign makes and GM's competitive position during the years ended December 31, 2002, 2001, and 2000 were as follows:

Vehicle Unit Sales (1)

(1) GM vehicle unit sales primarily represents vehicles manufactured by GM or manufactured by GM's investees and sold either under a GM nameplate or through a GM-owned distribution network. Consistent with industry practice, vehicle unit sales information employs estimates of sales in certain countries where public reporting is not legally required or otherwise available on a consistent basis.

Research and Development

In 2002, GM spent $5.8 billion for research, manufacturing engineering, product engineering, and development activities related primarily to the development of new products or services or the improvement of existing products or services, including activities related to vehicle emissions control, improved fuel economy, and the safety of persons using GM products. In addition, $72 million was spent for customer-sponsored activities. Comparably, $6.2 billion and $6.6 billion were spent on company-sponsored research and other product development activities in 2001 and 2000, respectively, and $82 million and $278 million were spent on customer-sponsored activities in 2001 and 2000, respectively.

Environmental Matters

Automotive Emissions Control Both the U.S. Federal and California governments currently impose stringent emission control requirements on motor vehicles sold in their respective jurisdictions. These requirements include pre-production testing of vehicles, testing of vehicles after assembly, the imposition of emission defect and performance warranties, and the obligation to recall and repair customer-owned vehicles determined to be non-compliant with emissions requirements. Both the U.S. Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) continue to place great emphasis on compliance testing of customer-owned vehicles. Failure to comply with the emission standards or defective emission control systems or components discovered during such testing can lead to substantial cost for General Motors related to emissions recalls. New CARB and Federal requirements will increase the time and mileage periods over which manufacturers are responsible for a vehicle's emission performance.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Automotive Emissions Control - (concluded) Both the EPA and the CARB emission requirements will become even more stringent in the future. A new tier of exhaust emission standards for cars and light-duty trucks, the "Low-Emission Vehicles (LEV) II" standards, will begin phasing in for California vehicles in the 2004 model year. Similar federal "Tier 2" standards will also start in 2004. In addition, both the CARB and the EPA have adopted more stringent standards applicable to future heavy-duty trucks. California requires that a specified percentage of cars and certain light-duty trucks be zero emission vehicles (ZEVs), such as electric vehicles or hydrogen fuel cell vehicles. This requirement starts at 10% in model year 2003 and increases in future years. Manufacturers have the option of meeting a portion of this requirement with partial ZEV credits, which are vehicles that meet very stringent emission standards and have extended emission system warranties. An additional portion of the ZEV requirement can be met with vehicles that meet these partial ZEV requirements and incorporate advanced technology, such as a hybrid electric propulsion system meeting specified criteria. Currently California is in the process of further amending its ZEV regulations, including delaying its start date until 2005. California is likely to finalize any such amendments sometime in the second quarter of 2003.

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The Clean Air Act permits states that have areas with air quality problems to adopt the California car and truck emission standards in lieu of the federal requirements and four states, New York, Massachusetts, Maine and Vermont, have done so. To provide states an alternative to the adoption of California standards, GM and other auto manufacturers began selling LEVs in the remaining 45 states in 2001, under the provisions of the National Low Emission Vehicle Program. In addition to the above-mentioned exhaust emission programs, onboard diagnostic (OBD) devices, used to diagnose problems with emission control systems, were required both Federally and in California effective with the 1996 model year. This system has the potential of increasing warranty costs and the chance for recall. OBD requirements become more challenging each year as vehicles meet lower emission standards, and new diagnostics are required. New evaporative emission control requirements for cars and trucks began phasing in with the 1995 model year in California and the 1996 model year Federally. Systems are being further modified to accommodate Federal onboard refueling vapor recovery (ORVR) control standards. ORVR was phased-in on passenger cars in the 1998 through 2000 model years, and is phasing-in on light-duty trucks in the 2001 through 2006 model years. Beginning with the 2004 model year, even more stringent evaporative emission standards apply in California, as well as Federally. Starting in the 2001 model year, the test procedure for exhaust emissions have become more complex with vehicles required to meet two additional test requirements: 1) measuring exhaust emissions over a new test cycle with the air conditioner operating; and 2) measuring exhaust emissions over a new high speed (80 mph) and high load cycle.

Industrial Environmental Control GM is subject to various laws relating to the protection of the environment including laws regulating air emissions, water discharges, waste management, and environmental cleanup. GM is in various stages of investigation or remediation for sites where contamination has been alleged, and recorded a liability of $219 million at December 31, 2002 and $253 million at December 31, 2001 for worldwide environmental investigation and remediation as summarized below:

. GM has been identified as a potentially responsible party at sites identified by the EPA and state regulatory agencies for investigation and remediation under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and similar state statutes. GM voluntarily and actively participates in cleanup activity where such involvement has been verified. The total liability for sites involving GM was estimated to be $86 million at December 31, 2002. This compares with $85 million at December 31, 2001.

. For closed plants owned by the Corporation, an estimated liability for environmental investigation and remediation is typically recognized at the time of the closure decision. Such liability, which is based on an environmental assessment of the plant property, was estimated at $38 million at December 31, 2002. This compares with $56 million at December 31, 2001.

. GM is involved in investigation and remediation activities at additional locations worldwide with an estimated liability of approximately $95 million at December 31, 2002. This compares with $112 million at December 31, 2001.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Industrial Environmental Control (concluded) The cost impact of the Clean Air Act Amendments under Title V is the annual emission fees of approximately $9 million per year. Additional programs under the Clean Air Act, including Hazardous Air Pollutant standards, and Compliance Assurance Monitoring and periodic monitoring requirements are estimated to cost $500 million to $700 million in aggregate through the year 2005. The Corporation currently estimates that future expenditures for industrial environmental control facilities through 2005 will be approximately $160 million. Specific environmental expenses are difficult to isolate since expenditures may be made for more than one purpose, making precise classification difficult.

Vehicular Noise Control Passenger cars and light-duty trucks are subject to state and local motor vehicle noise regulations. General Motors Corporation is committed to designing and developing all its products to meet these noise requirements. Addressing specific vehicle noise regulations for all state and local regulations however, is not practical or possible. The Corporation therefore compiles the most stringent requirement for all regulated markets and validates to the composite requirement. Public awareness of vehicle/traffic noise concerns is leading to an ever-increasing number of disparate state and local noise requirements. A

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document comprehensive assessment is required to address the potential cost impact of meeting increasingly restrictive noise requirements. Medium to heavy-duty trucks are regulated at the Federal level. Federal truck regulations preempt all state/local noise regulations for trucks over 10,000 lbs. gross vehicle weight rating (GVWR).

Automotive Fuel Economy The Energy Policy and Conservation Act passed in 1975 provided for production-weighted average fuel economy standards for passenger cars for 1978 and thereafter. Based on EPA combined city-highway test data, the GM 2002 model year domestic passenger car fleet attained a Corporate Average Fuel Economy (CAFE) of 28.8 miles per gallon (mpg) versus the standard of 27.5 mpg. The CAFE estimate for 2003 model year domestic passenger cars is projected at 28.6 mpg versus the standard of 27.5 mpg. For GM's imported passenger cars, 2002 model year CAFE attained 27.8 mpg versus a standard of 27.5 mpg. The CAFE estimate for 2003 model year import passenger cars is 28.6 mpg versus the standard of 27.5 mpg. Fuel economy standards for light-duty trucks became effective in 1979. General Motors' light truck CAFE fleet average for the 2002 model year is 21.1 mpg versus a standard of 20.7 mpg. GM's 2003 model year truck CAFE is projected at 21.2 mpg versus a standard of 20.7 mpg. GM's ability to meet increased CAFE standards is contingent on various future economic, consumer, legislative, and regulatory factors that GM cannot control and cannot predict with certainty. If GM could not comply with any new CAFE standards, GM could be subject to sizeable civil penalties and could have to close plants or severely restrict product offerings to remain in compliance.

End of Life Vehicles During September 2000, the European parliament passed a directive requiring member states to adopt legislation regarding end-of-life vehicles and the responsibility of manufacturers for dismantling and recycling vehicles they have sold. European Union member states are required to transform the concepts detailed in the directive into national law. Under the directive, manufacturers are financially responsible for at least a portion of the cost of the take-back of vehicles placed in service after July 2002 and all vehicles placed in service prior to July 2002 that are still in operation in January 2007. The laws developed in the individual national legislatures throughout Europe will have a significant impact on the amount ultimately paid by the manufacturers for this issue. GM recorded, in cost of sales and other expenses in the GME segment, an after-tax charge of $55 million ($0.10 per share of GM $1-2/3 par value common stock) in 2002 for those member states that have passed national laws through December 31, 2002. Management is assessing the impact of this potential legislation on GM's financial position and results of operations and may include charges to earnings in future periods.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Seasonal Nature of Business

In the automotive business, there are retail sales fluctuations of a seasonal nature, so that production varies from month to month. Certain changeovers occur throughout the year for reasons such as new market entries and new vehicle changes; however, the changeover period related to the annual new model introduction has traditionally occurred in the third quarter of each year. For this reason, third quarter operating results are, in general, less favorable than those in the other three quarters of the year, depending on the magnitude of the changeover needed to commence production of new models incorporating, for example, design modifications related to more fuel-efficient vehicle packaging, stricter government standards for safety and emission controls, and consumer-oriented improvements in performance, comfort, convenience, and style.

Segment Reporting Data

Operating segment and principal geographic area data for 2002, 2001, and 2000 are summarized in Note 25 to the GM Consolidated Financial Statements in Part II.

* * * * * *

The Registrant makes no attempt herein to predict the future trend of its business and earnings or the effect thereon of the results of changes in general economic, industrial, regulatory, and international conditions.

ITEM 2. Properties

The Corporation, excluding its Financing and Insurance Operations, has approximately 400 locations operating in approximately 40 states and approximately 230 cities in the United States. Of these, approximately 20 are engaged in the final assembly of GM cars and trucks; approximately 60 are service parts operations responsible for distribution or warehousing;

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document approximately 10 major plants, offices, and research facilities relate to the operations of Hughes Electronics Corporation; and the remainder are offices or involved primarily in the testing of vehicles or the manufacturing of automotive components and power products. In addition, the Corporation has approximately 20 locations in Canada and assembly, manufacturing, distribution, or warehousing operations in approximately 50 other countries, including equity interests in associated companies which conduct assembly, manufacturing, or distribution operations. The major facilities outside the United States and Canada, which are principally vehicle manufacturing and assembly operations, are located in Germany, the United Kingdom, Brazil, Mexico, Australia, Sweden, Belgium, Spain, China, Thailand, Argentina, Portugal, and Poland. Most facilities are owned by the Corporation or its subsidiaries. Leased properties consist primarily of warehouses and administration, engineering, and sales offices. The leases for warehouses generally provide for an initial period of five years and contain renewal options. Leases for sales offices are generally for shorter periods. Properties of the Registrant and its subsidiaries include facilities which, in the opinion of management, are suitable and adequate for the manufacture, assembly, and distribution of their products. Additional information regarding worldwide expenditures for plants and equipment is presented in Note 25 to the GM Consolidated Financial Statements in Part II.

ITEM 3. Legal Proceedings

(a) Material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Corporation became, or was, a party during the year ended December 31, 2002, or subsequent thereto, but before the filing of this report are summarized below:

Other Matters

Seven putative nationwide and statewide class actions are pending against General Motors in state and federal courts alleging that the paint or paint application process used on some GM vehicles was defective due to the omission of a primer surfacer layer. Generally, plaintiffs allege that GM's failure to disclose the alleged paint defect is a fraudulent omission and a violation of various states' consumer protection laws. No determination has been made that any case may proceed as a class action.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Other Matters (continued)

With respect to the suits relating to the primer surfacer issue described above: Christian Amedee and Louis Fuxan v. General Motors Corporation, et al., Civil District Court for the Parish of New Orleans, State of Louisiana filed March 24, 1995, Cherise Miller, et al., v. General Motors Corporation, United States District Court for the Northern District of Illinois, filed on April 8, 1998 (the court determined that plaintiffs had not demonstrated that they could meet the requirements for certification of a nationwide class ), and Rose Ann Hayes v. General Motors Corporation et al. filed on May 22, 2001 in the Circuit Court for Madison County Illinois are purported nationwide class actions; Eddie Glorioso v. General Motors Corporation and Scott Arnold v. General Motors Corporation, consolidated in Superior Court for the City and County of San Francisco, California, both filed in July 1998, are purported California statewide class actions; Scott Haverdink v. General Motors Corporation, Court of Common Pleas of Philadelphia County, Pennsylvania, filed on May 16, 1999, is a putative Pennsylvania statewide class action; and Darryl Oshanek v. General Motors Corporation and General Motors of Canada, Limited, filed in the Supreme Court of British Columbia, Canada, on June 2, 1999, is putative class action on behalf of residents of British Columbia in which GM is appealing a decision that it is a proper party. GM intends to vigorously oppose class certification and defend these cases.

* * *

In February 2003, General Motors Corporation, General Motors of Canada, Ltd. and Ford, DaimlerChrysler, Toyota, Honda, Nissan and BMW and their Canadian subsidiaries, the National Automobile Dealers Association and the Canadian Automobile Dealers Association, were named as defendants in purported nationwide class actions on behalf of all purchasers of new motor vehicles in the United States since January 1, 2001. Those actions were filed in federal courts in California, Illinois, New York, Massachusetts and Florida and a parallel purported statewide class action on behalf of all purchasers of new motor vehicles in California since January 1, 2001, was filed against the same defendants in a state court in California.

The nearly identical complaints allege that the manufacturer defendants, aided by the association defendants, conspired among themselves and with their

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document dealers to prevent the sale to United States citizens of vehicles produced for the Canadian market and sold by dealers in Canada. The complaints allege that new vehicle prices in Canada are ten to thirty percent lower than those in the United States and that preventing the sale of these vehicles to United States citizens resulted in the payment of supracompetitive prices by United States consumers. The complaints seek treble damages under the antitrust laws, but do not specify damages. No determination has been made to certify any of these cases as a class action. General Motors believes its actions have been lawful and intends to vigorously defend these cases.

* * *

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 December 31, 2002, approximately $670 million of proposed adjustments remain unresolved. Hughes is contessting the matter in the arbitration process, which will result in a binding decision unless the matter is otherwise settled. Although Hughes believes it has adequately provided for the disposition of this matter, the impact of its disposition cannot be determined at this time. It is possible that the final resolution of this matter could result in Hughes making a cash payment to Boeing that would be material to Hughes' consolidated results of operations and financial position.

* * *

I-6

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Other Matters (continued)

On June 3, 1999, the National Rural Telecommunications Cooperative ("NRTC") filed a lawsuit against DIRECTV, Inc. and Hughes Communications Galaxy, Inc., which Hughes refers to together in this description as "DIRECTV," in the United States District Court for the Central District of California, alleging that DIRECTV, Inc. breached its DBS Distribution Agreement with the NRTC. Hughes Communications Galaxy, Inc. was the original party to the DBS Distribution Agreement with the NRTC and assigned its rights and obligations to and under the DBS Distribution Agreement to DIRECTV, Inc. The DBS Distribution Agreement provides the NRTC with certain distribution rights, in certain specified portions of the United States, for a specified period of time, with respect to DIRECTV(R) programming delivered over 27 of the 32 frequencies at the 101 degrees west longitude orbital location. The NRTC claims that DIRECTV has wrongfully deprived it of the exclusive right to distribute programming formerly provided by United States Satellite Broadcasting Company, Inc. ("USSB"), over the other five frequencies at 101 degrees west longitude, and seeks recovery of related revenues from the date USSB was acquired by Hughes. DIRECTV denies that the NRTC is entitled to exclusive distribution rights to the former USSB programming because, among other things, the NRTC's exclusive distribution rights are limited to programming distributed over 27 of the 32 frequencies at 101 degrees west longitude. The NRTC also pled, in the alternative, the right to distribute former USSB programming on a non-exclusive basis, but stipulated to dismiss this claim without prejudice on August 25, 2000. DIRECTV maintains that the NRTC's right under the DBS Distribution Agreement is to market and sell the former USSB programming as its non-exclusive sales agent and that NRTC is not entitled to the additional claimed revenues. DIRECTV intends to vigorously defend against the NRTC claims. DIRECTV also filed a counterclaim against the NRTC seeking a declaration of the parties' rights under the DBS Distribution Agreement.

On August 26, 1999, the NRTC filed a second lawsuit in the United States District Court for the Central District of California against DIRECTV alleging breach of the DBS Distribution Agreement. In this lawsuit, the NRTC is asking the court to require DIRECTV to pay the NRTC a proportionate share of unspecified financial benefits that DIRECTV derives from programming providers and other third parties. DIRECTV denies that it owes any sums to the NRTC on account of the allegations in these matters and plans to vigorously defend itself against these claims. On June 21, 2001, the court permitted the NRTC to amend the action to also seek an exclusive right to distribute in its territories, and to retain revenues from, "Advanced Services," which the NRTC defines to include services such as Wink, TiVo, Ultimate TV and AOL-TV. DIRECTV denies that the NRTC is entitled to exclusive distribution rights to the

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document so-called Advanced Services because, among other things, the services are not services transmitted by DIRECTV over the 27 frequencies as to which the NRTC has contractual rights.

Pegasus Satellite Television, Inc. ("Pegasus") and Golden Sky Systems, Inc. ("Golden Sky"), the two largest NRTC affiliates, filed an action on January 11, 2000 against DIRECTV in the United States District Court for the Central District of California. The plaintiffs alleged, among other things, that DIRECTV has interfered with their contractual relationship with the NRTC. The plaintiffs alleged that their rights and damages are derivative of the rights and damages asserted by the NRTC in its two cases against DIRECTV. The plaintiffs also alleged that DIRECTV misused their subscriber information, thereby violating plaintiffs' trade secret rights, and interfered with their contractual relationships with manufacturers and distributors by preventing those parties from selling receiving equipment to the plaintiffs' retailers. On October 19, 2000, Golden Sky agreed to dismiss its equipment-related claims with prejudice. On November 1, 2002, the plaintiffs and DIRECTV stipulated to the dismissal of the plaintiffs' trade secret claims without prejudice, and on October 11, 2002, Pegasus and DIRECTV stipulated to the dismissal of Pegasus' equipment-related claims without prejudice. Neither dismissal required payment of funds by DIRECTV or the plaintiffs. DIRECTV denies that it has wrongfully interfered with any of the plaintiffs' business relationships and will vigorously defend the remaining claims in the lawsuit. DIRECTV filed a counterclaim on March 9, 2001, seeking judicial declarations that the contracts between Pegasus and the NRTC, and Golden Sky and the NRTC, do not include rights of first refusal and will terminate when the DIRECTV 1 satellite is removed from orbit. On June 21, 2001, the court permitted Pegasus and Golden Sky to amend their complaint to seek an exclusive right, also derivative from the NRTC's claimed right, to distribute in their territories, and to retain revenues from, the "Advanced Services." DIRECTV denies that Pegasus and Golden Sky are entitled to exclusive distribution rights to the so-called Advanced Services because, among other things, the services are not services transmitted by DIRECTV over the 27 frequencies as to which the NRTC and derivatively, Pegasus and Golden Sky, have contractual rights.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Other Matters (continued)

A class action suit was filed in the United States District Court for the Central District of California against DIRECTV on behalf of the NRTC's participating members on February 29, 2000. The court certified a class on December 27, 2000. The class asserted claims identical to the claims that were asserted by Pegasus and Golden Sky in their lawsuit against DIRECTV, described in the preceding paragraph. Similar to Golden Sky, however, the class has dismissed its equipment-related claims without prejudice. On November 1, 2002, the class and DIRECTV also stipulated to the dismissal without prejudice of the class' trade secret claims, without payment of funds by either DIRECTV or the class. DIRECTV filed counterclaims against the class identical to those filed against Pegasus and Golden Sky as described above. On June 21, 2001, the class was also permitted to amend its complaint to seek an exclusive right, derivative from the NRTC's claimed right, to distribute in their territories, and to retain revenues from, the "Advanced Services." DIRECTV denies that the class is entitled to exclusive distribution rights to the so-called Advanced Services because, among other things, the services are not services transmitted by DIRECTV over the 27 frequencies as to which the NRTC and derivatively, the class, have contractual rights.

The United States District Court for the Central District of California consolidated for purposes of discovery and other pretrial proceedings each of the NRTC, Pegasus and Golden Sky and class action lawsuits described above. The court has ordered the parties to participate in a pre-trial mediation and has set each of the cases for trial on June 3, 2003. The process by which the cases will be tried has not been finally determined. An amount of loss, if any, cannot be estimated at this time in the NRTC, Pegasus and class action litigation.

DIRECTV, Inc. (herein referred to as "DIRECTV") filed suit in California State Court, Los Angeles County, on June 22, 2001 against Pegasus and Golden Sky (herein referred to together as "Defendants") to recover monies calculated at approximately $52 million that Defendants owe DIRECTV under the parties' Seamless Marketing Agreement, which provides for reimbursement to DIRECTV of certain subscriber acquisition costs incurred by DIRECTV on account of new subscriber activations in Defendants' territory. Defendants had ceased making payments altogether, and indicated that they did not intend to make any further payments due under the agreement. On July 13, 2001, Defendants sent notice of termination of the agreement and on July 16, 2001, Defendants answered DIRECTV's complaint and filed a cross complaint alleging counts of fraud in the inducement, breach of contract, breach of the covenant of good faith and fair dealing, intentional interference with contractual relations, intentional interference with prospective economic advantage and violation of California Bus. and Prof. Code 17200. Defendants also thereafter removed the action to

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document federal district court, Central District of California, where it was transferred to the judge hearing the other cases among NRTC, Pegasus and a class of NRTC members, on the one hand, and DIRECTV on the other. The court consolidated the cases for purposes of discovery and other pretrial proceedings. On September 16, 2002, the court permitted Pegasus to amend its counterclaim to eliminate the interference and Section 17200 claims, and to add claims for both rescission of the agreement and specific performance of an audit right provided in the agreement, in the event it is determined that Pegasus breached the agreement and owes money thereunder to DIRECTV. On September 30, 2002, DIRECTV moved to dismiss Pegasus' claims for breach of the covenant of good faith and fair dealing and specific performance. The court granted DIRECTV's motion as to the specific performance claim, and further granted DIRECTV's motion on the good faith and fair dealing claim to the extent Pegasus sought punitive damages. DIRECTV denies any liability to Defendants, and intends to vigorously pursue its damages claim against Defendants and defend against Defendants' counterclaims. The case is also currently scheduled for trial beginning June 3, 2003. Based on Hughes' assessment of the merits of the case, Hughes does not believe that the litigation will have a material adverse impact on its consolidated results of operations or financial position.

On February 1, 2001, the NRTC filed a third lawsuit in the United States District Court for the Central District of California against DIRECTV seeking a declaration from the court that it is not required to defend and indemnify DIRECTV for the Pegasus, Golden Sky and class action lawsuits. The NRTC has been paying and continues to pay DIRECTV's legal fees in those matters under protest. DIRECTV filed a counterclaim on February 21, 2001 seeking a declaratory judgment that the NRTC is indeed responsible for the defense and indemnity of DIRECTV.

On September 19, 2001, the NRTC filed a fourth lawsuit against DIRECTV in the United States District Court of the Central District of California, seeking a declaration from the court that the NRTC is not required to defend and indemnify DIRECTV for the Pegasus Development Corporation and Personalized Media Communications, LLC lawsuit pending in the United States District Court for the District of Delaware. The NRTC has been paying and continues to pay DIRECTV's legal fees in that matter under protest. DIRECTV filed a counterclaim on October 26, 2001 seeking a declaratory judgment that the

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Other Matters (continued)

NRTC is indeed responsible for the defense and indemnity of DIRECTV. The NRTC and DIRECTV each filed cross motions for summary judgment in this lawsuit in January 2002. On July 1, 2002, the court entered an order granting the motion of DIRECTV for partial summary judgment on the NRTC's duty to defend, and denying the NRTC's motion for summary judgment on all claims.

The NRTC's two indemnity cases have been consolidated with each other, but are proceeding separately from DIRECTV's other litigation with the NRTC, Pegasus and Golden Sky, and the class, described above. The court has stayed further proceedings in the indemnity cases until determination of the merits of the other, underlying cases.

* * *

In April 2001, Robert Garcia, doing business as Direct Satellite TV, an independent retailer of DIRECTV(R) system equipment, instituted arbitration proceedings against DIRECTV, Inc. with the American Arbitration Association in Los Angeles, California regarding his commissions and certain chargeback disputes. The parties have been proceeding with the arbitration, though no hearing date has been set. On October 4, 2001, Mr. Garcia filed a class action complaint against DIRECTV, Inc. and Hughes in Los Angeles County Superior Court asserting the same chargeback/commissions claims and a Consumer Legal Remedies Act claim. Mr. Garcia alleges $300 million in class-wide damages and seeks certification of a class of plaintiffs to proceed in arbitration with court oversight. DIRECTV, Inc. and Hughes moved to dismiss and compel arbitration, which motion was heard on April 12, 2002. On April 17, 2002, the Los Angeles County Superior Court entered an order compelling plaintiffs in the purported class action of retailers to pursue their individual claims in arbitration. The court's order purported to retain jurisdiction, however, to determine whether the prerequisites for class treatment of dealer claims within arbitration are met. The court intends to set a schedule for class discovery and a class certification hearing. DIRECTV, Inc. and Hughes disagreed that the court could properly retain jurisdiction to conduct class proceedings, and believed that the court's order effectively denied DIRECTV, Inc. its contractual right to resolve individual dealer claims in arbitrations conducted under the Federal Arbitration Act. On May 2, 2002, DIRECTV, Inc. and Hughes filed a notice of appeal of the order. On December 11, 2002, the appellate court denied DIRECTV, Inc.'s appeal, thus permitting the trial court to set a schedule for class discovery and a class certification hearing. DIRECTV, Inc. and Hughes have petitioned the California Supreme Court for review of the order, and intend to oppose certification due to the individual nature of the claims involved, and to vigorously defend against plaintiffs' allegations.

On May 18, 2001, in Oklahoma State Court, plaintiffs Cable Connection, Inc., TV Options, Inc., Swartzel Electronics, Inc. and Orbital Satellite, Inc. filed a class action complaint against DIRECTV, Inc. and Hughes. All four plaintiffs purport to be independent retailers of satellite equipment (three residential and one commercial), who allege claims ranging from breach of contract to fraud, promissory estoppel, antitrust and unfair competition claims. The plaintiffs seek unspecified damages and injunctive relief. They claim to be bringing the complaint on behalf of all DIRECTV dealers, including former PRIMESTAR and USSB dealers. On August 17, 2001, DIRECTV, Inc. and Hughes successfully stayed the case and the court orally ordered the individual plaintiffs to pursue their claims in arbitration pursuant to the arbitration clause in each of the dealer's contracts with DIRECTV, Inc. None of the plaintiffs instituted arbitration proceedings. In March 2002, DIRECTV, Inc. filed a motion for a final order of arbitration. Plaintiffs then filed a motion requesting the court to order that a single arbitration be permitted on a class wide basis. DIRECTV, Inc. removed the action to federal court, plaintiffs moved to remand to state court and the federal court granted remand to state court on August 8, 2002. On September 5, 2002, the state court entered its final order compelling plaintiffs to pursue their individual claims in arbitration in Los Angeles, California, but purporting to retain jurisdiction to determine whether the prerequisites for class treatment of dealer claims within an arbitration are met. DIRECTV, Inc. filed a notice of appeal of the order, and the State Supreme Court issued an order to show cause by October 14, 2002, as to why the appeal should not be dismissed. DIRECTV, Inc. responded to the notice and on January 7, 2003, the State Supreme Court issued an order permitting DIRECTV, Inc. to proceed with its appeal. DIRECTV, Inc. intends to vigorously seek to enforce its arbitration agreement, to oppose plaintiffs' efforts to obtain class treatment, and to defend against plaintiffs' allegations.

* * *

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Other Matters (continued)

On June 27, 2000, SuperGuide Corporation ("SuperGuide") filed suit in the United States District Court for the Western District of North Carolina against DIRECTV Enterprises, Inc., DIRECTV, Inc. and DIRECTV Operations, Inc., which Hughes refers to together in this paragraph as the DIRECTV defendants, Hughes, Thomson Consumer Electronics, Inc., EchoStar Communications Corporation, EchoStar Satellite Corporation and EchoStar Technologies Corporation, alleging infringement of three United States patents and seeking unspecified damages and injunctive relief. Gemstar Development Corp. was added as a third-party defendant because it asserts to have exclusive control of the patents by reason of a license agreement with SuperGuide. Based on beneficial rulings narrowing the scope of the asserted claims, the defendants filed motions for summary judgment, and on July 3, 2002, the court granted summary judgment of non-infringement to the DIRECTV defendants, Hughes and DIRECTV system manufacturers under all asserted claims of the three patents in the case. Judgment for all defendants dismissing all claims of infringement and awarding costs to defendants was entered on July 25, 2002. Notices of appeal to the Court of Appeals for the Federal Circuit have been filed, and a hearing will be held in 2003.

* * *

On December 5, 2000, Personalized Media Communications, LLC ("PMC") and Pegasus Development Corporation ("Pegasus Development") filed suit in the United States District Court for the District of Delaware against DIRECTV, Inc., Hughes, Thomson Consumer Electronics, Inc. ("Thomson") and Philips Electronics North American Corp., alleging infringement of seven United States patents and seeking unspecified damages and injunctive relief. The case has been narrowed to 24 claims for purposes of discovery, and DIRECTV, Inc. may seek further narrowing prior to trial presently scheduled for the first quarter of 2004. Thomson has named Gemstar-TV Guide International, Inc. ("Gemstar"), Starsight Telecast, Inc. and TVG PMC, Inc. as third-party defendants, and has raised antitrust and patent misuse charges against Gemstar, Pegasus Development and PMC. The antitrust counts have been transferred to a multi-district proceeding in Atlanta for pre-trial development and have been bifurcated for separate trial. DIRECTV, Inc. has raised defenses of invalidity and non-infringement, in addition to license, laches and estoppel, and patent misuse. DIRECTV, Inc. intends to vigorously defend the lawsuit and pursue the counterclaims against Pegasus Development and PMC. DIRECTV, Inc. and Hughes have demanded indemnification by the NRTC, which the NRTC has been providing under protest. See the separate item above describing the action pending in the United States District Court of the Central District of California with respect to the indemnity issue.

On November 21, 2001, Broadcast Innovations, LLC filed suit in the United States District Court for the District of Colorado against DIRECTV, Inc., Hughes, Thomson multimedia, Inc., Pegasus Satellite Television, Inc., Dotcast, Inc., and EchoStar Communications Corporation, alleging infringement of two United States patents and seeking unspecified damages and injunction. One of the patents relates to conditional access technology, and DIRECTV, Inc. has turned over its defense to NDS Limited, the conditional access provider to the DIRECTV system. The case is in the discovery phase, and defendants will be filing potentially dispositive summary judgment motions. Depending on the outcome of these motions, the case may be tried in late 2003. DIRECTV, Inc. has raised defenses of non-infringement and invalidity, and intends to vigorously defend the lawsuit.

* * *

In April 1997, the International Electronics Technology Corp. filed suit in the United States District Court for the Central District of California against DIRECTV, Inc., Hughes Aircraft Co., and Thomson Consumer Electronics, Inc., alleging infringement of one United States patent and seeking unspecified damages and injunction. Plaintiff has asserted an interpretation of the claims at issue that relates to conditional access technology, and DIRECTV, Inc. has turned over the defense to NDS Limited. Trial has not yet been scheduled. DIRECTV, Inc. has raised defenses of non-infringement and/or invalidity, and intends to vigorously defend the lawsuit.

* * *

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Other Matters (concluded)

DIRECTV, Inc., DIRECTV Enterprises, LLC, and DIRECTV Operations, LLC, referred to together below as "DIRECTV Parties," filed a lawsuit against NDS Limited and related entities ("NDS"), the provider of DIRECTV's conditional access system. The lawsuit, which was filed under seal in United States District Court in Los Angeles on September 6, 2002, alleges, among other things, breach of contract and misappropriation of trade secrets. The DIRECTV Parties are seeking relief from the court that includes compensatory and other damages, delivery of software technology required by the contract, and a preliminary and permanent injunction that would enjoin NDS from engaging in further breaches of contract and misappropriation of trade secrets. NDS filed a motion to dismiss many of the DIRECTV Parties' claims and on December 30, 2002, the court granted in part and denied in part NDS's motion. The DIRECTV Parties are evaluating their options for amending their complaint. On October 21, 2002, NDS filed counterclaims against the DIRECTV Parties and a chip manufacturer, alleging that the DIRECTV Parties and the chip manufacturer misappropriated NDS's intellectual property and infringed NDS's patents in developing new conditional access cards. NDS is seeking injunctive relief as well as an unspecified amount in restitution, disgorgement of profits and punitive damages. The DIRECTV Parties dispute these allegations on the basis that they have a license to use the technology and believes that the counterclaims are without merit, will seek to dismiss certain of the claims and will vigorously defend the remaining claims made by NDS. On December 23, 2002, NDS filed suit in Germany against the chip manufacturer seeking in part an injunction against their continued work on behalf of the DIRECTV Parties. The DIRECTV Parties are cooperating with the chip manufacturer, who believes the claim is without merit.

* * *

In connection with the proposed merger between Hughes and EchoStar, the agreements entered into by the parties provided that, subject to certain conditions, Hughes could terminate the merger and EchoStar would pay a $600 million termination fee and purchase all the shares of PanAmSat if the merger did not receive regulatory approval. After failure of the merger to receive such approval, Hughes and EchoStar agreed to a settlement whereby the merger agreement was terminated, EchoStar paid Hughes a $600 million termination fee and did not purchase the PanAmSat shares, and EchoStar and Hughes mutually released all claims against each other arising from the transaction agreements. On December 18, 2002, a purported class action (P. Shoenfeld Asset Management LLC, et al. v. Shaw, et al.) was filed in Delaware Chancery Court against Hughes and the PanAmSat Board of Directors, alleging that this settlement favored Hughes in violation of alleged fiduciary duties. The case has not been certified as a class action. On January 31, 2003, Hughes and the PanAmSat Board of Directors filed a motion to dismiss the case for the plaintiff's failure to state a claim upon which relief can be granted. Hughes and the PanAmSat Board of Directors believe this action is without merit and intend to vigorously defend against the allegations raised.

(b) Previously reported legal proceedings which have been terminated, either during the year ended December 31, 2002, or subsequent thereto, but before the filing of this report are summarized below:

As previously reported, Hughes has had periodic discussions with the United States Department of State ("State Department") directed at potential settlement of administrative concerns related to past export activities with China. On December 26, 2002, the State Department issued a formal charging letter to Hughes and Boeing Satellite Systems, Inc. ("BSS"). As part of the sale of the satellite systems manufacturing businesses to Boeing, Hughes retained liability for certain possible fines and penalties and certain financial consequences of debarment or suspension that could be imposed by the State Department in connection with this matter. Hughes and BSS have now settled this matter through execution of a Consent Agreement with the State Department and a separate agreement among Hughes, BSS and Boeing. The Consent Agreement requires the payment of a fine in the aggregate amount of $20 million ($5 million of which is to be reimbursed to Hughes by BSS) to be paid in 8 equal installments over 7 years, which has been provided for in Hughes' consolidated financial statements as of December 31, 2002, a commitment by Hughes to spend $2 million over 5 years on internal export compliance, and various improvements in Hughes' export program. The State Department has agreed that there will be no suspension or debarment for either company as part of the settlement. This Consent Agreement resolves all outstanding government action related to the China matters, and all claims among Boeing, BSS and Hughes related to these matters.

* * *

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

As previously reported, Hughes Communications Galaxy, Inc. ("HCGI") filed a lawsuit on March 22, 1991 against the United States Government based upon the National Aeronautics and Space Administration's breach of contract to launch ten satellites on the Space Shuttle. On June 30, 2000, a final judgment was entered in favor of HCGI in the amount of $103 million and in April 2002, the United States government paid to Hughes the full amount of the judgment. As a result, Hughes recorded a $95 million gain, net of legal costs, as an offset to "Selling, general and administrative expenses" in the first quarter of 2002.

* * *

With respect to the previously reported dispute between General Electric Capital Corporation ("GECC") and DIRECTV arising out of a contract entered into between the parties on July 31, 1995, the parties executed an agreement on June 4, 2002 to settle the matter for $180 million. The settlement resulted in DIRECTV recording a second quarter 2002 pre-tax charge of $47 million to "Interest expense." In the first quarter of 2002, DIRECTV increased its provision for loss related to this matter by $83 million, of which $56 million was recorded as a charge to "Selling, general and administrative expenses" and $27 million was recorded as a charge to "Interest expense." Previously, DIRECTV had accrued $50 million in 1999 associated with the expected settlement of this claim. The $180 million settlement was paid to GECC in June 2002.

* * *

As previously reported, following the discontinuation of DIRECTV Japan's operations in September 2000, Global Japan, Inc. ("Global") commenced an action in the New York Supreme Court on October 5, 2000 against Hughes, DIRECTV Japan Management Company, Inc., DIRECTV International, Inc., DIRECTV, Inc. and the Hughes-appointed directors of DIRECTV Japan for alleged breach of contract and fiduciary duty, fraudulent conveyance and tortious interference in connection with the termination of two direct broadcast satellite distribution agreements between Global and DIRECTV Japan. Global sought, among other things, damages of approximately $100 million. On July 8, 2002, Hughes and Global executed an agreement to settle the matter for approximately $20 million. The settlement amount was charged against an existing accrual related to this matter. Payment for the approximate $20 million settlement was made to Global in July 2002.

* * *

On October 10, 2002, the Federal Communications Commission (FCC) announced that it declined to approve the transfer of the licenses necessary to allow the completion of the Hughes/EchoStar merger and designated the transfer for hearing by an administrative law judge. On October 31, 2002, the United States Department of Justice ("DOJ"), twenty-three states, the District of Columbia and Puerto Rico filed a complaint for permanent injunctive relief in the United States District Court for the District of Columbia against EchoStar, GM, Hughes and DIRECTV Enterprises LLC. As previously disclosed, Hughes and EchoStar terminated the merger agreement on December 9, 2002. In December 2002 and

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document January 2003, the DOJ and the state actions were dismissed and the FCC released its order terminating the administrative hearing proceeding and any other proceedings related to the applications for FCC approval of the transfer of licenses.

* * * * * * * * *

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

ITEM 4. Submission of Matters to a Vote of Security Holders

NONE

ITEM 4A. Executive Officers of the Registrant

The names and ages of all executive officers of the Registrant at February 28, 2003 and their positions and offices with the Registrant on that date are as follows:

Name and (Age) Positions and Offices ------

John F. Smith, Jr. (64) Chairman of the Board

G. Richard Wagoner, Jr. (50) President and Chief Executive Officer

John M. Devine (58) Vice Chairman and Chief Financial Officer

Robert A. Lutz (71) Vice Chairman of Product Development and Chairman of GM North America

Thomas A. Gottschalk (60) Executive Vice President, Law and Public Policy

There are no family relationships, as defined, between any of the above executive officers, and there is no arrangement or understanding between any of the above executive officers and any other person pursuant to which he was selected as an officer. Each of the above executive officers was elected by the Board of Directors to hold office until the next annual election of officers and until his successor is elected and qualified or until his earlier resignation or removal. The Board of Directors elects the officers in conjunction with each annual meeting of the stockholders.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

ITEM 4A. Executive Officers of the Registrant - concluded

Mr. John F. Smith, Jr. has been associated with General Motors since 1961. He was elected Executive Vice President in charge of International Operations in 1988. Effective August 1990, he was elected Vice Chairman of the Board of Directors. On April 6, 1992, Mr. Smith was elected President and Chief Operating Officer. Effective November 1992, he was elected Chief Executive Officer and President. He served as President until October 1998 and Chief Executive Officer until June 2000. On January 1, 1996, Mr. Smith became Chairman of the Board of Directors. Effective May 1, 2003, Mr. Smith will retire from the Chairman's position and leave the Board of Directors.

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Mr. G. Richard Wagoner, Jr. has been associated with General Motors since 1977. He was elected Vice President in charge of finance for General Motors Europe in June 1989. In July 1991, he was elected President and Managing Director of General Motors do Brasil. Effective November 1992, he was elected Executive Vice President and Chief Financial Officer of General Motors. In July 1994, he was named President of North American Operations. In October 1998, he was elected a director, President and Chief Operating Officer of General Motors. Effective June 1, 2000, he was elected Chief Executive Officer. Effective May 1, 2003, Mr. Wagoner will become Chairman of the Board of Directors.

Mr. John M. Devine was named Vice Chairman and Chief Financial Officer of General Motors Corporation, effective January 1, 2001. He has responsibility for GM's Worldwide Financial Operations and GM Asset Management. He is a member of the GM Automotive Strategy Board and serves as its global process leader for finance. Mr. Devine was Chairman and Chief Executive Officer of Fluid Ventures, LLC, immediately prior to his GM appointment. He retired from Ford Motor Company in October 1999, after a 32 year career, as the company's Executive Vice President and Chief Financial Officer.

Mr. Robert A. Lutz was named Vice Chairman of Product Development of General Motors Corporation, effective September 1, 2001. He was named Chairman of GM North America on November 13, 2001. He is a member of the Automotive Strategy Board and the North American Strategy Board. Mr. Lutz was Chairman and Chief Executive Officer of Exide Technologies, immediately prior to his GM appointment. He retains the Chairman position. He also has held a number of executive positions with Ford Motor Company until 1986 and the former Chrysler Corporation from which he retired in 1998.

Mr. Thomas A. Gottschalk has been associated with General Motors since 1994. He previously held the position of Senior Vice President and General Counsel. He was elected to the position of Executive Vice President of General Motors with primary responsibility for Law and Public Policy on May 25, 2001. He retains the General Counsel responsibility in his current position and is also responsible for the Office of the Secretary. He is a member of the Automotive Strategy Board and is the global process leader for Law and Public Policy. Prior to General Motors, he was a partner and member of the management committee of the law firm of Kirkland & Ellis in Washington, D.C.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters

General Motors' (GM's) common stocks are listed on the stock exchanges specified on the cover page of this Form 10-K under the trading symbols "GM" and "GMH." GM's Dividend Policy is described in the Management's Discussion and Analysis (MD&A) in Part II. As of December 31, 2002, there were 429,767 holders of record of GM $1-2/3 par value common stock and 177,355 holders of record of GM Class H common stock. As of December 31, 2001, there were 444,739 holders of record of GM $1-2/3 par value common stock and 185,553 holders of record of GM Class H common stock. The following table sets forth the high and low sale prices of GM's common stocks as reported on the Composite Tape and the quarterly dividends declared for the last two years.

2002 Quarters ------1st 2nd 3rd 4th ------Cash dividends per share of common stocks $1-2/3 par value $0.50 $0.50 $0.50 $0.50 Class H $- $- $- $-

Price range of common stocks $1-2/3 par value (1): High $62.01 $68.17 $54.08 $41.50 Low $47.92 $50.00 $38.11 $30.80 Class H (1): High $17.55 $17.00 $11.25 $12.00 Low $12.50 $8.49 $8.35 $8.00

2001 Quarters ------1st 2nd 3rd 4th ------Cash dividends per share of common stocks

Price range of common stocks $1-2/3 par value (1): High $59.48 $64.89 $67.80 $53.22 Low $50.25 $50.20 $39.17 $40.52 Class H (1): High $28.00 $25.09 $21.65 $15.80 Low $17.90 $17.50 $11.50 $12.12

(1) The principal market is the New York Stock Exchange, and prices are based on the Composite Tape. GM $1-2/3 par value common stock is also listed on the Chicago and Philadelphia stock exchanges and on the Pacific Exchange.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

ITEM 6. Selected Financial Data

Years Ended December 31 ------2002 2001 2000 1999 1998 ------(dollars in millions except per share amounts)

Total net sales and revenues $186,763 $177,260 $184,632 $176,558 $155,445 ======

Income from continuing $1,736 $601 $4,452 $5,576 $3,049 operations Income (loss) from discontinued - - - 426 (93) ------Operations Net income (1) $1,736 $601 $4,452 $6,002 $2,956 ======

$1-2/3 par value common stock Basic earnings per share (EPS) from continuing operations $3.37 $1.78 $6.80 $8.70 $4.40 Basic earnings (losses) per share from discontinued operations $ - $ - $ - $0.66 $(0.14) Diluted EPS from continuing operations $3.35 $1.77 $6.68 $8.53 $4.32 Diluted earnings (losses) per share from discontinued operations $ - $ - $ - $0.65 $(0.14) Cash dividends declared per share $2.00 $2.00 $2.00 $2.00 $2.00 Class H common stock (2) Basic earnings (losses) per share from continuing operations $(0.21) $(0.55) $0.56 $(0.26) $0.23 Diluted earnings (losses) per share from continuing operations $(0.21) $(0.55) $0.55 $(0.26) $0.23 Cash dividends declared per share $ - $ - $ - $ - $ -

Total assets $370,782 $322,412 $301,129 $273,729 $245,872 Notes and loans payable $201,940 $166,314 $144,655 $131,688 $116,075 GM-obligated mandatorily redeemable preferred securities of subsidiary trusts $ - $ - $139 $218 $220 Stockholders' equity $6,814 $19,707 $30,175 $20,644 $15,052

Reference should be made to the notes to GM's consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.

(1) On January 1, 2002, the Corporation implemented Statement of Financial

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets," which ceased the amortization method of accounting for goodwill and changed to an impairment-only approach. Accordingly, goodwill is no longer amortized and is tested for impairment at least annually.

(2) Adjusted to reflect the three-for-one stock split of the GM Class H common stock, in the form of a 200% stock dividend, paid on June 30, 2000.

* * * * * *

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management's discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with the Hughes Electronics Corporation (Hughes) consolidated financial statements and MD&A for the period ended December 31, 2002, included as Exhibit 99 to this GM Annual Report on Form 10-K for the period ended December 31, 2002, and related Hughes Annual Report on Form 10-K filed separately with the Securities and Exchange Commission (SEC); and the General Motors Acceptance Corporation (GMAC) Annual Report on Form 10-K for the period ended December 31, 2002, filed separately with the SEC. All earnings per share amounts included in the MD&A are reported as diluted. GM presents separate supplemental financial information for the following businesses: Automotive, Communications Services, and Other Operations (ACO) and Financing and Insurance Operations (FIO). GM's reportable operating segments within its ACO business consist of:

- GM Automotive (GMA), which is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Latin America/Africa/Mid-East (GMLAAM), and GM Asia Pacific (GMAP); - Hughes, which includes activities relating to digital entertainment, information and communications services, and satellite-based private business networks; and - Other, which includes the design, manufacturing and marketing of locomotives and heavy-duty transmissions, the elimination of intersegment transactions, certain non-segment specific revenues and expenditures, and certain corporate activities.

GM's reportable operating segments within its FIO business consist of GMAC and Other Financing, which includes financing entities operating in the U.S., Canada, Brazil, and Mexico that are not associated with GMAC. The disaggregated financial results for GMA have been prepared using a management approach, which is consistent with the basis and manner in which GM management internally disaggregates financial information for the purpose of assisting in making internal operating decisions. In this regard, certain common expenses were allocated among regions less precisely than would be required for stand-alone financial information prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). The financial results represent the historical information used by management for internal decision-making purposes; therefore, other data prepared to represent the way in which the business will operate in the future, or data prepared in accordance with GAAP, may be materially different.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

RESULTS OF OPERATIONS

For the year ended December 31, 2002, net income for the Corporation was $1.7 billion, or $3.35 per share of GM $1-2/3 par value common stock, compared with $601 million and $4.5 billion, or $1.77 and $6.68 per share of GM $1-2/3 par value common stock, for 2001 and 2000, respectively. Net income includes the special items on an after-tax basis outlined below:

List of Special Items - After Tax (dollars in millions)

See footnotes on next page for further discussion of these items.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Footnotes:

(A) The EchoStar Termination Payment reflects the $600 million EchoStar paid to Hughes in connection with the termination of the October 28, 2001 merger agreement between Hughes and EchoStar. (B) The Write-down of Crown Media Investment relates to the recognition of an

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document other than temporary decline in the market value of Hughes' investment in Crown Media. (C) The Write-down of XM Satellite Radio Investment relates to the recognition of an other-than-temporary decline in the market value of Hughes' investment in XM Satellite Radio. (D) The Costs Related to Shut-down of DIRECTV Broad-band Business relates to Hughes' costs to close the business including contract termination payments, write-offs of equipment, and severance payments. (E) The Loss on HTIL Transaction relates to the exchange of Hughes' ownership in Hughes Tele.com (India) Limited for an equity interest in and long-term receivables from Tata Teleservices Limited. (F) The Write-down of Fiat Auto Investment relates to GM's investment in Fiat Auto Holdings, B.V. ("FAH") and reflects completion of an impairment study relating to the carrying value of that investment, which was reduced from $2.4 billion to $220 million. (G) The Production Footprint Charge primarily relates to costs associated with the transfer of commercial truck production from Janesville, Wisconsin, to Flint, Michigan, which was recorded in the GMNA region. (H) The Sale of Equity Interests relates primarily to the Hughes investment in Thomson multimedia S.A. (I) The End of Life Vehicle Charge relates to the European Union's directive requiring member states to enact legislation regarding end-of-life vehicles and the responsibility of manufacturers for dismantling and recycling vehicles they have sold. See Note 24 to the consolidated financial statements. (J) The Restructuring Charge relates to the initiative implemented in the first quarter of 2002 to improve the competitiveness of GM's automotive operations in Europe. See Note 24 to the consolidated financial statements. (K) The Space Shuttle Settlement relates to the favorable resolution of a lawsuit that was filed against the U.S. government by Hughes on March 22, 1991, based upon the National Aeronautics and Space Administration's (NASA) breach of contract to launch 10 satellites on the Space Shuttle. (L) The GECC Contractual Dispute relates to a loss associated with a contractual dispute settled with General Electric Capital Corporation. (M) The Loan Guarantee Charge relates to a loan guarantee for a Hughes Network Systems affiliate in India. (N) The Ste. Therese Charge relates to asset impairments and postemployment costs for termination and other postemployment benefits associated with the announcement of the closing of the Ste. Therese, Quebec, assembly plant. (O) The Raytheon Settlement relates to Hughes' settlement with the Raytheon Company on a purchase price adjustment related to Raytheon's 1997 merger with Hughes Defense. (P) The Gain on Sale of Thomson relates to Hughes' sale of 4.1 million shares of Thomson multimedia S.A. common stock. (Q) The Sky Perfect write-down relates to Hughes' charge from the revaluation of its investment. (R) The Severance Charge relates to Hughes' 10% company-wide work force reduction in the U.S. (S) The DIRECTV Japan Adjustment relates to a favorable adjustment to the expected costs associated with the shutdown of Hughes' DIRECTV Japan business. (T) The Isuzu Restructuring charges include GM's portion of severance payments and asset impairments that were part of the restructuring of its affiliate Isuzu Motors Ltd. (U) The SFAS 133 Adjustment represents the net impact during the first quarter of 2001 from the initial adoption of SF,AS No. 133, "Accounting for Derivatives and Hedging Activities." (V) The Phase-out of Oldsmobile Charge relates to the costs associated with GM's decision to phase out the Oldsmobile division as the current model lineup product life cycles come to an end, or when the models are no longer economically viable. (W) The Postemployment Benefits Charge relates to postemployment costs for termination and other postemployment benefits associated with four North American manufacturing facilities slated for conversion and capacity reduction (Oklahoma City, Oklahoma; Delta Engine, Lansing, Michigan; Spring Hill, Tennessee; and Wilmington, Delaware). (X) The Capacity Reduction Adjustment relates to costs associated with the reduction in production capacity, including the restructuring of Vauxhall Motors Limited's manufacturing operations in the U.K. (Y) The Satellite Businesses Gain relates to the sale of Hughes' satellite systems manufacturing businesses to The Boeing Company.

II-5

Vehicle Unit Sales (1)

Wholesale Sales (2) Years Ended December 31, ------2002 2001 2000 ------(units in thousands) GMNA Cars 2,547 2,441 2,933 Trucks 3,174 2,746 2,842 ------Total GMNA 5,721 5,187 5,775 ------

GME Cars 1,545 1,666 1,744 Trucks 100 94 135 ------Total GME 1,645 1,760 1,879 ------

GMLAAM Cars 443 463 438 Trucks 197 203 196 ------Total GMLAAM 640 666 634 ------

GMAP Cars 185 202 175 Trucks 220 258 283 ------Total GMAP 405 460 458 ------

Total Worldwide 8,411 8,073 8,746 ======

(2) Wholesale sales represent vehicles manufactured by GM and certain investees and distributed through a GM-owned distribution network.

GMA Financial Review

GMA's income and margin adjusted to exclude special items (adjusted income

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document and margin) was $2.5 billion and 1.7% for 2002, $708 million and 0.5% for 2001, and $3.9 billion and 2.7% for 2000. The increase in 2002 adjusted income and margin, compared with 2001, was primarily due to an increase in wholesale sales volume, favorable product mix, and reduced structural and material costs. These favorable conditions more than offset the unfavorable impact of pricing pressures experienced in North America and Europe. The decrease in 2001 adjusted income and margin, compared with 2000, was primarily due to a decrease in wholesale sales volume and pricing pressures in North America and Europe. These unfavorable conditions were partially offset by cost structure improvements, also primarily in North America and Europe. GMA's total net sales and revenues adjusted to exclude special items (adjusted total net sales and revenues) were $148.0 billion, $140.7 billion, and $148.1 billion for 2002, 2001, and 2000, respectively. The increase in 2002 adjusted total net sales and revenues, compared with 2001, was largely due to an increase in wholesale volumes offset partially by unfavorable pricing pressures in North America and Europe. The decrease in 2001 adjusted total net sales and revenues, compared with 2000, was largely due to lower wholesale volumes and unfavorable pricing pressures in North America and Europe.

II-6

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

GMA Financial Review (continued)

GMNA's adjusted income was $3.0 billion, $1.5 billion, and $4.4 billion for 2002, 2001, and 2000, respectively. The increase in 2002 adjusted income from 2001 was primarily due to an increase in wholesale sales volume, improved product mix, material and structural costs reductions, and interest income from the resolution of certain prior tax years, partially offset by an increase in pension costs, other postretirement employee benefit costs (OPEB), and unfavorable net price of (2.1)% year-over-year. Net price comprehends the percent increase/(decrease) a retailer/distributor pays in the current period over the price paid in the previous year's period for a similar vehicle. The decrease in 2001 adjusted income from 2000 was primarily due to unfavorable net price of (1.3)% year-over-year and lower wholesale sales volumes. The decrease was partially offset by favorable product mix and improvements in manufacturing costs due to performance efficiencies, material cost savings, and engineering productivity. GME's adjusted loss was $549 million, $767 million, and $257 million for 2002, 2001, and 2000, respectively. The decrease in GME's 2002 adjusted loss from 2001 was primarily due to material, structural, and other cost improvements. This was partially offset by a decrease in wholesale sales volumes driven by a weak European industry and continuing competitive pricing pressures. The increase in GME's 2001 adjusted loss from 2000 was due to a continued shift in sales mix from larger, more profitable vehicles to smaller, less profitable entries, as well as a decrease in wholesale sales volume and continued competitive pricing pressures. These decreases were partially offset by improved material and structural cost performance. GMLAAM's adjusted loss was $181 million for 2002, compared with an adjusted loss of $80 million and an adjusted income of $26 million for 2001 and 2000, respectively. The increase in GMLAAM's 2002 adjusted loss from 2001 was primarily due to political unrest and economic uncertainty in Argentina, Brazil, and Venezuela, which have caused a significant deterioration in the industry for the region. The decrease in 2001 adjusted earnings, compared with 2000, was primarily due to material cost increases reflecting supplier cost pressures, manufacturing cost increases, and the devaluation of the currency in Argentina. These decreases were partially offset by nominal price increases and an increase in wholesale sales volumes. GMAP's adjusted income was $188 million for 2002, compared with adjusted income of $77 million and an adjusted loss of $233 million for 2001 and 2000, respectively. The increase in 2002 adjusted income, compared with 2001, was primarily due to equity income improvements from several joint ventures in the region, led by significantly improved results at the Shanghai GM joint venture. These improvements were partially offset by a decrease in wholesale sales volumes and increases in structural and other costs. The increase in 2001 adjusted earnings, compared with 2000, was primarily due to GMAP's suspension of recording its share of Isuzu's losses. GM reduced its investment balance in Isuzu to zero in the second quarter of 2001. In addition, there were equity income improvements from several joint ventures in the region, as well as slightly favorable price increases and increased wholesale sales volumes.

Hughes Financial Review Total adjusted net sales and revenues were $9.0 billion, $8.3 billion and $8.7 billion for 2002, 2001 and 2000, respectively. The increase in adjusted net sales and revenues in 2002, compared with 2001, was due to increased revenues at DIRECTV U.S. due to continued subscriber growth. The increase in adjusted net sales and revenues at DIRECTV U.S. was partially offset by a decrease in adjusted net sales and revenues at Hughes Network Systems (HNS), which was principally due to lower sales resulting from the substantial completion of two contracts in late 2001. PanAmSat Corporation (PanAmSat) also reported a decrease in adjusted net sales and revenues due to a sales-type lease transaction executed during 2001 for which there was no comparable transaction in 2002. The decrease in adjusted net sales and revenues in 2001, compared with 2000, was due

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document to decreased revenues at PanAmSat, decreased revenues at HNS, and the sale of the satellite systems manufacturing businesses to The Boeing Company on October 6, 2000. The decrease in adjusted net sales and revenues at PanAmSat was primarily due to a decline of new outright sales and sales-type lease transactions executed during 2001 compared to 2000. The decrease in adjusted net sales and revenues at HNS was primarily due to decreased shipments of DIRECTV receiving equipment due primarily to DIRECTV completing the conversion of PRIMESTAR By DIRECTV customers to the high-power DIRECTV service in 2000. These decreases were partially offset by an increase in adjusted net sales and revenues at the Direct-To-Home businesses that resulted from the addition of approximately 1.5 million net new subscribers in the United States and Latin America since December 31, 2000.

Hughes' adjusted losses were $467 million, $525 million, and $303 million for 2002, 2001 and 2000, respectively. The decrease in 2002 adjusted loss, compared with 2001, was primarily due to additional gross profits gained from the DIRECTV U.S. revenue growth mentioned above, lower expenses resulting from cost saving initiatives and a decrease in amortization expense related to goodwill as a result of the implementation of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" (See Note 1 to the consolidated financial statements). These favorable factors were partially offset by a decrease in interest income due to lower average cash and cash equivalent balances in 2002, an increase in interest expense which included a $74 million charge in 2002 for losses associated with the final settlement of a contractual dispute with General Electric Capital Corporation, increased depreciation expense due to capital expenditures for property and satellites placed into service

II-7

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Hughes Financial Review (concluded) since December 31, 2001 and a decrease in income tax benefit resulting from lower pre-tax losses in 2002. The increase in 2001 adjusted loss, compared with 2000, was primarily due to lower profits in 2001 from sales and sales-type lease transactions and higher operating costs at PanAmSat, increased costs associated with the rollout of new DIRECWAY services, lower profits resulting from decreased shipments of DIRECTV receiving equipment at HNS, the added cost of DIRECTV Broadband, and increased depreciation and amortization expense due to various acquisitions in 2001 and capital expenditures for satellites and property.

GMAC Financial Review

GMAC's adjusted income was $1.9 billion, $1.8 billion, and $1.6 billion for 2002, 2001, and 2000, respectively. Years Ended December 31, ------2002 2001 2000 ------(dollars in millions)

Financing operations $1,239 $1,211 $1,055 Mortgage operations 544 332 327 Insurance operations 87 209 220 ------Adjusted income $1,870 $1,752 $1,602 ======

Income from financing operations totaled $1.2 billion, $1.2 billion, and $1.1 billion in 2002, 2001, and 2000, respectively. The increase in income in 2002, compared with 2001, was primarily due to higher asset levels which were partially offset by higher credit loss provisions and wider borrowing spreads that have occurred primarily as a result of rating agency downgrades in late 2001 and 2002. The increase in adjusted income in 2001, compared with 2000, was primarily due to lower market interest rates and increased asset levels. These increases were partially offset by weakness in off-lease residual values, higher credit losses, and wider borrowing spreads that occurred in the wake of negative rating agency actions. Income from mortgage operations totaled $544 million, $332 million, and $327 million in 2002, 2001, and 2000, respectively. The increase in income in 2002, compared with 2001, was primarily due to increased production volumes, higher servicing levels, and improved hedging results, which was partially offset by a decrease in the value of mortgage servicing rights. The increase in income in 2001, compared with 2000, was primarily due to strong origination volumes and securitizations which kept pace with the large run-off of home mortgages that occurred during periods of high refinancing activity. Income from insurance operations totaled $87 million, $209 million, and $220 million in 2002, 2001, and 2000, respectively. The decrease in income in 2002, compared with 2001, reflects a write-down of certain investment securities primarily due to the prolonged decline in equity markets, partially offset by improved underwriting results and a favorable tax settlement. The decrease in

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document income in 2001, compared with 2000, was primarily due to a reduction in capital gains reflecting the general weakness in the equity markets. This decrease was partially offset by improved underwriting results.

LIQUIDITY AND CAPITAL RESOURCES

Financing Structure

In 2002, GM and GMAC experienced adequate access to the capital markets as GM and GMAC were able to issue various securities to raise capital and extend borrowing terms consistent with GM's need for financial flexibility. Downgrades to GM's and GMAC's credit ratings in October 2002 have reduced GM's long-term credit rating by Standard & Poor's to BBB and A3 by Moody's (GMAC is rated A2 by Moody's). Despite these downgrades GM's and GMAC's access to the commercial paper and unsecured debt markets remains sufficient to meet the Corporation's capital needs. Moreover, the downgrades have not had a significant adverse effect on GM's and GMAC's ability to obtain bank credit or to sell asset-backed securities. Accordingly, GM and GMAC expect that they will continue to have adequate access to the capital markets sufficient to meet the Corporation's needs for financial flexibility. As an additional source of funds, GM currently has unrestricted access to a $5.6 billion line of credit with a syndicate of banks which is committed through June 2006, an additional $3.2 billion in committed facilities with various maturities and uncommitted lines of credit of $2.7 billion. Similarly, GMAC has a $1.5 billion syndicated line of credit committed through June 2003, $7.4 billion committed through June 2006, $4.1 billion of bilateral committed lines with various maturities, and uncommitted lines of credit of $17.8 billion. In addition, New Center Asset Trust (NCAT) has $18.1 billion of liquidity facilities committed through June 2003. In October 2002, GMAC transferred $5.8 billion of credit lines from its syndicated facility (committed through June 2003) to NCAT. Mortgage Interest Networking Trust (MINT) has $4.1 billion of liquidity facilities committed through April 2003. NCAT and MINT are non-consolidated limited purpose statutory trusts established to issue asset-backed commercial paper. See Off-Balance Sheet Arrangements for more discussion.

II-8

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Financing Structure (concluded)

On February 7, 2002, GM issued $875 million of 7.250% Senior Notes due February 15, 2052. The bonds mature in 50 years and are redeemable by GM, in whole or part, prior to 2052 if certain circumstances are satisfied. On March 6, 2002, GM also issued $3.8 billion of convertible debt securities as part of a comprehensive effort to improve the Corporation's financial flexibility. The offering includes $1.2 billion principal amount of 4.5% Series A Convertible Senior Debentures due 2032 and $2.6 billion principal amount of 5.25% Series B Convertible Senior Debentures due 2032. The securities mature in 30 years and are convertible into GM $1-2/3 par value common stock once specific conditions are satisfied. The proceeds of the offerings, combined with other cash generation initiatives, were used to rebuild GM's liquidity position, reduce its underfunded pension liability, and fund its postretirement health care obligations. In 2002, GM contributed a total of $4.9 billion to its U.S. pension plans and $1.0 billion to the long-term Voluntary Employees' Beneficiary Association (VEBA) Trust. Stockholders' equity decreased to $6.8 billion at December 31, 2002 from $19.7 billion at December 31, 2001. This decrease was primarily due to the increase in the minimum pension liability adjustment recorded at December 31, 2002. (See Note 14 to the consolidated financial statements.)

Automotive, Communications Services, and Other Operations

At December 31, 2002, cash, marketable securities, and $3.0 billion of short-term assets of the VEBA trust invested in fixed-income securities totaled $18.5 billion, compared with $12.2 billion at December 31, 2001. The increase from December 31, 2001 was primarily due to proceeds from the bond and convertible debt offerings, and strong operating cash flow from automotive operations. Total assets in the VEBA trust used to pre-fund part of GM's other postretirement benefits liability approximated $5.8 billion and $4.9 billion at December 31, 2002 and 2001, respectively. GM previously indicated that it had a goal of maintaining $13.0 billion of cash and marketable securities in order to continue funding product development programs throughout the next downturn in the business cycle. This $13.0 billion target includes cash to pay certain costs that were pre-funded in part by VEBA contributions. Long-term debt was $16.7 billion and $10.7 billion at December 31, 2002 and 2001, respectively. The ratio of long-term debt to long-term debt and GM's net assets of ACO was 267.0% and 72.6% at December 31, 2002 and 2001, respectively. The ratio of long-term debt and short-term loans payable to the total of this debt and GM's net assets of ACO was 234.3% and 76.5% at December 31, 2002 and 2001, respectively. The increase in both ratios is primarily due to the net

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document assets of ACO changing to a net liability position as a result of the increase in the unfunded status of GM's pension plans at December 31, 2002. Net liquidity excluding Hughes, calculated as cash, marketable securities, and $3.0 billion of short-term assets of the VEBA trust invested in fixed-income securities less the total of loans payable and long-term debt, was $2.3 billion and $1.0 billion at December 31, 2002 and 2001, respectively. In order to provide financial flexibility to GM and its suppliers, GM maintains a two-part financing program through GECC which was renewed October 2, 2002 pursuant to a Trade Payables Agreement with GM wherein GECC (1) purchases GM receivables at a discount from GM suppliers prior to the due date of those receivables, and pays on behalf of GM the amount due on other receivables which have reached their due date (the first part) and (2) from time to time allows GM to defer payment to GECC with respect to all or a portion of receivables which it has purchased or paid on behalf of GM, which deferral could last from 10 days and up to 40 days. To the extent GECC can realize favorable economics from transactions arising in the first part of the program, they are shared with GM. Whenever GECC and GM agree that GM will defer payment beyond the normal due date for receivables under the second part of the program, GM becomes obligated to pay interest for the period of such deferral. Outstanding balances of GM receivables held by GECC are classified as accounts payable in GM's financial statements. If any of GM's long-term unsecured debt obligations become subject to a rating by S&P of BBB- (GM's current rating is BBB) with a negative outlook or below BBB-, or a rating by Moody's of Baa3 (GM's current rating is A3) with a negative outlook or below Baa3, the program would be unavailable to GM and its suppliers. The maximum amount permitted under the program is $2 billion. At December 31, 2002, the outstanding balance under the first part of the program amounted to approximately $1.2 billion, and there was no outstanding balance under the second part of the program, compared with an outstanding balance under the first part of the program of $495 million and $1.2 billion outstanding balance under the second part of the program at December 31, 2001.

II-9

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Financing and Insurance Operations

GMAC's consolidated assets totaled $227.7 billion at December 31, 2002, representing an 18% increase from the $192.7 billion outstanding at December 31, 2001. The increase in total assets was primarily due to an increase in finance receivables and loans, from $109.7 billion at December 31, 2001 to $134.8 billion at December 31, 2002. The continued use of GM sponsored special rate financing programs in the United States fueled asset growth in the consumer retail contract portfolio. Additionally in 2002, GMAC structured more securitizations as financing transactions (for accounting purposes) instead of qualifying as sales, resulting in an increase in finance receivables and loans, primarily in the mortgage operations. Consistent with the growth in assets, GMAC's total debt increased to $183.1 billion at December 31, 2002, as compared to $152.0 billion at December 31, 2001. GMAC's 2002 year-end ratio of total debt to total stockholder's equity was 10.3:1 compared to 9.4:1 at December 31, 2001. GMAC's liquidity, as well as its ability to profit from ongoing activity, is in large part dependent upon its timely access to capital and the costs associated with raising funds in different segments of the capital markets. Liquidity is managed to preserve stable, reliable and cost effective sources of cash to meet all current and future obligations. GMAC's strategy in managing liquidity risk has been to develop diversified funding sources across a global investor base. A weak corporate bond market, combined with downgrades in certain of GMAC's credit ratings, increased GMAC's unsecured borrowing spreads to unprecedented levels in 2002. As a result, GMAC placed a greater emphasis on securitization and retail debt in its funding mix. Management expects to continue to use diverse funding sources to maintain its financial flexibility and expects that access to the capital markets will continue at levels sufficient to meet GMAC's funding needs.

Investment in Fiat Auto Holdings

On March 13, 2000, GM entered into a contract (the "Master Agreement") with Fiat S.p.A. ("Fiat") under which GM acquired 20% of FAH. A copy of the Master Agreement has been made public in filings with the SEC. Fiat continues to hold the other 80% of FAH through various subsidiaries. FAH is the sole stockholder of Fiat Auto S.p.A. ("Fiat Auto"), which owns and operates the global automotive group of Fiat (other than the Ferrari, Maserati and Iveco businesses, which are held separately by Fiat). Additionally, GM and Fiat Auto have formed joint ventures relating to powertrain and purchasing and initiated other collaborative activities. The Master Agreement provides that, from January 24, 2004 to July 24, 2009, Fiat has the right to exercise a put option (the "Put") to require GM to purchase Fiat's FAH shares at fair market value. Whether and when Fiat may seek to exercise the Put is unknown. It is uncertain as to whether the Put would ever be exercised due to the possibilities that it could be affected by subsequent

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document agreements of the companies, it could become non-exercisable under other provisions of the Master Agreement, it could be rendered unenforceable by reason of actions Fiat may have taken, or Fiat may choose to not exercise the Put. If and when the Put is implemented, the fair market value of FAH shares would be determined by investment banks under procedures set forth in the Master Agreement. Until any such valuation is completed, the amount, if any, that GM might have to pay for Fiat's FAH shares is not quantifiable. If GM were to acquire Fiat's FAH shares and thus become the sole owner of Fiat Auto, GM would decide what, if any, additional capitalization would then be appropriate for Fiat Auto. Specifically, if Fiat Auto were to need additional funding, GM would have to decide whether or not to provide such funding and under what conditions to provide any funding. Unless FAH or Fiat Auto were subject to liquidation or insolvency, FAH's consolidated financial statements would be required for financial reporting purposes to be consolidated with those of GM. Any indebtedness, losses and capital needs of FAH and Fiat Auto after their acquisition by GM are not presently determinable, but they could have a material adverse effect on GM. While GM and Fiat have discussed potential alternatives to the Master Agreement, no changes to it have been agreed upon. GM expects to continue working with Fiat on future product sharing and the powertrain and purchasing joint ventures they initiated in March 2000, which are providing significant cost savings in line with initial estimates to the operations of both companies. Additional opportunities for industrial cooperation among GM and Fiat Auto are being explored for the purpose of further reducing operating costs for both parties.

II-10

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Off-Balance Sheet Arrangements

GM and GMAC use off-balance sheet special purpose entities (SPEs) where the economics and sound business principles warrant their use. The principal use of these SPEs occurs in connection with the securitization and sale of financial assets generated or acquired in the ordinary course of business by GM's wholly-owned subsidiary GMAC and its subsidiaries and, to a lesser extent, by GM. The assets securitized and sold by GMAC and its subsidiaries consist principally of mortgages, and wholesale and retail loans secured by vehicles sold through GM's dealer network. The assets sold by GM consist of trade receivables. GM and GMAC use SPEs in a manner consistent with conventional practices in the securitization industry, the purpose of which is to isolate the receivables for the benefit of securitization investors. Usually, the SPEs used in these transactions meet the criteria of a qualifying special purpose entity (QSPE). The use of QSPEs enables GM and GMAC to access the highly liquid and efficient markets for the sale of these types of financial assets when they are packaged in securitized forms. GM leases real estate and equipment from various SPEs that have been established to facilitate the financing of those assets for GM by nationally prominent, creditworthy lessors. These assets consist principally of office buildings, warehouses, and machinery and equipment. The use of such entities allows the parties providing the financing to isolate particular assets in a single entity and thereby syndicate the financing to multiple third parties. This is a conventional financing technique used to lower the cost of borrowing and, thus, the lease cost to a lessee such as GM. There is a well-established market in which institutions participate in the financing of such property through their purchase of interests in SPEs. All of the SPEs established to facilitate property leases to GM are owned by institutions that are independent of, and not affiliated with, GM. No officers, directors or employees of GM, GMAC, or their affiliates hold any direct or indirect equity interests in such entities. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). This interpretation addresses consolidation of certain variable interest entities (VIEs), which include entities previously referred to as SPEs. (See New Accounting Standards for further discussion.)

Assets in SPEs were as follows (dollars in millions):

December 31, ------2002 2001 ------Automotive, Communications Services, and Other Operations

Assets leased under operating leases $2,904 $2,785 Trade receivables sold 439 868 ------Total $3,343 $3,653 ======

Receivables sold or securitized: Mortgage loans $112,128 $113,100 Retail finance receivables 16,164 11,978 Wholesale finance receivables 17,415 16,227 ------Total $145,707 $141,305 ======

BOOK VALUE PER SHARE

Book value per share was determined based on the liquidation rights of the various classes of common stock. Book value per share of GM $1-2/3 par value common stock decreased to $9.06 at December 31, 2002, from $24.81 at December 31, 2001. Book value per share of GM Class H common stock decreased to $1.81 at December 31, 2002, from $4.96 at December 31, 2001.

DIVIDENDS

Dividends may be paid on common stocks only when, as, and if declared by GM's Board of Directors in its sole discretion. The amount available for the payment of dividends on each class of common stock will be reduced on occasion by dividends paid on that class and will be adjusted on occasion for changes to the amount of surplus attributed to the class resulting from the repurchase or issuance of shares of that class. At December 31, 2002, the amount available for the payment of dividends on GM $1-2/3 par value and GM Class H common stocks was $10.3 billion and $21.3 billion, respectively. GM's policy is to distribute dividends on its $1-2/3 par value common stock based on the outlook and indicated capital needs of the business. Cash dividends per share of GM $1-2/3 par value common stock were $2.00 in 2002, 2001, and 2000. With respect to GM Class H common stock, the GM Board has not approved the payment of any cash dividends to date in order to allow cash to be retained for investment in the business of Hughes.

II-11

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

EUROPEAN MATTERS

During September 2000, the European parliament passed a directive requiring member states to adopt legislation regarding end-of-life vehicles and the responsibility of manufacturers for dismantling and recycling vehicles they have sold. European Union member states were required to transform the concepts detailed in the directive into national law. Under the directive, manufacturers are financially responsible for at least a portion of the cost of the take-back of vehicles placed in service after July 2002 and all vehicles placed in service prior to July 2002 that are still in operation in January 2007. The laws developed in the individual national legislatures throughout Europe will have a significant impact on the amount ultimately paid by the manufacturers for this issue. GM recorded, in cost of sales and other expenses in the GME segment, an after-tax charge of $55 million ($0.10 per diluted share of GM $1-2/3 par value common stock) in 2002 for those member states that have passed national laws through December 31, 2002. Management is assessing the impact of this potential legislation on GM's financial position and results of operations, and may include charges to earnings in future periods. During 2001, GM Europe announced its plan to turn around its business with the implementation of Project Olympia. The initial stages of Project Olympia sought to identify initiatives that could deliver: . Solid and profitable business performance as of 2003 . A strengthened and optimized sales structure . A revitalized Opel/Vauxhall brand . Further market growth opportunities . Continuous improvement by refocusing the organizational structure The project identified several initiatives which aim to address the goals mentioned above. These initiatives include, among other things, reducing GME's manufacturing capacity, restructuring the dealer network in Germany, and redefining the way vehicles are marketed. These initiatives resulted in a decrease to GM's pre-tax earnings and were recorded in the GME region in the first quarter of 2002 as follows: (1) $298 million related to employee separation costs for approximately 4,000 employees; (2) $235 million related to asset write-downs; and (3) $108 million related to the dealer network restructuring in Germany. The net income impact of these charges in the first quarter of 2002 was $407 million, or $0.72 per diluted share of GM $1-2/3 par value common stock ($553 million included in cost of sales and other expenses; $88 million included in selling, general, and administrative expenses; and $(234) million included in income tax expense). The European Commission has approved a new block exemption regulation that provides for a reform of the rules governing automotive distribution and service in Europe. The European Commission's proposal would eliminate the current block

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document exemption in place since 1985 that permits manufacturers to control where their dealerships are located and the brands that they sell. The current block exemption expired in October 2002; however, there is a transition period until the end of September 2003 for existing agreements with dealers. In order to implement both the new regulatory changes as well as desired commercial strategies, GME issued a termination letter to all European Union dealers (excluding those already under termination notice) while simultaneously also offering an unconditional Letter of Intent to remain part of GME's network. Dealers and authorized repairers are expected to sign new agreements by September 30, 2003, when the new regulation becomes fully effective. Management does not believe that the future impact of the changes to the block exemption regulation will have a material adverse effect on GM's consolidated financial position or results of operations.

HUGHES TRANSACTIONS

On December 9, 2002, Hughes, GM, and EchoStar Communications Corporation (EchoStar) entered into a Termination, Settlement, and Release Agreement (Termination Agreement), in which these parties agreed to terminate the Agreement and Plan of Merger, dated as of October 28, 2001, as amended, between Hughes and EchoStar (Merger Agreement) and certain related agreements. Under the terms of the Termination Agreement, EchoStar paid Hughes $600 million in cash and Hughes retained its 81% ownership position in PanAmSat. This resulted in a gain of $600 million ($372 million after-tax), or $0.21 per diluted share of GM $1-2/3 par value common stock, recorded in total net sales and revenues. The companies entered into the Termination Agreement because the Merger could not be completed within the time allowed by the Merger Agreement due to regulatory opposition. GM has announced that it is currently evaluating a variety of strategic options for Hughes, including a reduction or elimination of its retained economic interest in Hughes, transactions that would involve strategic investors and public offerings of GM Class H common stock or related securities for cash or in exchange for outstanding GM debt obligations. (See Note 26 to the consolidated financial statements.) Any such transaction might involve the separation of Hughes from GM. GM and Hughes have engaged in preliminary discussions with some parties. No decisions have been made regarding which options or combinations of options, if any, GM will pursue. Due to the numerous uncertainties involved in these matters, there can be no assurance that any transaction or offering will be announced or completed or as to the time at which such a transaction or offering might be completed.

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ISUZU RESTRUCTURING

On December 25, 2002 GM, Isuzu and its creditor banks finalized all transactions related to the contemplated restructuring of Isuzu. Under the restructuring package, GM invested a total of Y60 billion (approximately U.S. $500 million) to acquire a majority interest in certain of Isuzu's diesel engine businesses and complete ownership of certain diesel engine technologies. GM also acquired rights to use various related technologies. The allocation of the purchase price to the assets and liabilities acquired will be completed in 2003. In addition, GM had its existing equity in Isuzu retired as part of Isuzu's financial restructuring plan, and GM purchased new equity in Isuzu, leaving GM with a 12% ownership stake in Isuzu.

INVESTMENT IN GM DAEWOO

On October 17, 2002, GM announced that the transfer of certain assets of Daewoo Motor Company had been completed, leading to the creation of GM Daewoo Auto & Technology Company (GM Daewoo). GM, Suzuki Motor Corporation, Shanghai Automotive Industry Corporation (SAIC), and creditors of Daewoo Motor Company are the stockholders in GM Daewoo. GM Daewoo owns three manufacturing plants and 10 subsidiaries in South Korea, Europe, Puerto Rico, and Vietnam. Included in GM Daewoo are design, engineering, research and development, sales, marketing, and administration assets located in Bupyung, South Korea. Daewoo Motor Company's manufacturing facility in Bupyung, South Korea, was formed into a new company, Daewoo Incheon Motor Company (DIMC), and will supply GM Daewoo with vehicles, engines, transmissions and components for at least six years. The agreements give GM Daewoo an option to acquire DIMC any time within the next six years. As of December 31, 2002, GM invested $251 million in GM Daewoo common stock for its purchase of 42.1% of GM Daewoo, and Daewoo's creditors will own 33%. Suzuki and SAIC will have a 14.9% and 10% equity interest, respectively, in GM Daewoo. GM accounts for this investment under the equity method.

EMPLOYMENT AND PAYROLLS

Worldwide employment at December 31, (in thousands) 2002 2001 2000

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document ------GMNA 193 202 213 GME 66 73 89 GMLAAM 24 24 25 GMAP 11 11 11 GMAC 32 29 29 Hughes 12 14 12 (1) Other 12 13 11 ------Total employees 350 366 390 ======

Worldwide payrolls (in billions) $21.0 $19.8 $21.0 (1) U.S. hourly payrolls (in billions) (2) (4) $9.1 $8.5 $9.4 Average labor cost per active hour worked U.S. $62.78 $57.76 $52.16 hourly (3) (4)

(1) Amounts have been adjusted to exclude Hughes' employees transferred to The Boeing Company. (2) Includes employees "at work" (excludes laid-off employees receiving benefits). (3) Includes U.S. hourly wages and benefits divided by the number of hours worked. (4) Amounts have been adjusted to exclude Hughes employees.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CRITICAL ACCOUNTING ESTIMATES

Accounting policies are integral to understanding this MD&A. The consolidated financial statements of GM are prepared in conformity with accounting principles generally accepted in the United States, which requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. GM's accounting policies are described in Note 1 to the consolidated financial statements. Critical accounting estimates are described in this section. An accounting estimate is considered critical if: the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made; different estimates reasonably could have been used; or if changes in the estimate that would have a material impact on the Corporation's financial condition or results of operations are reasonably likely to occur from period to period. Management believes that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The Corporation has discussed the development, selection and disclosures of these critical accounting estimates with the Audit Committee of GM's Board of Directors, and the Audit Committee has reviewed the Corporation's disclosures relating to these estimates.

Sales Allowances

At the later of the time of sale or the time an incentive is announced to dealers (applies to vehicles sold by GM and in dealer inventory), GM records as a reduction of revenue the estimated impact of sales allowances in the form of dealer and customer incentives. There may be numerous types of incentives available at any particular time. Some factors used in estimating the cost of incentives include the volume of vehicles that will be affected by the incentive programs offered by product and the rate of customer acceptance of any incentive program. If the actual number of vehicles differs from this estimate, or if a different mix of incentives occurs, the sales allowances could be affected.

Policy and Warranty

Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of warranty claims. Management actively studies trends of warranty claims and takes action to improve vehicle quality and minimize warranty claims.

Impairment of Long-Lived Assets

GM periodically reviews the carrying value of its long-lived assets held and used, other than goodwill and intangible assets with indefinite lives, and assets to be disposed of when events and circumstances warrant such a review. This review is performed using estimates of future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.

Pension and OPEB costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest cost, expected return on plan assets, mortality rates, and other factors. In accordance with accounting principles generally accepted in the United States, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect GM's pension and other postretirement obligations and future expense. GM has established for its U.S. pension and OPEB plans a discount rate of 6.75% for year-end 2002. The 6.75% discount rate represents a 50 basis point reduction from the 7.25% discount rate used at year-end 2001. GM's U.S. pre-tax pension expense is forecasted to increase from approximately $1.0 billion in 2002, excluding curtailments and settlements, to approximately $2.9 billion in 2003 due to negative 2002 actual asset returns, a lower 2002 year-end discount rate, and lowering of the expected return on plan assets assumption from 10% to 9%.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

The following table illustrates the sensitivity to a change in certain assumptions for U.S. pension plans (as of December 31, 2002 the Projected Benefit Obligation (PBO) for U.S. pension plans was $80.1 billion and the minimum pension liability charged to equity with respect to U.S. pension plans was $21.2 billion net of tax; see Note 14 to the consolidated financial statements):

Impact on Impact on 2003 Impact on December 31, Pre-Tax Pension December 31, 2002 Equity Change in Assumption Expense 2002 PBO (Net of Tax) ------25 basis point decrease in discount +$120 million +$1.9 billion -$1.1 billion rate

25 basis point increase in discount -$120 million -$1.8 billion +$1.1 billion rate

25 basis point decrease in expected +$170 million - - return on assets

25 basis point increase in expected -$170 million - - return on assets

These changes in assumptions would have no impact on GM's funding requirements.

The following table illustrates the sensitivity to a change in the discount rate assumption related to GM's U.S. OPEB plans (the U.S. Accumulated Postretirement Benefit Obligation (APBO) was a significant portion of GM's worldwide APBO of $57.2 billion as of December 31, 2002; see Note 14 to the consolidated financial statements):

Impact on 2003 Impact on Pre-Tax OPEB December 31, 2002 Change in Assumption Expense APBO ------

25 basis point decrease in discount +$150 million +$1.6 billion rate

25 basis point increase in discount -$140 million -$1.5 billion rate

Postemployment Benefits

GM establishes reserves for termination and other postemployment benefit liabilities to be paid pursuant to union or other contractual agreements in connection with closed plants. The reserve is based on a comprehensive study that considers the impact of the annual production and labor forecast

Allowance for Credit Losses

The allowance for credit losses generally is established by GMAC during the period in which receivables are acquired and is maintained at a level considered appropriate by management based on historical and other factors that affect collectibility. These factors include the historical trends of repossessions, charge-offs, recoveries, and credit losses; the careful monitoring of portfolio credit quality, including the impact of acquisitions; and current and projected economic and market conditions. Different assumptions or changes in economic circumstances could result in changes to the allowance for credit losses.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Investments in Operating Leases

GMAC's investments in residual values of its leasing portfolio represent an estimate of the values of the assets at the end of the lease contract and are initially recorded based on appraisals and estimates. Management reviews residual values periodically to determine that recorded amounts are appropriate and the operating lease assets have not been impaired. GMAC actively manages the remarketing of off-lease vehicles to maximize the realization of their value. Changes in the value of the residuals or other external factors impacting GMAC's future ability to market the vehicles under prevailing market conditions may impact the realization of residual values.

Mortgage Servicing Rights

The Corporation capitalizes mortgage servicing rights associated with loans sold with servicing retained and servicing rights acquired through bulk and flow purchase transactions. The Corporation capitalizes the cost of originated mortgage servicing rights based upon the relative fair market value of the underlying mortgage loans and mortgage servicing rights at the time of sale of the underlying mortgage loan. The Corporation capitalizes purchased mortgage servicing rights at cost, an amount not exceeding the estimated fair market value of those purchased mortgage servicing rights.

Accounting for Derivatives and Other Contracts at Fair Value

The Corporation uses derivatives in the normal course of business to manage its exposure to fluctuations in commodity prices and interest and foreign currency rates. Effective January 1, 2001, the Corporation accounts for its derivatives on the Consolidated Balance Sheet as assets or liabilities at fair value in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Such accounting is complex, evidenced by significant interpretations of the primary accounting standard, which continues to evolve, as well as the significant judgments and estimates involved in the estimating of fair value in the absence of quoted market values.

NEW ACCOUNTING STANDARDS

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement eliminates the required classification of gain or loss on extinguishment of debt as an extraordinary item of income and states that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board Opinion No. 30, "Reporting Results of Operations." This statement also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions, and makes various other technical corrections to existing pronouncements. The Corporation implemented SFAS No. 145 on January 1, 2003. Management does not expect this statement to have a material impact on GM's consolidated financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement nullifies 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)." This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than the date of an entity's commitment to an exit plan, and establishes that fair value is the objective for initial measurement of the liability. The Corporation implemented SFAS No. 146 on January 1, 2003 for transactions that occur after December 31, 2002. Management does not expect this statement to have a material impact on GM's consolidated financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. On August 6, 2002, pursuant to SFAS No. 123, GM announced that the Corporation would expense the fair market value of stock options newly granted to employees beginning in January 2003. Assuming prospective application of SFAS No. 123, the expense associated with stock options will be approximately $51 million, or $0.09 per share of GM $1 2/3 par value common stock for 2003. However, management is currently evaluating the various methods of application of SFAS No. 123 outlined in SFAS No. 148 and the associated impact on GM's consolidated financial position or results of operations. In December 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee. This interpretation is applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Management is currently evaluating the impact of recognizing such liabilities on GM's consolidated

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

NEW ACCOUNTING STANDARDS (concluded) financial position and results of operations. FIN 45 also contains disclosure provisions surrounding existing guarantees, which are effective for financial statements of interim or annual periods ending after December 15, 2002. (See Note 15 to the consolidated financial statements for these disclosures.) In January 2003, the FASB issued FIN 46, which requires the consolidation of certain entities considered to be variable interest entities (VIEs). An entity is considered to be a VIE when it has equity investors which lack the characteristics of a controlling financial interest, or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it is determined that the investor will absorb a majority of the VIE's expected losses or residual returns if they occur. FIN 46 provides certain exceptions to these rules, including qualifying SPEs subject to the requirements of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." VIEs created after January 31, 2003 must be consolidated immediately, while VIEs that existed prior to February 1, 2003 must be consolidated as of July 1, 2003. GM may be required to consolidate certain VIEs (previously collectively referred to as SPEs) with which it does business. Management is currently reviewing existing VIEs that may require consolidation. However, it is reasonably possible that certain VIEs with assets totaling approximately $1.1 billion, established exclusively to facilitate GM's leasing activities related to the ACO business, may require consolidation. Should GM default on all of its obligations with respect to its involvement in these entities, GM's maximum exposure to loss would be approximately $1.1 billion. With respect to the FIO business, VIE structures are used to facilitate various activities of GMAC, including securitization of loans, mortgage funding, and other investing activities. Based on management's preliminary assessment, it is reasonably possible that VIEs with assets totaling approximately $17.5 billion may require consolidation. Management is considering restructuring alternatives to ensure the continued non-consolidation of such assets. In the absence of successful alternatives, the consolidation of such VIEs would have the effect of increasing both assets and liabilities in an amount equal to the assets of the VIEs. GM's exposure to loss related to these entities is approximately $3.2 billion.

ADDITIONAL MATTERS

Like most domestic and foreign automobile manufacturers, over the years GM has used some brake products incorporating small amounts of encapsulated asbestos. These products, generally brake linings, are known as asbestos- containing friction products. There is a significant body of scientific data demonstrating that these asbestos-containing friction products are safe and do not create an increased risk of asbestos-related disease. GM believes that the use of asbestos in these products was appropriate. As with other companies that have used asbestos, there has been an increase in the number of claims against GM related to allegations concerning the use of asbestos-containing friction products in recent years. A growing number of auto mechanics are filing suit seeking recovery based on their alleged exposure to the small amount of asbestos used in brake components. These claims almost always identify numerous other potential sources for the claimant's alleged exposure to asbestos which do not involve GM or even asbestos-containing friction products and many of which place users at much greater risk. The vast majority of these claimants do not have an asbestos-related illness and may never develop one. This is consistent with the experience reported by other automotive manufacturers and other end users of asbestos. The efforts of GM and the other domestic auto manufacturers to consolidate their asbestos brake product litigation with similar and related claims currently pending against Federal Mogul in the Delaware bankruptcy court

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (where the Federal Mogul bankruptcy is pending) were unsuccessful. Although such consolidation made sense for the effective and efficient resolution of the similar and related claims against GM, the failure of this effort will not affect GM's defenses which remain strong and will be presented in individual cases. Two other types of claims related to alleged asbestos exposure are being asserted against GM, representing a significantly lower exposure than the automotive friction product claims. Like other locomotive manufacturers, GM used a limited amount of asbestos in locomotive brakes and in the insulation used in some locomotives resulting in lawsuits being filed against it by railroad workers seeking relief based on their alleged exposure to asbestos. These claims almost always identify numerous other potential sources for the claimant's alleged exposure to asbestos, which do not involve GM or even locomotives. Many of these claimants do not have an asbestos-related illness and may never develop one. In addition, like many other manufacturers, a relatively small number of claims are brought by contractors who are seeking recovery based on alleged exposure to asbestos-containing products while working on premises owned by GM. These claims almost always identify numerous other potential sources for the claimant's alleged exposure to asbestos which do not involve GM. The vast majority of these claimants do not have an asbesto-related illness and may never develop one.

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ADDITIONAL MATTERS (concluded)

While General Motors has resolved many of these cases over the years and continues to do so for conventional strategic litigation reasons (avoiding defense costs and possible exposure to runaway verdicts), GM, as stated above, believes the vast majority of such claims against GM are without merit. Only a small percentage of the claims pending against GM allege the contraction of a malignant disease associated with asbestos exposure. The vast majority of claimants do not have an asbestos-related illness and may never develop one. In addition, GM believes that it has very strong defenses based upon a number of published epidemiological studies prepared by highly respected scientists. Indeed, GM believes there is compelling evidence warranting the dismissal of virtually all of these claims against GM. GM will vigorously press this evidence before judges and juries whenever possible. Furthermore, GM believes there is strong statutory and judicial precedent supporting Federal preemption of the asbestos tort claims asserted on behalf of railroad workers. Such preemption would mean that Federal Law entirely eliminates the possibility that such individuals could maintain a claim against GM. Many courts examining this issue have agreed with GM's position. GM's annual expenditures associated with the resolution of these claims have increased in nonmaterial amounts in recent years, but the amount expanded in any year is highly dependent on the number of claims filed, the amount of pretrial proceedings conducted, and the number of trials and settlements which occur during the period. While over the foreseeable future GM anticipates annual expenditures relating to these claims will increase somewhat as a function of the number of claims increasing, it is management's belief, based upon consultation with legal counsel, that the claims will not result in a material adverse effect upon the financial condition or results of operations of GM.

FORWARD-LOOKING STATEMENTS

In this report, in reports subsequently filed by GM with the SEC on Forms 10-Q and 8-K, and in related comments by management of GM and Hughes, our use of the words "expect," "anticipate," "estimate," "forecast," "objective," "plan," "goal," and similar expressions is intended to identify forward-looking statements. While these statements represent our current judgments on what the future may hold, and we believe these judgments are reasonable, actual results may differ materially due to numerous important factors that are described below and other factors that may be described in subsequent reports which GM may file with the SEC on Forms 10-Q and 8-K: . Changes in economic conditions, currency exchange rates, significant terrorist acts, or political instability in the major markets where the Corporation procures material, components, and supplies for the production of its principal products or where its products are produced, distributed, or sold (i.e., North America, Europe, Latin America, and Asia Pacific). . Shortages of fuel or interruptions in transportation systems, labor strikes, work stoppages, or other interruptions to or difficulties in the employment of labor in the major markets where the Corporation purchases material, components, and supplies for the production of its products or where its products are produced, distributed, or sold. . Significant changes in the competitive environment in the major markets where the Corporation purchases material, components, and supplies for the production of its products or where its products are produced, distributed, or sold. . Changes in the laws, regulations, policies, or other activities of governments, agencies, and similar organizations where such actions may

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document affect the production, licensing, distribution, or sale of the Corporation's products, the cost thereof, or applicable tax rates. . The ability of the Corporation to achieve reductions in cost and employment levels, to realize production efficiencies, and to implement capital expenditures, all at the levels and times planned by management. . With respect to Hughes, additional risk factors include: 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 DIRECTV Latin America, LLC operates, 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, and Hughes' ability to access capital to maintain its financial flexibility.

* * * * * *

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

GM is exposed to market risk from changes in foreign currency exchange rates, interest rates, and certain commodity and equity security prices. GM enters into a variety of foreign exchange, interest rate, and commodity forward contracts and options, primarily to maintain the desired level of exposure arising from these risks. A risk management control system is utilized to monitor foreign exchange, interest rate, commodity and equity price risks, and related hedge positions. A discussion of GM's accounting policies for derivative financial instruments is included in Note 1 to the GM consolidated financial statements. Further information on GM's exposure to market risk is included in Notes 19 and 20 to the GM consolidated financial statements. The following analyses provide quantitative information regarding GM's exposure to foreign currency exchange rate risk, interest rate risk, and commodity and equity price risk. GM uses a model to evaluate the sensitivity of the fair value of financial instruments with exposure to market risk that assumes instantaneous, parallel shifts in exchange rates, interest rate yield curves, and commodity and equity prices. For options and instruments with nonlinear returns, models appropriate to the instrument are utilized to determine the impact of market shifts. There are certain shortcomings inherent in the sensitivity analyses presented, primarily due to the assumption that exchange rates change in a parallel fashion and that interest rates change instantaneously. In addition, the analyses are unable to reflect the complex market reactions that normally would arise from the market shifts modeled.

Foreign Exchange Rate Risk GM has foreign currency exposures related to buying, selling, and financing in currencies other than the local currencies in which it operates. More specifically, GM is exposed to foreign currency risk related to the uncertainty to which future earnings or asset and liability values are exposed as the result of operating cash flows and various financial instruments that are denominated in foreign currencies. At December 31, 2002, the net fair value asset of financial instruments with exposure to foreign currency risk was approximately $3.7 billion compared to a net fair value liability of $5.3 billion at December 31, 2001. The potential loss in fair value for such financial instruments from a 10% adverse change in quoted foreign currency exchange rates would be approximately $370 million and $531 million for 2002 and 2001, respectively.

Interest Rate Risk GM is subject to market risk from exposure to changes in interest rates due to its financing, investing, and cash management activities. More specifically, the Corporation is exposed to interest rate risk associated with long-term debt and contracts to provide commercial and retail financing, retained mortgage servicing rights, and retained assets related to mortgage securitization. In addition, GM is exposed to prepayment risk associated with its capitalized mortgage servicing rights and its retained assets. This risk is managed with U.S. Treasury options and futures, exposing GM to basis risk since the derivative instruments do not have identical characteristics to the underlying mortgage servicing rights. At December 31, 2002 and 2001, the net fair value liability of financial instruments held for purposes other than trading with exposure to interest rate risk was approximately $27.7 billion and $23.3 billion, respectively. The potential loss in fair value resulting from a 10% adverse shift in quoted interest rates would be approximately $1.6 billion and

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document $1.6 billion for 2002 and 2001, respectively. At December 31, 2002 and 2001, the net fair value asset of financial instruments held for trading purposes with exposure to interest rate risk was approximately $4.4 billion and $3.6 billion, respectively. The potential loss in fair value resulting from a 10% adverse shift in quoted interest rates would be approximately $26 million and $182 million for 2002 and 2001, respectively. This analysis excludes GM's operating lease portfolio. A fair value change in the debt that funds this portfolio would potentially have a different impact on the fair value of the portfolio itself. As such, the overall impact to the fair value of financial instruments from a hypothetical change in interest rates may be overstated.

Commodity Price Risk GM is exposed to changes in prices of commodities used in its Automotive business, primarily associated with various non-ferrous metals used in the manufacturing of automotive components. GM enters into commodity forward and option contracts to offset such exposure. At December 31, 2002 and 2001, the net fair value liability of such contracts was approximately $43 million and $78 million, respectively. The potential loss in fair value resulting from a 10% adverse change in the underlying commodity prices would be approximately $159 million and $150 million for 2002 and 2001, respectively. This amount excludes the offsetting impact of the price risk inherent in the physical purchase of the underlying commodities.

Equity Price Risk GM is exposed to changes in prices of various available-for-sale equity securities in which it invests. At December 31, 2002 and 2001, the fair value of such investments was approximately $1.8 billion and $2.3 billion, respectively. The potential loss in fair value resulting from a 10% adverse change in equity prices would be approximately $182 million and $231 million for 2002 and 2001, respectively.

* * * * * *

II-19

Independent Auditors' Report

General Motors Corporation, its Directors, and Stockholders:

We have audited the Consolidated Balance Sheets of General Motors Corporation and subsidiaries as of December 31, 2002 and 2001, and the related Consolidated Statements of Income, Cash Flows, and Stockholders' Equity for each of the three years in the period ended December 31, 2002. Our audits also included the Supplemental Information to the Consolidated Balance Sheets and Consolidated Statements of Income and Cash Flows and financial statement schedule listed at Item 15 (collectively, the financial statement schedules). These financial statements and the financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of General Motors Corporation and subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the financial statements, effective January 1, 2002, General Motors Corporation changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."

/s/DELOITTE & TOUCHE LLP ------DELOITTE & TOUCHE LLP

Detroit, Michigan January 16, 2003 (March 12, 2003, as to Note 26)

ITEM 8

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2002 2001 2000 ------(dollars in millions except per share amounts) GENERAL MOTORS CORPORATION AND SUBSIDIARIES Total net sales and revenues (Notes 1, 2 and 23) $186,763 $177,260 $184,632 ------Cost of sales and other expenses (Notes 2 and 3) 153,344 144,093 145,664 Selling, general, and administrative expenses 23,624 23,302 22,252 Interest expense (Note 13) 7,715 8,347 9,552 ------Total costs and expenses 184,683 175,742 177,468 ------Income before income taxes and minority interests 2,080 1,518 7,164 Income tax expense (Note 8) 533 768 2,393 Equity income (loss) and minority interests 189 (149) (319) ------Net income 1,736 601 4,452 Dividends on preference stocks (47) (99) (110) ------Earnings attributable to common stocks $1,689 $502 $4,342 ======

Basic earnings (losses) per share attributable to common stocks Earnings per share attributable to $1-2/3 par value $3.37 $1.78 $6.80 ======Earnings per share attributable to Class H $(0.21) $(0.55) $0.56 ======

Earnings (losses) per share attributable to common stocks assuming dilution Earnings per share attributable to $1-2/3 par value $3.35 $1.77 $6.68 ======Earnings per share attributable to Class H $(0.21) $(0.55) $0.55 ======

Reference should be made to the notes to consolidated financial statements.

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SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, ------2002 2001 2000 ------(dollars in millions) AUTOMOTIVE, COMMUNICATIONS SERVICES, AND OTHER OPERATIONS Total net sales and revenues (Notes 1, 2, and 23) $159,737 $151,491 $160,627 ------Cost of sales and other expenses (Notes 2 and 3) 144,550 135,620 138,303 Selling, general, and administrative expenses 14,993 16,043 16,246 ------Total costs and expenses 159,543 151,663 154,549 ------Interest expense (Note 13) 789 751 815 Net expense from transactions with Financing and Insurance Operations (Note 1) 296 435 682 ------(Loss) income before income taxes and minority interests (891) (1,358) 4,581 Income tax (benefit) expense (Note 8) (489) (270) 1,443 Equity income (loss) and minority interests 256 (79) (299) ------Net income (loss) - Automotive, Communications Services, and Other Operations $(146) $(1,167) $2,839 ======

FINANCING AND INSURANCE OPERATIONS

Total revenues $27,026 $25,769 $24,005 ------

Interest expense (Note 13) 6,926 7,596 8,737 Depreciation and amortization expense (Note 9) 5,541 5,857 5,982 Operating and other expenses 8,356 7,348 5,805 Provisions for financing and insurance losses (Note 1) 3,528 2,527 1,580 ------

Total costs and expenses 24,351 23,328 22,104 ------Net income from transactions with Automotive, Communications Services, and Other Operations (Note 1) (296) (435) (682) ------Income before income taxes and minority interests 2,971 2,876 2,583 Income tax expense (Note 8) 1,022 1,038 950 Equity income (loss) and minority interests (67) (70) (20) ------Net income - Financing and Insurance Operations $1,882 $1,768 $1,613 ======

The above Supplemental Information is intended to facilitate analysis of General Motors Corporation's businesses: (1) Automotive, Communications Services, and Other Operations; and (2) Financing and Insurance Operations.

Reference should be made to the notes to consolidated financial statements.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Cash and cash equivalents (Note 1) $21,449 $18,555 Other marketable securities (Note 4) 16,825 12,069 ------Total cash and marketable securities 38,274 30,624 Finance receivables - net (Note 5) 134,647 109,211 Accounts and notes receivable (less allowances) 15,715 10,798 Inventories (less allowances) (Note 6) 9,967 10,034 Deferred income taxes (Note 8) 41,649 28,239 Equipment on operating leases (less accumulated depreciation) (Note 7) 34,811 36,087 Equity in net assets of nonconsolidated associates 5,044 4,950 Property - net (Note 9) 37,973 36,440 Intangible assets - net (Notes 1 and 10) 17,954 16,927 Other assets (Note 11) 34,748 39,102 ------Total assets $370,782 $322,412 ======

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable (principally trade) $27,452 $26,197 Notes and loans payable (Note 13) 201,940 166,314 Postretirement benefits other than pensions (Note 14) 38,187 38,393 Pensions (Note 14) 22,762 10,839 Deferred income taxes (Notes 8 and 12) 8,964 6,690 Accrued expenses and other liabilities (Note 12) 63,829 53,526 ------Total liabilities 363,134 301,959 Minority interests 834 746 Stockholders' equity (Note 17) $1-2/3 par value common stock (outstanding, 560,447,797 and 558,439,976 shares) 936 932 Class H common stock (outstanding, 958,284,272 and 877,386,595 shares) 96 88 Capital surplus (principally additional paid-in capital) 21,583 21,519 Retained earnings 10,031 9,463 ------Subtotal 32,646 32,002 Accumulated foreign currency translation adjustments (2,784) (2,919) Net unrealized losses on derivatives (205) (307) Net unrealized gains on securities 372 512 Minimum pension liability adjustment (23,215) (9,581) Accumulated other comprehensive loss (25,832) (12,295) ------

Total stockholders' equity 6,814 19,707 ------

Total liabilities and stockholders' equity $370,782 $322,412 ======

Reference should be made to the notes to consolidated financial statements.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED BALANCE SHEETS

December 31, GENERAL MOTORS CORPORATION AND SUBSIDIARIES 2002 2001 ------ASSETS (dollars in millions) Automotive, Communications Services, and Other Operations Cash and cash equivalents (Note 1) $13,291 $8,432 Marketable securities (Note 4) 2,174 790 ------Total cash and marketable securities 15,465 9,222 Accounts and notes receivable (less allowances) 5,861 5,406

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Inventories (less allowances) (Note 6) 9,967 10,034 Equipment on operating leases (less accumulated depreciation) (Note 7) 5,305 4,524 Deferred income taxes and other current assets (Note 8) 11,273 7,877 ------Total current assets 47,871 37,063 Equity in net assets of nonconsolidated associates 5,044 4,950 Property - net (Note 9) 36,152 34,908 Intangible assets - net (Notes 1 and 10) 14,611 13,721 Deferred income taxes (Note 8) 32,759 22,294 Other assets (Note 11) 7,323 17,274 ------Total Automotive, Communications Services, and Other Operations assets 143,760 130,210 Financing and Insurance Operations Cash and cash equivalents (Note 1) 8,158 10,123 Investments in securities (Note 4) 14,651 11,279 Finance receivables - net (Note 5) 134,647 109,211 Investment in leases and other receivables (Note 7) 35,517 33,382 Other assets (Note 11) 34,049 28,207 Net receivable from Automotive, Communications Services, and Other Operations (Note 1) 1,089 1,557 ------Total Financing and Insurance Operations assets 228,111 193,759 ------Total assets $371,871 $323,969 ======

LIABILITIES AND STOCKHOLDERS' EQUITY

Automotive, Communications Services, and Other Operations Accounts payable (principally trade) $20,169 $18,297 Loans payable (Note 13) 1,516 2,402 Accrued expenses (Note 12) 40,976 34,090 Net payable to Financing and Insurance Operations (Note 1) 1,089 1,557 ------Total current liabilities 63,750 56,346 Long-term debt (Note 13) 16,651 10,726 Postretirement benefits other than pensions (Note 14) 34,275 34,515 Pensions (Note 14) 22,709 10,790 Other liabilities and deferred income taxes (Notes 8 and 12) 16,789 13,794 ------Total Automotive, Communications Services, and Other Operations liabilities 154,174 126,171 Financing and Insurance Operations Accounts payable 7,283 7,900 Debt (Note 13) 183,773 153,186 Other liabilities and deferred income taxes (Notes 8 and 12) 18,993 16,259 ------Total Financing and Insurance Operations liabilities 210,049 177,345 ------Total liabilities 364,223 303,516 Minority interests 834 746 Stockholders' equity (Note 17) $1-2/3 par value common stock (outstanding, 560,447,797 and 936 932 558,439,976 shares) Class H common stock (outstanding, 958,284,272 and 96 88 877,386,595 shares) Capital surplus (principally additional paid-in capital) 21,583 21,519 Retained earnings 10,031 9,463 ------Subtotal 32,646 32,002 Accumulated foreign currency translation adjustments (2,784) (2,919) Net unrealized losses on derivatives (205) (307) Net unrealized gains on securities 372 512 Minimum pension liability adjustment (23,215) (9,581) ------Accumulated other comprehensive loss (25,832) (12,295) ------Total stockholders' equity 6,814 19,707 ------Total liabilities and stockholders' equity $371,871 $323,969 ======

Reference should be made to the notes to consolidated financial statements.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended December 31, ------2002 2001 2000 ------Cash flows from operating activities (dollars in millions) Net income $1,736 $601 $4,452 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization expenses 12,938 12,908 13,411 Postretirement benefits other than pensions, net of payments (208) 1,881 799 and VEBA contributions Pension expense, net of contributions (3,380) 148 128 Net change in mortgage loans (4,376) (4,241) 242 Net change in mortgage securities (656) (777) (577) Rental fleet vehicle - acquisitions (5,595) (4,997) (6,000) Rental fleet vehicle - dispositions 4,774 6,116 6,008 Change in other investments and miscellaneous assets 6,195 (1,235) (538) Change in other operating assets and liabilities (Note 1) 4,600 (101) 3,229 Other 1,081 2,682 291 ------Net cash provided by operating activities $17,109 $12,985 $21,445 ------

Cash flows from investing activities Expenditures for property (7,443) (8,631) (9,722) Investments in marketable securities - acquisitions (39,386) (35,130) (27,119) Investments in marketable securities - liquidations 35,688 34,352 27,171 Net change in mortgage servicing rights (1,711) (2,075) (1,084) Increase in finance receivables (143,166) (107,440) (73,754) Proceeds from sales of finance receivables 117,276 95,949 59,221 Operating leases - acquisitions (16,624) (12,938) (15,415) Operating leases - liquidations 13,994 11,892 10,085 Investments in companies, net of cash acquired (872) (1,285) (6,379) (Note 1) Other 867 (1,184) 2,597 ------Net cash used in investing activities (41,377) (26,490) (34,399) ------

Cash flows from financing activities Net (decrease) increase in loans payable (404) (20,044) 7,865 Long-term debt - borrowings 53,144 64,371 27,760 Long-term debt - repayments (24,889) (21,508) (22,459) Repurchases of common and preference stocks (97) (264) (1,613) Proceeds from issuing common stocks 62 100 2,792 Proceeds from sales of treasury stocks 19 418 - Cash dividends paid to stockholders (1,168) (1,201) (1,294) ------Net cash provided by financing activities 26,667 21,872 13,051 ------

Effect of exchange rate changes on cash and cash equivalents 495 (96) (255) ------Net increase (decrease) in cash and cash equivalents 2,894 8,271 (158) Cash and cash equivalents at beginning of the year 18,555 10,284 10,442 ------Cash and cash equivalents at end of the year $21,449 $18,555 $10,284 ======

Reference should be made to the notes to consolidated financial statements.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Reference should be made to the notes to consolidated financial statements.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, and 2000

(a) Resolution of workers' compensation, pension, and other postemployment liabilities owed to GM by Delphi Automotive Systems, which GM spun off in 1999.

Reference should be made to the notes to consolidated financial statements.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Significant Accounting Policies

Principles of Consolidation The consolidated financial statements include the accounts of General Motors Corporation and domestic and foreign subsidiaries that are more than 50% owned, principally General Motors Acceptance Corporation and Subsidiaries (GMAC) and Hughes Electronics Corporation and Subsidiaries (Hughes), (collectively referred to as the "Corporation," "General Motors" or "GM"). General Motors' share of earnings or losses of associates, in which at least 20% of the voting securities is owned, is included in the consolidated operating results using the equity method of accounting, except for investments where GM is not able to exercise significant influence over the operating and financial decisions of the investee, in which case, the cost method of accounting is used. GM encourages reference to the GMAC and Hughes Annual Reports on Form 10-K for the period ended December 31, 2002, filed separately with the U. S. Securities and Exchange Commission, and the Hughes consolidated financial statements included as Exhibit 99 to this GM Annual Report on Form 10-K for the period ended December 31, 2002. Certain amounts for 2001 and 2000 have been reclassified to conform with the 2002 classifications.

Nature of Operations, Financial Statement Presentation, and Supplemental Information GM presents its primary financial statements on a fully consolidated basis. Transactions between businesses have been eliminated in the Corporation's consolidated financial statements. These transactions consist principally of borrowings and other financial services provided by Financing and Insurance Operations (FIO) to Automotive, Communications Services, and Other Operations (ACO). To facilitate analysis, GM presents supplemental information to the statements of income, balance sheets, and statements of cash flows for the following businesses: (1) ACO, which consists of the design, manufacturing, and marketing of cars, trucks, locomotives, and heavy-duty transmissions and related parts and accessories, as well as the operations of Hughes; and (2) FIO, which consists primarily of GMAC. GMAC provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, vehicle and homeowners' insurance, and asset-based lending.

Use of Estimates in the Preparation of the Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported therein. Due to the

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document inherent uncertainties involved in making estimates, actual results reported in future periods may differ from those estimates.

Revenue Recognition Sales generally are recorded when products are shipped (when title and risks and rewards of ownership have passed), or when services are rendered to independent dealers or other third parties. Provisions for dealer and customer sales incentives, allowances, and rebates are made at the time of vehicle sales. Incentives, allowances, and rebates related to vehicles previously sold are recognized as reductions of sales when announced. Financing revenue is recorded over the terms of the receivables using the interest method. Income from operating lease assets is recognized on a straight-line basis over the scheduled lease terms. Insurance premiums are earned on a basis related to coverage provided over the terms of the policies. Commissions, premium taxes, and other costs incurred in acquiring new business are deferred and amortized over the terms of the related policies on the same basis as premiums are earned.

Advertising and Research and Development Advertising, research and development, and other product-related costs are charged to expense as incurred. Advertising expense was $4.6 billion in 2002, $4.3 billion in 2001, and $4.6 billion in 2000. Research and development expense was $5.8 billion in 2002, $6.2 billion in 2001, and $6.6 billion in 2000.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Significant Accounting Policies (continued)

Depreciation and Amortization Expenditures for special tools placed in service after January 1, 2002 are amortized using the straight-line method over their estimated useful lives. Expenditures for special tools placed in service prior to January 1, 2002, are amortized over their estimated useful lives, primarily using the units of production method. Replacements of special tools for reasons other than changes in products are charged directly to cost of sales. As of January 1, 2001, the Corporation adopted the straight-line method of depreciation for real estate, plants, and equipment placed in service after that date. Assets placed in service before January 1, 2001, continue generally to be depreciated using accelerated methods. The accelerated methods accumulate depreciation of approximately two-thirds of the depreciable cost during the first half of the estimated useful lives of property groups as compared to the straight-line method, which allocates depreciable costs equally over the estimated useful lives of property groups. Management believes the adoption of the straight-line amortization/depreciation method for special tools placed into service after January 1, 2002, and real estate, plants, and equipment placed into service after January 1, 2001, better reflects the consistent use of these assets over their useful lives. The effect of these changes on the results of operations for the years ended December 31, 2002 and 2001 is estimated at $7 million and $26 million after-tax , respectively. Equipment on operating leases is depreciated using the straight-line method over the term of the lease agreement. The difference between the net book value and the proceeds of sale or salvage on items disposed of is accounted for as a charge against or credit to the provision for depreciation.

Valuation of Long-Lived Assets GM periodically evaluates the carrying value of long-lived assets to be held and used in the business, other than goodwill and intangible assets with indefinite lives, and assets held for sale when events and circumstances warrant, generally in conjunction with the annual business planning cycle. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair market value for assets to be held and used. For assets held for sale, such loss is further increased by costs to sell. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Long-lived assets to be disposed of other than by sale are considered held and used until disposed of.

Goodwill and Other Intangible Assets Prior to January 1, 2002, goodwill was amortized using the straight-line method over 20 to 40 year periods. On January 1, 2002, the Corporation implemented Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which ceased the amortization method of accounting for goodwill and changed to an impairment-only approach. Accordingly, goodwill is no longer amortized and is tested for impairment at least annually.

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document GM's reported net income and earnings per share information, exclusive of amortization expense recognized related to goodwill and amortization of intangibles with indefinite lives required under previous accounting standards on an after-tax basis, is as follows (dollars in millions except per share amounts):

Year-Ended December 31, ------2002 2001 2000 ------

Reported net income $1,736 $601 $4,452 Add:

Goodwill amortization - 327 318 Amortization of intangibles with indefinite lives - 7 7 ------Adjusted net income $1,736 $935 $4,777 Basic earnings (losses) per share attributable to common stocks EPS attributable to GM $1-2/3 par value: Reported $3.37 $1.78 $6.80 Adjusted $3.37 $2.11 $7.16 EPS attributable to GM Class H: Reported $(0.21) $(0.55) $0.56 Adjusted $(0.21) $(0.38) $0.74 Earnings (losses) per share attributable to common stocks assuming dilution EPS attributable to GM $1-2/3 par value: Reported $3.35 $1.77 $6.68 Adjusted $3.35 $2.10 $7.03 EPS attributable to GM Class H: Reported $(0.21) $(0.55) $0.55 Adjusted $(0.21) $(0.38) $0.72

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Significant Accounting Policies (continued)

Foreign Currency Transactions and Translation Foreign currency exchange transaction and translation losses, net of taxes, included in consolidated net income in 2002, 2001, and 2000, pursuant to SFAS No. 52, "Foreign Currency Translation," amounted to $98 million, $147 million, and $57 million, respectively.

Stock-Based Compensation Through December 31, 2002, as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," GM applied the intrinsic value method of recognition and measurement under Accounting Principles Board Opinion No. 25 (APB No. 25) to its stock options and other stock-based employee compensation awards. No compensation expense related to employee stock options is reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of the grant. In August of 2002, GM announced that, beginning January 1, 2003, the Corporation will expense the fair market value of stock options newly granted to employees pursuant to SFAS No. 123. The following table illustrates the effect on net income and earnings per share if compensation cost for all outstanding and unvested stock option and other stock-based employee compensation awards had been determined based on their fair values at the grant date, consistent with the method prescribed by SFAS No. 123 (dollars in millions except per share amounts):

Year-Ended December 31, ------2002 2001 2000 ------Net income, as reported $1,736 $601 $4,452 Less: stock-based compensation expense determined using fair value based method in SFAS No. 123 (318) (374) (327) ------Pro forma net income $1,418 $227 $4,125 ======

Earnings (losses) attributable to common stocks $1-2/3 par value - as reported $1,885 $984 $3,957 - pro forma $1,687 $769 $3,709

Basic earnings (losses) per share attributable to common stocks $1-2/3 par value - as reported $3.37 $1.78 $6.80 - pro forma $3.01 $1.39 $6.38 Class H - as reported $(0.21) $(0.55) $0.56 - pro forma $(0.34) $(0.73) $0.45

Diluted earnings (losses) per share attributable to common stocks $1-2/3 par value - as reported $3.35 $1.77 $6.68 - pro forma $3.00 $1.38 $6.26 Class H - as reported $(0.21) $(0.55) $0.55 - pro forma $(0.34) $(0.73) $0.44

Policy and Warranty Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of warranty claims. Management actively studies trends of warranty claims and takes action to improve vehicle quality and minimize warranty claims. (See Note 12).

Cash and Cash Equivalents Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Significant Accounting Policies (continued)

Statement of Cash Flows Supplementary Information Years Ended December 31, ------Automotive, Communications Services, and Other 2002 2001 2000 Operations ------(dollars in millions) Increase (decrease) in cash due to changes in other operating assets and liabilities was as follows: Accounts receivable $(116) $111 $(625) Prepaid expenses and other deferred charges 289 (254) 66 Inventories 350 522 (297) Accounts payable 861 558 1,254 Deferred taxes and income taxes payable (1,921) (1,444) (629) Accrued expenses and other liabilities 5,186 (1,549) 955 ------Total $4,649 $(2,056) $724 ======

Cash paid for interest and income taxes was as follows: Interest $1,341 $892 $968 Income taxes $1,726 $1,149 $2,310

During 2002, ACO made investments in companies, net of cash acquired, of approximately $700 million. This amount consists primarily of GM's purchase of a 42.1% equity interest in GM Daewoo Auto & Technology Company (GM Daewoo) for approximately $251 million and GM's investments in Isuzu-related entities for $180 million. During 2001, the majority of the $740 million of investments made by ACO consisted of GM's purchase of an additional 10% ownership in Suzuki Motor Corporation (Suzuki) for approximately $520 million. During 2000, ACO made investments in companies, net of cash acquired, of approximately $4.3 billion. This amount consists primarily of GM's purchase of a 20% equity interest in Fuji Heavy Industries Ltd. (Fuji) for approximately $1.3 billion and GM's acquisition of a 20% interest in Fiat Auto Holdings, B.V. (FAH) for $2.4 billion. In addition during 2000, Fiat S.p.A. purchased approximately 32 million shares of GM $1-2/3 par value common stock for $2.4 billion which is included in proceeds from issuing common stocks.

Years Ended December 31, ------Financing and Insurance Operations 2002 2001 2000 ------(dollars in millions)

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Increase (decrease) in cash due to changes in other operating assets and liabilities was as follows: Other receivables $(3,673) $(1,386) $(726) Other assets 23 (82) (29) Accounts payable (617) 483 3,155 Deferred taxes and other liabilities 4,218 2,940 105 ------Total $(49) $1,955 $2,505 ======

Cash paid for interest and income taxes was as follows: Interest $6,639 $7,239 $8,511 Income taxes $471 $694 $475

FIO made investments in companies, net of cash acquired, of approximately $180 million, $540 million, and $2.1 billion in 2002, 2001, and 2000, respectively. The 2001 investments were primarily for a mortgage warehouse lending business. The 2000 investments were primarily for a commercial factoring business and a Japanese real estate holding company.

Derivative Instruments GM is party to a variety of foreign exchange rate, interest rate and commodity forward contracts, and options entered into in connection with the management of its exposure to fluctuations in foreign exchange rates, interest rates, and certain commodity prices. These financial exposures are managed in accordance with corporate policies and procedures.

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GENERAL MOTORS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Significant Accounting Policies (continued)

Derivative Instruments (concluded) All derivatives are recorded at fair value on the consolidated balance sheet. Effective changes in fair value of derivatives designated as cash flow hedges and hedges of a net investment in a foreign operation are recorded in net unrealized gain / (loss) on derivatives, a separate component of accumulated other comprehensive loss. Amounts are reclassified from accumulated other comprehensive loss when the underlying hedged item impacts earnings and all ineffective changes in fair value are recorded currently in earnings. Changes in fair value of derivatives designated as fair value hedges are recorded currently in earnings offset to the extent the derivative was effective by changes in fair value of the hedged item. Changes in fair value of derivatives not designated as hedging instruments are recorded currently in earnings.

New Accounting Standards

In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement eliminates the required classification of gain or loss on extinguishment of debt as an extraordinary item of income and states that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board Opinion No. 30, "Reporting Results of Operations." This statement also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions, and makes various other technical corrections to existing pronouncements. The Corporation implemented SFAS No. 145 on January 1, 2003. Management does not expect this statement to have a material impact on GM's consolidated financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement nullifies 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)." This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than the date of an entity's commitment to an exit plan, and establishes that fair value is the objective for initial measurement of the liability,. The Corporation implemented SFAS No. 146 on January 1, 2003, for transactions that occur after December 31, 2002. Management does not expect this statement to have a material impact on GM's consolidated financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. On August 6, 2002, pursuant to SFAS No. 123, GM announced that the Corporation would expense the fair market value of

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document stock options newly granted to employees beginning January 1, 2003. In December 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee. This interpretation is applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Management is currently evaluating the impact of recognizing such liabilities on GM's consolidated financial position and results of operations. FIN 45 also contains disclosure provisions surrounding existing guarantees, which are effective for financial statements of interim or annual periods ending after December 15, 2002 (see Note 15). In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46), which requires the consolidation of certain entities considered to be variable interest entities (VIEs). An entity is considered to be a VIE when it has equity investors who lack the characteristics of a controlling financial interest, or its capital is insufficient to permit it to finance its activities without additional subordinated financial support. Consolidation of a VIE by an investor is required when it is determined that the investor will absorb a majority of the VIE's expected losses or residual returns if they occur. FIN 46 provides certain exceptions to these rules, including qualifying SPEs subject to the requirements of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." VIEs created after January 31, 2003 must be consolidated immediately, while VIEs that existed prior to February 1, 2003 must be consolidated as of July 1, 2003. GM may be required to consolidate certain VIEs (previously collectively referred to as SPEs) with which it does business. Management is currently reviewing existing VIEs that may require consolidation. However, it is reasonably possible that certain VIEs with assets totaling approximately $1.1 billion, established exclusively to facilitate GM's leasing activities related to the ACO business, may require consolidation. Should GM default on all of its obligations with respect to its involvement in these entities, GM's maximum exposure to loss would be approximately $1.1 billion. With respect to the FIO business, VIE structures are used to facilitate various activities of GMAC, including securitization of loans, mortgage funding, and other investing activities. Based on management's preliminary assessment, it is reasonably possible that VIEs with assets totaling approximately $17.5 billion may require consolidation. Management is considering restructuring alternatives to ensure the continued non-consolidation of such assets. In the absence of successful alternatives, the consolidation of such VIEs would have the effect of increasing both assets and liabilities in an amount equal to the assets of the VIEs. GM's exposure to loss related to these entities is approximately $3.2 billion.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 1. Significant Accounting Policies (concluded)

New Accounting Standards (concluded)

Labor Force GM, on a worldwide basis, has a concentration of its labor supply in employees working under union collective bargaining agreements, a significant number of which will expire in 2003.

NOTE 2. Asset Impairments

GM recorded pre-tax charges against income for asset impairments of $254 million ($158 million after-tax, or $0.28 per share of GM $1-2/3 par value common stock) in 2002, $140 million ($90 million after-tax, or $0.16 per share of GM $1-2/3 par value common stock) in 2001 and $917 million ($587 million after-tax, or $0.99 per share of GM $1-2/3 par value common stock) in 2000. These charges are components of the following line items in the income statement:

Years Ended December 31, ------2002 2001 2000 ------(dollars in millions) Total net sales and revenues $- $ - $315 Cost of sales and other expenses 254 140 602 ------Total $254 $140 $917 ======

In 2002, the pre-tax charges were comprised of $113 million ($70 million after-tax) for GM Europe (GME), and $141 million ($88 million after-tax) for GM North America (GMNA). The charges related to the write-down of equipment

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document associated with GME's restructuring initiative implemented during the first quarter of 2002, (see Note 24). The GMNA charges relate to equipment write-downs associated with changes to the region's production facilities and the write-down of special tools. The 2001 charges related to the write-down of equipment as a result of the announcement of the closing of the Ste. Therese, Quebec, assembly plant in 2002 and the write-down of certain equipment on operating leases that was determined to be impaired in GMNA. In 2000, the pre-tax charges were comprised of $572 million ($356 million after-tax) for GMNA, and $345 million ($231 million after-tax) for GME. The charges related to the write-down of special tools and equipment on operating leases as a result of the phase-out of the Oldsmobile division as the current model lineup product life cycles come to an end, or until the models are no longer economically viable, and the reduction in production capacity at GME, including the restructuring of Vauxhall Motors Limited's manufacturing operations in the U.K.

NOTE 3. Postemployment Benefit Costs

GM records liabilities for termination and other postemployment benefits to be paid pursuant to union or other contractual agreements in connection with closed plants in North America. GM reviews the adequacy and continuing need for these liabilities on an annual basis in conjunction with its year-end production and labor forecasts. Furthermore, GM reviews the reasonableness of these liabilities on a quarterly basis. In 2002, GM recognized postemployment benefit liabilities of $281 million ($174 million after-tax, or $0.31 per share of GM $1-2/3 par value common stock) primarily related to the transfer of commercial truck production from Janesville, Wisconsin, to Flint, Michigan. The Janesville charge relates to 772 employees and was included in cost of sales.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 3. Postemployment Benefit Costs (concluded)

The adjustments of $159 million ($99 million after-tax, or $0.18 per share of GM $1-2/3 par value common stock), recorded in cost of sales, are primarily the result of a reversal of postemployment benefit liabilities for employees at the Spring Hill, Tennessee plant. This reversal was recorded due to approximately 400 employees, who had been included in the planned production capacity reduction, were instead absorbed into the continuing workforce due to a change in the plan. In 2001, GM recognized postemployment benefit liabilities related to the announced closing of the Ste. Therese, Quebec assembly plant in 2002. The 2001 charge relates to 1,350 employees and increased cost of sales by $137 million ($89 million after-tax, or $0.16 per share of GM $1-2/3 par value common stock). The liability for postemployment benefits as of December 31, 2002 totals approximately $613 million relating to 11 plants and approximately 3,400 employees, with anticipated spending of approximately 70% over the next three years. The liability for postemployment benefits was $626 million relating to 12 plants and approximately 5,600 employees as of December 31, 2001. The liability for postemployment benefits was $665 million relating to 12 plants and approximately 5,800 employees as of December 31, 2000. The following tables summarize the activity from December 31, 2000 through December 31, 2002 for this liability (dollars in millions):

Balance at December 31, 2000 $665 Spending (214) Interest accretion 38 Additions 137 Adjustments ------Balance at December 31, 2001 $626 === Spending (182) Interest accretion 47 Additions 281 Adjustments (159) --- Balance at December 31, 2002 $613 ===

NOTE 4. Marketable Securities

Marketable securities held by GM are classified as available-for-sale, except for certain mortgage-related securities, which are classified as held-to-maturity or trading securities. Unrealized gains and losses, net of related income taxes, for available-for-sale and held-to-maturity securities are included as a separate component of stockholders' equity. Unrealized gains and losses for trading securities are included in income on a current basis. GM determines cost on the specific identification basis.

Investments in marketable securities were as follows (dollars in millions):

Book/ Fair Unrealized Unrealized Cost Value Gains Losses December 31, 2002 ------Type of security Bonds, notes, and other securities Corporate debt securities and other $1,915 $1,932 $22 $5 U.S. Government and Agencies 240 242 2 ------Total marketable securities $2,155 $2,174 $24 $5 ======

December 31, 2001 ------Type of security Bonds, notes, and other securities Corporate debt securities and other $777 $790 $13 $ ------Total marketable securities $777 $790 $13 $ - ======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 4. Marketable Securities (concluded)

Debt securities totaling $342 million mature within one year and $1.7 billion mature after one through five years, $27 million mature after five through ten years and $90 million mature after ten years. Proceeds from sales of marketable securities totaled $261 million in 2002, $373 million in 2001, and $1.3 billion in 2000. The gross gains related to sales of marketable securities were $3 million, $3 million, and $1 million in 2002, 2001, and 2000, respectively. The gross losses related to sales of marketable securities were zero, $7 million, and $12 million in 2002, 2001, and 2000, respectively.

Financing and Insurance Operations ------

Investments in securities were as follows (dollars in millions):

Book/ Fair UnrealizedUnrealized Cost Value Gains Losses ------December 31, 2002 ------Type of security Bonds, notes, and other securities United States government and agencies $2,836 $2,875 $39 $- States and municipalities 599 650 52 1 Foreign government securities 479 497 19 1 Mortgage-backed securities 2,479 2,708 292 63 Corporate debt securities and other 1,886 1,986 110 10 ------Total debt securities available-for-sale 8,279 8,716 512 75 Mortgage-backed securities held-to-maturity 305 305 Mortgage-backed securities held for trading purposes 5,029 4,378 - 651 ------Total debt securities 13,613 13,399 512 726 Equity securities 1,224 1,252 163 135 ------Total investment in securities $14,837 $14,651 $675 $861 ======

Total consolidated other marketable securities $16,992 $16,825 $699 $866

December 31, 2001 ------Type of security Bonds, notes, and other securities United States government and agencies $615 $626 $14 $3 States and municipalities 931 970 43 4 Foreign government securities 35 37 2 - Mortgage-backed securities 2,334 2,509 203 28 Corporate debt securities and other 1,704 1,721 43 26 ------Total debt securities available-for-sale 5,619 5,863 305 61 Mortgage-backed securities held to maturity 375 375 - - Mortgage-backed securities held for trading purposes 4,306 3,722 - 584 ------Total debt securities 10,300 9,960 305 645 Equity securities 1,215 1,319 246 142 ------Total investment in securities $11,515 $11,279 $551 $787 ======

Total consolidated other marketable securities $12,292 $12,069 $564 $787 ======

Debt securities available-for-sale totaling $514 million mature within one year, $1.7 billion mature after one through five years, $1.3 billion mature after five years through 10 years, and $5.2 billion mature after 10 years. Proceeds from sales of marketable securities totaled $12.8 billion in 2002, $5.1 billion in 2001, and $3.5 billion in 2000. The gross gains related to sales of marketable securities were $402 million, $228 million, and $316 million in 2002, 2001, and 2000, respectively. The gross losses related to sales of marketable securities were $121 million, $145 million and $148 million in 2002, 2001, and 2000, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 5. Finance Receivables and Securitizations

Finance Receivables - Net

Finance receivables - net included the following (dollars in millions): December 31, ------Consumer: 2002 2001 ------Retail automotive $77,392 $66,560 Residential mortgages 15,238 2,879 ------Total consumer 92,630 69,439 Commercial: Automotive: Wholesale 21,462 15,580 Leasing and lease financing 5,985 8,572 Term loans to dealers and others 5,584 5,545 Commercial and industrial 9,461 10,350 Commercial real estate: Commercial mortgage 621 473 Construction 1,963 1,419 ------Total commercial 45,076 41,939 ------Total finance receivables and loans 137,706 111,378 ------

Allowance for financing losses (3,059) (2,167) ------Total consolidated finance receivables - net(1) $134,647 $109,211 ======

(1) Net of unearned income of $6.5 billion and $5.8 billion at December 31, 2002 and 2001, respectively.

Finance receivables that originated outside the United States were $23.4 billion and $20.2 billion at December 31, 2002 and 2001, respectively. The aggregate amounts of total finance receivables maturing in each of the five

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document years following December 31, 2002, is as follows: 2003-$60.4 billion; 2004-$25.6 billion; 2005-$19.4 billion; 2006-$13.0 billion; 2007-$7.1 billion; and 2008 and thereafter-$18.7 billion. Actual maturities may differ from those scheduled due to prepayments.

Securitizations of Finance Receivables and Mortgage Loans

The Corporation securitizes automotive and mortgage financial assets as a funding source. The Corporation sells retail finance receivables, wholesale loans, residential mortgage loans, commercial mortgage loans, and commercial investment securities. The Corporation retains servicing responsibilities and subordinated interests for all of its securitizations of retail finance receivables and wholesale loans. Servicing responsibilities are retained for the majority of its residential and commercial mortgage loan securitizations; subordinate interests are retained for some of these securitizations. As of December 31, 2002, the weighted average servicing fees for GM's primary servicing activities were 190 basis points, 100 basis points, 33 basis points and 9 basis points of the outstanding principal balance for sold retail finance receivables, wholesale loans, residential mortgage loans and commercial mortgage loans, respectively. Additionally, the Corporation receives the rights to cash flows remaining after the investors in the securitization trusts have received their contractual payments. The Corporation maintains cash reserve accounts at predetermined amounts for certain securitization activities in the unlikely event that deficiencies occur in cash flows owed to the investors. The amounts available in such cash reserve accounts are recorded in other assets and totaled $280 million, $937 million, $365 million, and $24 million as of December 31, 2002, for retail finance receivable, wholesale loan, residential mortgage loan, and commercial mortgage loan securitizations, respectively and $255 million, $893 million, $378 million, and $7 million as of December 31, 2001, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 5. Finance Receivables and Securitizations (continued)

Securitizations of Finance Receivables and Mortgage Loans - (continued)

The following table summarizes pre-tax gains on securitizations and certain cash flows received from and paid to securitization trusts for sales of finance receivables and loans that were completed during 2002, 2001 and 2000:

2002 ------Retail Mortgage loans Year ended December 31, finance Wholesale ------(in millions) receivables loans Residential Commercial ------Pre-tax gains on securitizations $239 $ - $619 $30 Cash flow information: Proceeds from new securitizations 9,982 2,327 38,025 1,848 Servicing fees received 251 146 268 17 Other cash flows received on retained interests 1,120 235 1,044 86 Purchases of delinquent or foreclosed assets (299) - (131) - Pool buyback cash flows (289) (55) (714) - Servicing advances (117) - (2,470) (122) Repayments of servicing advances 117 - 2,352 116 Proceeds from collections reinvested in revolving securitizations 482 104,485 - -

2001 ------Retail Mortgage loans Year ended December 31, finance Wholesale ------(in millions) receivables loans Residential Commercial ------Pre-tax gains on securitizations 210 $ - 966 24 Cash flow information: Proceeds from new securitizations 7,331 7,055 35,137 2,934

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Servicing fees received 168 124 256 16 Other cash flows received on retained interests 1,160 400 844 60 Purchases of delinquent or forecloed assets (240) - (34) - Pool buyback cash flows (270) - (390) - Servicing advances (88) - (1,861) (95) Repayments of servicing advances 66 - 1,817 71 Proceeds from collections reinvested in revolving securitizations - 81,563 364 -

2000 ------Retail Mortgage loans Year ended December 31, finance Wholesale ------(in millions) receivables loans Residential Commercial ------Pre-tax gains on securitizations 14 $ - 682 33 Cash flow information: Proceeds from ne securitizations 4,559 4,199 24,959 2,310 Servicing fees received 105 85 212 13 Other cash flows received on retained interest 1,550 631 483 44 Purchases of delinquent or foreclosed assets (182) - (282) - Pool buyback cash flows (348) - - - Servicing advances (75) - (617) (82) Repayments of servicing advances 66 - 586 74 Proceeds from collections reinvested in revolving securitizations - 50,463 - -

Pre-tax gains recognized on commercial investment securities were $18 million, $17 million, and $7 million for the years ended December 31, 2002, 2001, and 2000, respectively. Cash proceeds from new securitizations of commercial investment securities were $439 million, $643 million, and $382 million for the years ended December 31, 2002, 2001, and 2000, respectively. In addition, cash flows received on retained interests of commercial investment securities aggregated $37 million, $16 million, and $2 million for the years ended December 31, 2002, 2001, and 2000, respectively. Key economic assumptions used in measuring the estimated fair value of retained interests of sales completed during 2002 and 2001, as of the dates of such sales, were as follows:

2002 ------Retail Mortgage loans Commercial Year ended December 31, finance ------investment (in millions) receivables(a) Residential(b) Commercial securities ------Key assumptions (rates per annum): Annual prepayment rate (c) 0.8-1.3% 6.9-54.7% 0.0-50.0% 0.0-90.0% Weighted average life (in years) 1.5-2.6 1.3-4.5 1.0-7.8 2.7-16.4 Expected credit losses (d) 0.0-24.8% 0.0-1.5% 0.0-0.9% Discount rate 9.5-12.0% 6.5-13.5% 2.8-37.4% 3.4-23.9% Variable returns to 1 month LIBOR + Interest rate yield curve + transferees contractual spread contractual spread

2001 ------Retail Mortgage loans Commercial Year ended December 31, finance ------investment (in millions) receivables(a) Residential(b) Commercial securities ------Key assumptions (rates per annum): Annual prepayment rate (c) 0.8-1.3% 9.8-38.0% 0.0-50.0% 0.0-25.0% Weighted average life (in years) 1.5-1.8 1.7-6.4 1.2-9.3 3.5-14.9 Expected credit losses (d) 0.0-22.9% 0.0-1.9% 0.0-0.8% Discount rate 9.5-12.0% 6.5-13.5% 6.9-54.7% 9.8-19.5% Variable returns to 1 month LIBOR + Interest rate yield curve + transferees contractual spread contractual spread

(a) The fair value of retained interests in wholesale securitizations approximates cost due to the short-term and floating rate nature of

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document wholesale loans. (b) Included within residential mortgage loans are home equity loans and lines, high loan-to-value loans and residential first and second mortgage loans. (c) Based on the weighted average maturity (WAM) for finance receivables and constant prepayment rate (CPR) for mortgage loans and commercial investment securities. (d) A reserve totaling $127 million and $92 million at December 31, 2002 and 2001, respectively, has been established for expected credit losses on sold retail finance receivables.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 5. Finance Receivables and Securitizations (continued)

Securitizations of Finance Receivables and Mortgage Loans - (continued)

The table below outlines the key economic assumptions and the sensitivity of the estimated fair value of retained interests at December 31, 2002 to immediate 10% and 20% adverse changes in those assumptions:

Retail finance Mortgage loans Commercial receivables ------Investment ($ in millions) (a) Residential Commercial Securities ------Carrying value/fair value of retained interests $1,850 (b) $1,661 $624 $336 ------Weighted average life (in years) 0.1-2.6 1.3-4.6 0.1-19.4 1.2-20.9 ------Annual prepayment rate 0.2-1.5% 6.6-80.7% 0.0-50.0% 0.0-90.0% WAM CPR CPR CPR Impact of 10% adverse change $ -- $(144) $ -- $(1) Impact of 20% adverse change -- (267) -- (2) ------Loss assumption (b) 0.0-24.8% 0.0-4.1% 0.0-36.8% Impact of 10% adverse chnnge $(13) $(205) $(4) $(5) Impact of 20% adverse change (26) (399) (8) (9) ------Discount rate 9.5-14.0% 6.5-13.5% 2.8-45.0% 3.6-28.5% Impact of 10% adverse change $(11) $(39) $(14) $(21) Impact of 20% adverse change (21) (78) (27) (41) ------Market rate (d) 1.3-3.6% (c) (c) (c) Impact of 10% adverse change $(13) $(33) $ -- $ -- Impact of 20% adverse change (26) (62) ------(a) The fair value of retained interests in wholesale securitizations approximates cost due to the short-term and floating rate nature of wholesale receivables. (b) The fair value of retained interests in retail securitizations is net of a reserve for expected credit losses totaling $127 million at December 31, 2002. (c) Forward benchmark interest rate yield curve plus contractual spread. (d) Represents the rate of return paid to the investors.

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which may magnify or counteract the sensitivities. Additionally, the Corporation hedges

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document interest rate and prepayment risks associated with certain of the retained interests; the effects of such hedge strategies have not been considered herein. Expected static pool net credit losses include actual incurred losses plus projected net credit losses divided by the original balance of the outstandings comprising the securitization pool. The table below displays the expected static pool net credit losses based on securitizations occurring in each year.

Loans securitized in: (a) ------Years Ended December 31, 2002 2001 2000 ------Retail automotive 0.4% 0.4% 1.0% Residential mortgage 0.0-24.8% 0.0-22.9% 0.0-21.7% Commercial mortgage 0.0-4.1% 0.0-2.3% 0.0-3.0% Commercial investment securities 0.0-36.8% 0.0-17.0% 0.0-0.8%

(a) Static pool losses not applicable to wholesale finance receivable securitizations due to their short-term nature.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 5. Finance Receivables and Securitizations (concluded)

Securitizations of Finance Receivables and Mortgage Loans - (concluded)

The following table presents components of securitized financial assets and other assets managed, along with quantitative information about delinquencies and net credit losses:

Total finance Amount 60 days receivables and or Net credit loans more past due losses ------December 31, (in millions) 2002 2001 2002 2001 2002 2001 ------Retail automotive $92,890 $78,071 $637 $358 $844 $575 Residential mortgage 102,525 95,076 4,012 3,388 864 305 ------Total consumer 195,415 173,147 4,649 3,746 1,708 880 Wholesale 38,877 31,807 88 64 (15) 6 Commercial mortgage 18,356 16,503 350 250 8 1 Other automotive and commercial 22,994 25,885 317 376 176 281 ------Total commercial 80,227 74,195 755 690 169 288 Total managed portfolio (a) 275,642 247,342 $5,404 $4,436 $1,877 $1,168 ------Securitized finance (123,337)(125,735) receivable and loans Loans held for sale (14,599) (10,229) ------Total finance receivables and loans $137,706 $111,378 ------(a) Managed portfolio represents finance receivables and loans on the balance sheet or that have been securitized, excluding securitized finance receivables and loans that the Corporation continues to service but with which it has no other continuing involvement.

NOTE 6. Inventories

Inventories included the following for ACO (dollars in millions): December 31, ------2002 2001 ------Productive material, work in process, and supplies $4,915 $5,069 Finished product, service parts, etc. 6,859 6,779 ------Total inventories at FIFO 11,774 11,848 Less LIFO allowance 1,807 1,814 ------Total inventories (less allowances) $9,967 $10,034 ======

Inventories are stated generally at cost, which is not in excess of market.

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The cost of approximately 84% of U.S. inventories is determined by the last-in, first-out (LIFO) method. Generally, the cost of all other inventories is determined by either the first-in, first-out (FIFO) or average cost methods.

NOTE 7. Equipment on Operating Leases

The Corporation has significant investments in the residual values of its leasing portfolios. The residual values represent the estimate of the values of the assets at the end of the lease contracts and are initially recorded based on appraisals and estimates. Realization of the residual values is dependent on the Corporation's future ability to market the vehicles under then prevailing market conditions. Management reviews residual values periodically to determine that recorded amounts are appropriate.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 7. Equipment on Operating Leases (concluded)

Automotive, Communications Services, and Other Operations

Equipment on operating leases included in equipment on operating leases and other assets was as follows (dollars in millions):

December 31, ------2002 2001 ------Equipment on operating leases $11,070 $9,864 Less accumulated depreciation (1,922) (1,767) ------Net book value 9,148 8,097 ======

Current $5,305 $4,524 Noncurrent (Note 11) 3,843 3,573 ------Net book value $9,148 $8,097 ======

Financing and Insurance Operations

Equipment on operating leases included in investment in leases and other receivables was as follows (dollars in millions):

December 31, ------2002 2001 ------Equipment on operating leases $33,427 $36,534 Less accumulated depreciation (7,764) (8,544) ------Net book value $25,663 $27,990 ======

Total consolidated net book value $34,811 $36,087 ======

The lease payments to be received related to equipment on operating leases maturing in each of the five years following December 31, 2002, are as follows: ACO - 2003-$568 million; 2004-$526 million; 2005 - $502 million; 2006 - $503 million; 2007-$409 million, and 2008 and beyond - $1.9 billion; FIO - 2003-$5.6 billion; 2004-$4.0 billion; 2005 - $2.1 billion; 2006 - $511 million; and 2007-$26 million. There are no leases maturing after 2007.

NOTE 8. Income Taxes

Income before income taxes and minority interests included the following (dollars in millions):

Years Ended December 31, ------2002 2001 2000 ------U.S. income (loss) $70 $(1,190) $3,019

The provision for income taxes was estimated as follows (dollars in millions): Years Ended December 31, ------2002 2001 2000 ------Income taxes estimated to be payable currently U.S. federal $48 $34 $45 Foreign 1,472 1,347 971 U.S. state and local 310 (9) 72 ------Total payable currently 1,830 1,372 1,088 ------Deferred income tax expense (credit) - net U.S. federal (98) (246) 742 Foreign (958) (401) 281 U.S. state and local (241) 43 282 ------Total deferred (1,297) (604) 1,305 ------

Total income taxes $533 $768 $2,393 ======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 8. Income Taxes (continued)

Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ materially from the amount accrued. Provisions are made for estimated U.S. and foreign income taxes, less available tax credits and deductions, which may be incurred on the remittance of the Corporation's share of subsidiaries' undistributed earnings not deemed to be permanently reinvested. Taxes have not been provided on foreign subsidiaries' earnings, which are deemed permanently reinvested, of $11.9 billion at December 31, 2002, and $13.1 billion at December 31, 2001. Quantification of the deferred tax liability, if any, associated with permanently reinvested earnings is not practicable. A reconciliation of the provision for income taxes compared with the amounts at the U.S. federal statutory rate was as follows (dollars in millions):

Years Ended December 31, ------2002 2001 2000 ------Tax at U.S. federal statutory income tax rate $728 $485 $2,507 Foreign rates other than 35% 27 134 78 Taxes on unremitted earnings of subsidiaries (13) 29 - Tax credits (40) (50) (45) Raytheon settlement (1) - 180 - ESOP dividend deduction (2) (85) - - Other adjustments (84) (10) (147) ------

Total income tax $533 $768 $2,393 ======

(1) Non-tax deductible settlement with the Raytheon Company on a purchase price adjustment related to Raytheon's 1997 merger with Hughes Defense. (2) Deduction for dividends paid on GM $1-2/3 par value held under the employee stock ownership portion of the GM Savings Plans, pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001.

Deferred income tax assets and liabilities for 2002 and 2001 reflect the impact of temporary differences between amounts of assets, liabilities, and equity for financial reporting purposes and the bases of such assets, liabilities, and equity as measured by tax laws, as well as tax loss and tax credit carryforwards.

Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities included the following (dollars in millions):

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document December 31, ------2002 2001 ------Deferred Tax Deferred Tax ------Assets Liabilities Assets Liabilities ------Postretirement benefits other than pensions $14,945 $ - $15,057 $ - Pension and other employee benefit plans 8,009 461 753 78 Warranties, dealer and customer allowances,claims, and discounts 6,047 - 4,376 - Depreciation and amortization 380 4,110 412 3,671 Tax carryforwards 4,630 - 3,993 - Lease transactions - 4,732 - 4,426 Miscellaneous foreign 6,175 2,007 4,465 1,463 Other 9,483 4,365 8,048 4,948 ------Subtotal 49,669 15,675 37,104 14,586 Valuation allowances (1,309) - (969) ------Total deferred taxes $48,360 $15,675 $36,135 $14,586

Net deferred tax asset $32,685 $21,549 ======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 8. Income Taxes (concluded)

Deferred tax detail above is included in the consolidated balance sheet and supplemental information as follows:

2002 2001 ------

Current deferred tax assets $8,890 $5,945 Current deferred tax liabilities (5,806) (4,877) Non current deferred tax assets 32,759 22,294 Non current deferred tax liabilities (3,158) (1,813) ------Total $32,685 $21,549 ======

Of the tax carryforwards, approximately 16% relates to the alternative minimum tax credit (which can be carried forward indefinitely) and approximately 11% relates to the U.S. state net operating loss carryforwards, which will expire in the years 2003-2022 if not used. However, a substantial portion of the U.S. state net operating loss carryforwards will not expire until after the year 2006. The other tax credit carryforwards, consisting primarily of research and experimentation credits, will expire in the years 2019-2022 if not used. The valuation allowance principally relates to U.S. state and certain foreign operating loss carryforwards.

NOTE 9. Property - Net

Property - net was as follows (dollars in millions):

Estimated Useful Lives (Years) December 31, ------2002 2001 ------Automotive, Communications Services, and Other Operations ------Land - $963 $899 Buildings and land improvements 2-40 14,259 13,294 Machinery and equipment 3-30 44,468 41,091 Construction in progress - 3,134 4,464 ------Real estate, plants, and equipment 62,824 59,748 Less accumulated depreciation (35,907) (33,404) ------Real estate, plants, and equipment - net 26,917 26,344 Special tools - net 9,235 8,564

Financing and Insurance Operations ------Equipment and other 2-10 $2,329 $2,150 Less accumulated depreciation (508) (618) ------Total property - net $1,821 $1,532 ------

Total consolidated property - net $37,973 $36,440 ======

Depreciation and amortization expense was as follows (dollars in millions):

Years Ended December 31, ------Automotive, Communications Services, and Other 2002 2001 2000 Operations ------Depreciation (Note 7) $4,701 $4,383 $4,368 Amortization of special tools 2,647 2,360 2,753 Amortization of intangible assets (Note 10) 49 308 308 ------Total $7,397 $7,051 $7,429 ======

Financing and Insurance Operations ------Depreciation (Note 7) $5,522 $5,684 $5,842 Amortization of intangible assets (Note 10) 19 173 140 ------Total $5,541 $5,857 $5,982 ======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 10. Goodwill and Acquired Intangible Assets

The components of the Corporation's acquired intangible assets as of December 31, 2002, were as follows (dollars in millions): Gross Accumulated Net Carrying Amortization Carrying Amount Amount ------Automotive, Communications Services, and Other Operations ------

Amortizing intangible assets: Patents and intellectual property rights $305 $1 $304 Dealer network and subscriber base 356 165 191 ------Total $661 $166 495 ======

Non-amortizing intangible assets: License fees - orbital slots 432 ---

Total acquired intangible assets 927 ---

Goodwill 6,992 Prepaid pension asset (Note 14) 6,692 ------Total intangible assets $14,611 ======

------Financing and Insurance Operations ------

Amortizing intangible assets: Customer lists and contracts $67 $24 $43 Trademarks and other 39 12 27 Covenants not to compete 18 18 ------

Non-amortizing intangible assets:

Goodwill 3,273 ----- Total intangible assets 3,343 ===== Total consolidated intangible assets $17,954 ======

Aggregate amortization expense on existing acquired intangible assets was $54 million for the year ended December 31, 2002. Estimated amortization expense in each of the next five years is as follows: 2003 - $121 million; 2004 - $78 million; 2005 - $56 million; 2006 - $56 million; and 2007 - $56 million. The changes in the carrying amounts of goodwill for the year ended December 31, 2002, were as follows (dollars in millions):

(1) The amount recorded for Hughes excludes GM's purchase accounting adjustments related to GM's acquisition of Hughes Aircraft Company. The carrying value of $57 million in goodwill associated with the purchase is reported in the Other segment. In the fourth quarter of 2002, Hughes, in its stand alone financial statements, wrote off $739 million for goodwill impairments at DIRECTV Latin America and DIRECTV Broadband; however, in accordance with SFAS No. 142, GM evaluated the carrying value of goodwill associated with its Hughes' Direct-to-Home Broadcast reporting unit in the aggregate and determined that the goodwill was not impaired.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 11. Other Assets

Automotive, Communications Services, and Other Operations

Other assets included the following (dollars in millions): December 31, ------2002 2001 ------

Equipment on operating leases - noncurrent (Note 7) $3,843 $3,573 Satellites 1,080 1,243 Investments in equity securities 582 3,408 U.S. prepaid pension benefit cost (Note 14) 1 7,006 Other 1,817 2,044 ------Total other assets $7,323 $17,274 ======

Investments in equity securities at December 31, 2002 and 2001, include GM's 20% investment in the common stock of FAH, the entity which is the sole shareholder of Fiat Auto S.p.A. (Fiat Auto), acquired for $2.4 billion in 2000. Subsequent to that acquisition, the European market for new vehicles experienced

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document a continued decrease in volumes, and manufacturers have experienced increased pricing and general competitive pressures. Those market conditions and other factors led to deterioration in the performance of Fiat Auto. Accordingly, GM commenced a review of the appropriate carrying value of GM's investment in FAH. The review was completed during the third quarter of 2002 and resulted in a non-cash charge of $2.2 billion ($1.4 billion after-tax), recorded in cost of sales and other expenses in the ACO Other segment. This write-down brings the carrying value of GM's investment in FAH from $2.4 billion to $220 million. The carrying value is based on GM's 20% interest in the estimated market value of FAH equity, which comprises FAH's ownership of Fiat Auto, including 50% ownership interests in the purchasing and powertrain joint ventures between GM and Fiat Auto. In connection with the acquisition of 20% of the common stock of FAH, GM did not acquire the ability or right to appoint any directors to the board of Fiat Auto, its controlling stockholder, Fiat S.p.A.(Fiat), or any of the companies in the Fiat group. In fact, no officer, director, or employee of GM or any controlled affiliate of GM serves as a director, officer, or employee of Fiat Auto, Fiat, or any of the companies in the Fiat group. Accordingly, because GM is not able to exercise significant influence over the operating and financial decisions of Fiat Auto, this investment is accounted for using the cost method. (See Note 15 for further discussion of GM's investment alliance with Fiat). The balance in Investments in equity securities at December 31, 2002 and 2001, also includes the fair value of investments in equity securities classified as available-for-sale for all periods presented. It is GM's intent to hold these securities for longer than one year. Balances include historical costs of $309 million and $704 million with unrealized gains of $76 million and $311 million and unrealized losses of $24 million and $38 million at December 31, 2002 and 2001, respectively.

Financing and Insurance Operations

Other assets included the following (dollars in millions): December 31, ------2002 2001 ------Mortgage servicing rights $2,683 $4,840 Real estate mortgages - held for sale 14,563 10,187 Other mortgage - related assets 2,555 1,791 Premiums and other insurance receivables 1,742 1,501 Deferred policy acquisition costs 584 165 Rental car buybacks 377 235 Intangible assets (Note 10) 3,343 3,206 Property (Note 9) 1,821 1,532 Cash deposits held for securitization trusts 1,481 1,281 Restricted cash collections for securitization trusts 1,244 447 Other 3,656 3,022 ------Total other assets $34,049 $28,207 ======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 11. Other Assets (concluded)

Reclassification for Consolidated Balance Sheet Presentation

December 31, ------2002 2001 ------ACO - other assets, as detailed above $7,323 $17,274 FIO - other assets, as detailed above 34,049 28,207 ------Subtotal 41,372 45,481 ------Equipment on operating leases - noncurrent (Note 7) (3,843) (3,573) Prepaid assets and other 2,383 1,932 Intangible assets (Note 10) (3,343) (3,206) Property (Note 9) (1,821) (1,532) ------Total consolidated other assets $34,748 $39,102 ======

NOTE 12. Accrued Expenses, Other Liabilities, and Deferred Income Taxes

Automotive, Communications Services, and Other Operations

Accrued expenses, other liabilities, and deferred income taxes included the following (dollars in millions): December 31, ------2002 2001 ------Dealer and customer allowances, claims, and discounts $10,388 $8,080 Deferred revenue, principally sales of vehicles to rental companies 10,496 8,331 Policy, product warranty, and recall campaigns 8,856 8,177 Payrolls and employee benefits (excludes postemployment) 4,331 3,419 Unpaid losses under self-insurance programs 1,996 2,016 Taxes 1,985 1,052 Interest 725 904 Postemployment benefits (including extended disability benefits) 1,251 2,218 Other 9,425 8,090 ------Total accrued expenses and other liabilities $49,453 $42,287

Pensions 53 49 Postretirement benefits 3,146 3,128 Deferred income taxes 5,113 2,420 ------

Total accrued expenses, other liabilities, and deferred income taxes $57,765 $47,884 ======

Current $40,976 $34,090 Non-current 16,789 13,794 ------Total accrued expenses, other liabilities, and deferred income taxes $57,765 $47,884 ======

Year Ended Policy, product warranty and recall campaigns liability December 31, 2002 ------Beginning balance $8,177 Payments (4,106) Increase in liability (warranties issued during period) 4,335 Adjustments to liability (pre-existing warranties) 450 ------Ending balance $8,856 =====

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 12. Accrued Expenses, Other Liabilities, and Deferred Income Taxes (concluded)

Financing and Insurance Operations ------

Other liabilities and deferred income taxes included the following (dollars in millions): December 31, ------2002 2001 ------Unpaid insurance losses, loss adjustment expenses, and unearned insurance premiums $5,637 $4,375 Income taxes 1,659 483 Interest 2,741 2,428 Interest rate derivatives 843 2,942

Payable to securitization trusts 1,082 485 Other 2,414 526 ------Total other liabilities $14,376 $11,239

Postretirement benefits 766 750 Deferred income taxes 3,851 4,270

Total consolidated accrued expenses and other liabilities $63,829 $53,526 ======Total deferred income tax liability (Note 8) $8,964 $6,690 ======

NOTE 13. Long-Term Debt and Loans Payable

Automotive, Communications Services, and Other Operations ------

Long-term debt and loans payable were as follows (dollars in millions):

Weighted-Average Interest Rate December 31, ------2002 2001 2002 2001 ------Long-term debt and loans payable Payable within one year Current portion of long-term debt (1) 2.7% 2.5% $624 $64 Commercial paper (1) - 2.7% - 129 All other 5.7% 3.8% 892 2,209 ------Total loans payable 1,516 2,402 Payable beyond one year (1) 6.0% 6.6% 16,625 10,720 Unamortized discount (22) (27) Mark to market adjustment (2) 48 33 ------Total long-term debt and loans payable $18,167 $13,128 ======

(1) The weighted-average interest rates include the impact of interest rate swap agreements. (2) Effective January 1, 2001, the Corporation began recording its hedged debt at fair market value on the balance sheet due to the implementation of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."

Long-term debt payable beyond one year at December 31, 2002 included maturities as follows: 2004 - $140 million; 2005 - $1.6 billion; 2006 - $462 million; 2007 - $130 million; 2008 and after - $14.3 billion. Amounts payable beyond one year after consideration of foreign currency swaps at December 31, 2002 included $1.7 billion in currencies other than the U.S. dollar, primarily the Canadian dollar ($815 million), the Japanese yen ($676 million), and the Brazilian real ($108 million). At December 31, 2002 and 2001, long-term debt and loans payable for ACO included $15.6 billion and $10.9 billion, respectively, of obligations with fixed interest rates and $2.6 billion and $2.2 billion, respectively, of obligations with variable interest rates (predominantly LIBOR), after considering the impact of interest rate swap agreements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 13. Long-Term Debt and Loans Payable (continued)

To achieve its desired balance between fixed and variable rate debt, GM has entered into interest rate swap and cap agreements. The notional amounts of such agreements as of December 31, 2002 for ACO were approximately $1.7 billion relating to swap agreements ($988 million pay fixed and $745 million pay variable). No such cap agreements existed at December 31, 2002. The notional amounts of such agreements as of December 31, 2001 for ACO were approximately $1.7 billion relating to swap agreements ($239 million pay fixed and $1.5 billion pay variable) and $90 million relating to cap agreements. GM's ACO business maintains substantial lines of credit with various banks that totaled $11.5 billion at December 31, 2002, of which $2.6 billion represented short-term credit facilities and $8.9 billion represented long-term credit facilities. At December 31, 2001, bank lines of credit totaled $11.0 billion, of which $2.3 billion represented short-term credit facilities and $8.7 billion represented long-term credit facilities. The unused short-term and long-term portions of the credit lines totaled $1.8 billion and $6.6 billion at December 31, 2002, compared with $1.8 billion and $6.7 billion at December 31, 2001. Certain bank lines of credit contain covenants with which the Corporation and applicable subsidiaries were in compliance throughout the year ended December 31, 2002.

Debt was as follows (dollars in millions):

Weighted-Average Interest Rate December 31, ------2002 2001 2002 2001 ------Debt Payable within one year Current portion of long-term debt (1) 3.5% 4.3% $27,344 $22,014 Commercial paper (1) 2.7% 2.7% 13,425 16,620 All other 3.0% 3.1% 25,383 20,640 ------Total loans payable 66,152 59,274 Payable beyond one year (1) 5.2% 5.5% 115,218 93,717 Unamortized discount (717) (693) Mark to market adjustment (2) 3,120 ------888 Total debt $183,773 $153,186 ======

Total consolidated notes and loans payable $201,940 $166,314 ======

(1)The weighted-average interest rates include the impact of interest rate swap agreements. (2)Effective January 1, 2001, the Corporation began recording its hedged debt at fair market value on the balance sheet due to the implementation of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."

Debt payable beyond one year at December 31, 2002 included maturities as follows: 2004 - $26.3 billion; 2005 - $16.5 billion; 2006 - $17.9 billion; 2007 - $8.4 billion; 2008 and after - $46.1 billion. Amounts payable beyond one year after consideration of foreign currency swaps at December 31, 2002 included $12.9 billion in currencies other than the U.S. dollar, primarily the Canadian dollar ($6.0 billion), the euro ($3.3 billion), the U.K. pound sterling ($1.7 billion), and the Australian dollar ($926 million). At December 31, 2002 and 2001, debt for FIO included $68.9 billion and $65.7 billion, respectively, of obligations with fixed interest rates and $112.4 billion and $87.3 billion, respectively, of obligations with variable interest rates (predominantly LIBOR), after considering the impact of interest rate swap agreements. To achieve its desired balance between fixed and variable rate debt, GM has entered into interest rate swap, cap, and floor agreements. The notional amounts of such agreements as of December 31, 2002 for FIO were approximately $56.4 billion relating to swap agreements ($53.7 billion pay variable and $2.7 billion pay fixed). No such cap and floor agreements existed at December 31, 2002. The notional amounts of such agreements as of December 31, 2001 for FIO were approximately $46.2 billion relating to swap agreements ($41.3 billion pay variable and $4.9 billion pay fixed), $23 million relating to cap agreements, and $73 million relating to floor agreements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 13. Long-Term Debt and Loans Payable (concluded)

GM's FIO business maintains substantial lines of credit with various banks that totaled $53.0 billion at December 31, 2002, of which $17.8 billion represented short-term credit facilities and $35.2 billion represented long-term credit facilities. At December 31, 2001, bank lines of credit totaled $49.8 billion, of which $19.0 billion represented short-term credit facilities and $30.8 billion represented long-term credit facilities. The unused short-term and long-term portions of the credit lines totaled $7.4 billion and $34.7 billion at December 31, 2002 compared with $8.2 billion and $30.7 billion at December 31, 2001. Certain bank lines of credit contain covenants with which the Corporation and applicable subsidiaries were in compliance throughout the year ended December 31, 2002.

NOTE 14. Pensions and Other Postretirement Benefits

GM has a number of defined benefit pension plans covering substantially all

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document employees. Plans covering U.S. and Canadian represented employees generally provide benefits of negotiated, stated amounts for each year of service as well as significant supplemental benefits for employees who retire with 30 years of service before normal retirement age. The benefits provided by the plans covering U.S. and Canadian salaried employees and employees in certain foreign locations are generally based on years of service and compensation history. GM also has certain nonqualified pension plans covering executives that are based on targeted wage replacement percentages and are unfunded. Pension plan assets are primarily invested in equity and fixed income securities, U.S. Government obligations, commingled pension trust funds, insurance contracts, GM $1-2/3 par value common stock (valued at December 31, 2002 at approximately $30 million), and GM Class H common stock (valued at December 31, 2002 at $1.6 billion). GM's funding policy with respect to its qualified pension plans is to contribute annually not less than the minimum required by applicable law and regulations. GM made pension contributions to the U.S. hourly and salary plans of $4.8 billion in 2002, no pension contributions in 2001, and contributions of $5.0 billion in 2000 (consisting entirely of GM Class H common stock contributed during the second quarter of 2000). In addition, GM made pension contributions to all other U.S. plans of $106 million, $99 million, and $69 million in 2002, 2001, and 2000, respectively. Additionally, GM maintains hourly and salary benefit plans that provide postretirement medical, dental, vision, and life insurance to most U.S. retirees and eligible dependents. The cost of such benefits is recognized in the consolidated financial statements during the period employees provide service to GM. Postretirement plan assets in GM's hourly VEBA trust are invested primarily in equity securities, fixed income securities, and GM Class H common stock (valued at December 31, 2002 at approximately $200 million).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 14. Pensions and Other Postretirement Benefits (continued)

Certain of the Corporation's non-U.S. subsidiaries have postretirement plans, although most participants are covered by government-sponsored or administered programs. The cost of such programs generally is not significant to GM.

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $92 billion, $89 billion, and $66 billion, respectively, as of December 31, 2002, and $59 billion, $59 billion, and $48 billion, respectively, as of December 31, 2001,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 14. Pensions and Other Postretirement Benefits (continued)

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document For measurement purposes, an approximate 7.2% annual rate of increase in the per capita cost of covered health-care benefits was assumed for 2003. The rate was assumed to decrease on a linear basis to 5.0% through 2009 and remain at that level thereafter. A one percentage point increase in the assumed health-care trend rate would have increased the Accumulated Postretirement Benefit Obligation (APBO) by $6.3 billion at December 31, 2002 and increased the aggregate service and interest cost components of non-pension postretirement benefit expense for 2002 by $523 million. A one percentage point decrease would have decreased the APBO by $5.3 billion and decreased the aggregate service and interest cost components of non-pension postretirement benefit expense for 2002, by $416 million. GM sets the discount rate assumption annually for each of its retirement-related benefit plans at their respective measurement dates to reflect the yield of high quality fixed-income debt instruments. GM's expected return on assets assumption is derived from a detailed periodic study conducted by GM's actuaries and GM's asset management group. The study includes a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the anticipated requirements of the respective plans to determine the average rate of earnings expected on the funds invested to provide for the pension plan benefits. While the study gives appropriate consideration to recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate. Based on its recent study, GM is revising its expected long-term return assumption for its U.S. plans effective January 1, 2003 to 9%, a reduction from its previous level of 10%. The following table illustrates the sensitivity to a change in certain assumptions for U.S. pension plans (as of December 31, 2002 the Projected Benefit Obligation (PBO) for U.S. pension plans was $80.1 billion and the minimum pension liability charged to equity with respect to U.S. pension plans was $21.2 billion net of tax):

Impact on 2003 Impact on Impact on Pre-Tax Pension December 31, December 31, Change in Assumption Expense 2002 2002 Equity PBO (Net of tax) ------

25 basis point decrease in discount +$120 million +$1.9 billion -$1.1 billion rate

25 basis point increase in discount -$120 million -$1.8 billion +$1.1 billion rate

25 basis point decrease in expected +$170 million - - return on assets

25 basis point increase in expected -$170 million - - return on assets

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 14. Pensions and Other Postretirement Benefits (concluded)

These changes in assumptions would have no impact on GM's funding requirements.

The following table illustrates the sensitivity to a change in the discount rate assumption related to GM's U.S. OPEB plans (the U.S. APBO was a significant portion of GM's worldwide APBO of $57.2 billion as of December 31, 2002):

Impact on 2003 Impact on Pre-Tax OPEB December 31, 2002 Change in Assumption Expense APBO ------

25 basis point decrease in discount +$150 million +$1.6 billion rate

25 basis point increase in discount -$140 million -$1.5 billion rate

Commitments GM had the following minimum commitments under noncancelable operating leases having remaining terms in excess of one year, primarily for property: 2003-$822 million; 2004-$685 million; 2005-$533 million; 2006-$526 million; 2007-$405 million; and $1.4 billion in 2008 and thereafter. Certain of these minimum commitments fund the obligations of non-consolidated SPEs. Certain of the leases contain escalation clauses and renewal or purchase options. Rental expenses under operating leases were $985 million, $849 million, and $861 million in 2002, 2001, and 2000, respectively. GM sponsors a credit card program, entitled the GM Card program, that offers rebates that can be applied primarily against the purchase or lease of GM vehicles. The amount of rebates available to qualified cardholders (net of deferred program income) was $4.0 billion, $3.9 billion, and $3.8 billion at December 31, 2002, 2001, and 2000, respectively. At December 31, 2002, GM had unconditionally guaranteed approximately $45 million of the debt of unaffiliated suppliers. The debt is fully collateralized with supplier company assets and accordingly no liability has been recorded. In addition, GM has entered into agreements with certain suppliers that may require GM to make payments based on changes in the suppliers' costs. GM's maximum exposure under such agreements is approximately $38 million. No liabilities are recorded with respect to such agreements. GM has guaranteed a minimum value of $1.6 billion upon expiration of various leases or approximately 87% of appraised fair value at such time. These leases have terms of up to six years and many contain renewal options. At expiration, the fair values of all such properties are expected to fully mitigate GM's obligations under these guarantees. No liabilities are recorded with respect to these guarantees. The Corporation has guaranteed certain amounts related to the securitization of mortgage loans. In addition, GMAC issues financial standby letters of credit as part of their financing and mortgage operations. At December 31, 2002 approximately $50 million was recorded with respect to these guarantees, the maximum exposure under which is approximately $2.7 billion. In addition to guarantees, GM has entered into agreements indemnifying certain parties with respect to environmental conditions pertaining to ongoing or sold GM properties. Due to the nature of the indemnifications, GM's maximum exposure under these agreements cannot be estimated. No amounts have been recorded for such indemnities as the Corporation's obligations under them are not probable and estimable. In addition to the above, in the normal course of business GM periodically enters into agreements that incorporate indemnification provisions. While the maximum amount to which GM may be exposed under such agreements cannot be estimated, it is the opinion of management that these guarantees and indemnifications are not expected to have a material adverse effect on the Corporation's consolidated financial position or results of operations.

Contingent Matters Litigation is subject to uncertainties and the outcome of individual litigated matters is not predictable with assurance. Various legal actions, governmental investigations, claims, and proceedings are pending against the Corporation, including those arising out of alleged product defects; employment-related matters; governmental regulations relating to safety, emissions, and fuel economy; product warranties; financial services; dealer, supplier, and other contractual relationships; and environmental matters.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 15. Commitments and Contingent Matters (continued)

Contingent Matters (concluded) 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 December 31, 2002, approximately $670 million of proposed adjustments remain unresolved. Hughes is contesting the matter in the arbitration process, which will result in a binding decision unless the matter is otherwise settled. Although Hughes believes it has adequately provided for the disposition of this matter, the impact of its disposition cannot be

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document determined at this time. It is possible that the final resolution of this matter could result in Hughes making a cash payment to Boeing that would be material to Hughes' consolidated results of operations and financial position. GM has established reserves for matters in which losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or other treble damage claims, or demands for recall campaigns, environmental remediation programs, or sanctions, that if granted, could require the Corporation to pay damages or make other expenditures in amounts that could not be estimated at December 31, 2002. After discussion with counsel, it is the opinion of management that such liability is not expected to have a material adverse effect on the Corporation's consolidated financial condition or results of operations.

Investment in Fiat Auto Holdings On March 13, 2000, GM entered into a contract (the "Master Agreement") with Fiat under which GM acquired 20% of FAH. A copy of the Master Agreement has been made public in filings with the United States Securities and Exchange Commission (SEC). Fiat continues to hold the other 80% of FAH through various subsidiaries. FAH is the sole stockholder of Fiat Auto, which owns and operates the global automotive group of Fiat (other than the Ferrari, Maserati and Iveco businesses, which are held separately by Fiat). Additionally, GM and Fiat Auto have formed joint ventures relating to powertrain and purchasing and initiated other collaborative activities. The Master Agreement provides that, from January 24, 2004 to July 24, 2009, Fiat has the right to exercise a put option (the "Put") to require GM to purchase Fiat's FAH shares at fair market value. Whether and when Fiat may seek to exercise the Put is unknown. It is uncertain as to whether the Put would ever be exercised due to the possibilities that it could be affected by subsequent agreements of the companies, it could become non-exercisable under other provisions of the Master Agreement, it could be rendered unenforceable by reason of actions Fiat may have taken, or Fiat may choose to not exercise the Put. If and when the Put is implemented, the fair market value of FAH shares would be determined by investment banks under procedures set forth in the Master Agreement. Until any such valuation is completed, the amount, if any, that GM might have to pay for Fiat's FAH shares is not quantifiable. If GM were to acquire Fiat's FAH shares and thus become the sole owner of Fiat Auto, GM would decide what, if any, additional capitalization would then be appropriate for Fiat Auto. Specifically, if Fiat Auto were to need additional funding, GM would have to decide whether or not to provide such funding and under what conditions to provide any funding. Unless FAH or Fiat Auto were subject to liquidation or insolvency, FAH's consolidated financial statements would be required for financial reporting purposes to be consolidated with those of GM. Any indebtedness, losses and capital needs of FAH and Fiat Auto after their acquisition by GM are not presently determinable, but they could have a material adverse effect on GM. While GM and Fiat have discussed potential alternatives to the Master Agreement, no changes to it have been agreed upon.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 16. Preferred Securities of Subsidiary Trust

On April 2, 2001, GM redeemed the Series G Trust's sole assets causing the Series G Trust to redeem the approximately 5 million outstanding Series G 9.87% Trust Originated Preferred Securitiessm (TOPrSsm). The Series G TOPrS were redeemed at a price of $25 per share plus accrued and unpaid dividends of $0.42 per share. Also on April 2, 2001, GM redeemed the approximately 5 million outstanding Series G depositary shares, each of which represents a one-fourth interest in a GM Series G 9.12% Preference Share, at a price of $25 per share plus accrued and unpaid dividends of $0.59 per share. The securities together had a total face value of approximately $252 million.

NOTE 17. Stockholders' Equity

The following table presents changes in capital stock for the period from January 1, 2000 to December 31, 2002 (dollars in millions): Common Stocks ------$1-2/3 Total par Capital value Class H Stock ------Balance at January 1, 2000 $1,033 $14 $1,047 Shares reacquired (184) - (184) Shares issued 65 74 139

Balance at December 31, 2000 914 88 1,002 Shares reacquired - - - Shares issued 18 - 18 ------

Balance at December 31, 2001 932 88 1,020 Shares reacquired - - - Shares issued 4 8 12 ------

Balance at December 31, 2002 $936 $96 $1,032 ======

Preference Stock On June 24, 2002, approximately 2.7 million shares of GM Series H 6.25% Automatically Convertible Preference Stock held by AOL Time Warner (AOL) mandatorily converted into approximately 80 million shares of GM Class H common stock as provided for pursuant to the terms of the preference stock. GM originally issued the shares of preference stock to AOL in 1999 in connection with AOL's $1.5 billion investment in, and its strategic alliance with, Hughes. The preference stock accrued quarterly dividends at a rate of 6.25% per year. GM immediately invested the $1.5 billion received from AOL into shares of Hughes Series A Preferred Stock designed to correspond to the financial terms of the preference stock. Dividends on the Hughes Series A Preferred Stock were payable to GM quarterly at an annual rate of 6.25%. The underwriting discount on the Hughes Series A Preferred Stock was amortized over three years. The original terms of Hughes Series A Preferred Stock required Hughes to redeem the Series A preferred stock through a cash payment to GM immediately upon the conversion of the preference stock held by AOL into shares of GM Class H common stock. Simultaneous with GM's receipt of the cash redemption proceeds, GM was committed to make a capital contribution to Hughes of the same amount. In connection with this capital contribution, the denominator of the fraction used in the computation of the Available Separate Consolidated Net Income (ASCNI) of Hughes was to be increased by the corresponding number of shares of GM Class H common stock issued. Accordingly, upon conversion of the GM Series H 6.25% Automatically Convertible Preference Stock into GM Class H common stock, both the numerator and denominator used in the computation of ASCNI increased by the amount of the GM Class H common stock issued. On June 24, 2002, prior to the conversion of the preference stock on such date, and prior to the time that the Hughes Series A Preferred Stock would have been redeemed on such date, GM, as approved by the GM and Hughes Boards of Directors, contributed the Hughes Series A Preferred Stock to Hughes. In connection with the contribution of the Hughes Series A Preferred Stock to Hughes, Hughes issued to GM shares of Hughes Series B Convertible Preferred Stock. The Hughes Series B Convertible Preferred Stock does not accrue dividends and is not redeemable. The Hughes Series B Convertible Preferred Stock does not affect the net income of Hughes or the allocation of the earnings per share and amounts available for the payment of dividends on the GM Class H common stock.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 17. Stockholders' Equity (continued)

This contribution by GM had the same effect with respect to the numerator and the denominator of the fraction used in the computation of ASCNI of Hughes that a cash redemption by Hughes of its Series A preferred stock and a cash contribution by GM of the redemption amount would have had. The Hughes Series B Convertible Preferred Stock may be converted to Hughes Class B common stock at the option of GM any time after June 24, 2003.

Common Stocks During the second quarter of 2000, GM completed an exchange offer in which GM repurchased 86 million shares of GM $1-2/3 par value common stock and issued 92 million shares of GM Class H common stock. In addition, on June 12, 2000, GM contributed approximately 54 million shares and approximately 7 million shares of GM Class H common stock to the U.S. Hourly-Rate Employees Pension Plan and VEBA trust, respectively. The total value of the contributions was approximately $5.6 billion. As a result of the exchange offer and employee benefit plan contributions, the economic interest in Hughes attributable to GM $1-2/3 par value common stock decreased from approximately 62% to approximately 30% and the economic interest in Hughes attributable to GM Class H common stock increased from approximately 38% to 70% on a fully diluted basis. On June 6, 2000, the GM Board declared a three-for-one stock split of the GM Class H common stock. The stock split was in the form of a 200% stock dividend, paid on June 30, 2000 to GM Class H common stockholders of record on June 13, 2000. All GM Class H common stock per share amounts and numbers of shares for all periods presented have been adjusted to reflect the stock split. Furthermore, as a result of this stock split, the voting and liquidation rights

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document of the GM Class H common stock were reduced from 0.6 votes per share and 0.6 liquidation units per share, to 0.2 votes per share and 0.2 liquidation units per share in order to avoid dilution in the aggregate voting or liquidation rights of any class. The voting and liquidation rights of the GM $1-2/3 par value common stock were not changed. The voting and liquidation rights of GM $1-2/3 par value common stock are one vote per share and one liquidation unit per share. On July 24, 2000, Fiat purchased for $2.4 billion approximately 32 million shares of GM $1-2/3 par value common stock, or approximately 5.4% of GM's $1-2/3 par value common stock outstanding as of that date. Fiat sold its entire stake in GM for $1.2 billion in December 2002. (See Notes 11 and 15). The liquidation rights of the GM $1-2/3 par value and GM Class H common stocks are subject to certain adjustments if outstanding common stock is subdivided, by stock split or otherwise, or if shares of one class of common stock are issued as a dividend to holders of another class of common stock. 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). The outstanding shares of GM Class H common stock may be recapitalized as shares of GM $1-2/3 par value common stock at any time after December 31, 2002, at the sole discretion of the GM Board, or automatically, if at any time the Corporation should sell, liquidate, or otherwise dispose of 80% or more of the business of Hughes, based on the fair market value of the assets, both tangible and intangible, of Hughes as of the date that such proposed transaction is approved by the GM Board. In the event of any recapitalization, all outstanding shares of GM Class H common stock will automatically be converted into GM's $1-2/3 par value common stock at an exchange rate that would provide GM Class H common stockholders with that number of shares of GM $1-2/3 par value common stock that would have a value equal to 120% of the value of their GM Class H common stock, on such date. A recapitalization of the type described in the prior sentence would occur if any of the triggering events took place unless the holders of GM common stock (including the holders of GM $1-2/3 par value common stock and holders of the GM Class H common stock voting separately as individual classes) vote to approve an alternative proposal from the GM Board.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 17. Stockholders' Equity (concluded)

Other Comprehensive Income The changes in the components of other comprehensive income (loss) are reported net of income taxes, as follows (dollars in millions):

NOTE 18. Earnings Per Share Attributable to Common Stocks

Earnings per share (EPS) attributable to each class of GM common stock was determined based on the attribution of earnings to each such class of common stock for the period divided by the weighted-average number of common shares for each such class outstanding during the period. Diluted EPS attributable to each class of GM common stock considers the effect of potential common shares, unless the inclusion of the potential common shares would have an antidilutive effect. All GM Class H common stock per share amounts and numbers of shares for 2000 have been adjusted to reflect the three-for-one stock split, in the form of a 200% stock dividend, paid on June 30, 2000. The attribution of earnings to each class of GM common stock was as follows (dollars in millions):

Years Ended December 31, ------2002 2001 2000 ------Earnings attributable to common stocks Earnings attributable to $1-2/3 par value $1,885 $984 $3,957 Earnings (losses) attributable to Class H $(196) $(482) $385

Earnings attributable to GM $1-2/3 par value common stock for the period represent the earnings attributable to all GM common stocks, reduced by the Available Separate Consolidated Net Income (ASCNI) of Hughes for the respective period. In 2001 and prior years, losses attributable to GM Class H common stock represent the ASCNI of Hughes, excluding the effects of GM purchase accounting adjustments arising from GM's acquisition of Hughes Aircraft Company, reduced by the amount of dividends accrued on the Series A Preferred Stock of Hughes (as an equivalent measure of the effect that GM's payment of dividends on the GM Series H 6.25% Automatically Convertible Preference Stock would have if paid by Hughes). Beginning in 2002, losses attributable to GM Class H common stock were not adjusted for the effects of GM purchase accounting, mentioned above, because the related goodwill is no longer being amortized in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." The calculated losses used for computation of the ASCNI of Hughes are then multiplied by a fraction, the numerator of which is equal to the weighted-average number of shares of GM Class H common stock outstanding (920 million, 876 million, and 681 million for 2002, 2001, and 2000, respectively) and the denominator of which is a number equal to the weighted-average number of shares of GM Class H common stock which if issued and outstanding would represent a 100% interest in the earnings of Hughes (the "Average Class H dividend base"). The Average Class H dividend base was 1.3 billion during 2002, 2001, and 2000.

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NOTE 18. Earnings Per Share Attributable to Common Stocks (continued)

In addition, the denominator used in determining the ASCNI of Hughes may be adjusted on occasion as deemed appropriate by the GM Board to reflect subdivisions or combinations of the GM Class H common stock, certain transfers of capital to or from Hughes, the contribution of shares of capital stock of GM to or for the benefit of Hughes employees, and the retirement of GM Class H common stock purchased by Hughes. The GM Board's discretion to make such adjustments is limited by criteria set forth in GM's Restated Certificate of Incorporation. Shares of GM Class H common stock delivered by GM in connection with the award of such shares to and the exercise of stock options by employees of Hughes increase the numerator and denominator of the fraction referred to above. On occasion, in anticipation of exercises of stock options, Hughes purchases GM Class H common stock from the open market. Upon purchase, these shares are retired and therefore decrease the numerator and denominator of the fraction referred to above. The reconciliation of the amounts used in the basic and diluted earnings per share computations was as follows (dollars in millions except per share amounts):

Certain stock options were not included in the computation of diluted earnings per share for the periods presented since the options' underlying exercise prices were greater than the average market prices of the GM $1-2/3 par value common stock and GM Class H common stock. In addition, for periods in which there was an adjusted loss attributable to common stocks, options to purchase shares of GM $1-2/3 par value common stock and GM Class H common stock with underlying exercise prices less than the average market prices were outstanding, but were excluded from the calculations of diluted loss per share, as inclusion of these securities would have been antidilutive to the net loss per share.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued

NOTE 19. Derivative Financial Instruments and Risk Management

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Effective January 1, 2001, GM adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, which requires that all derivatives be recorded at fair value on the balance sheet and establishes criteria for designation and effectiveness of derivative transactions for which hedge accounting is applied. GM assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its documented policies. As a result of the adoption of this standard as of January 1, 2001, GM recorded a transition adjustment representing a one-time after-tax charge to income totaling $23 million, as well as an after-tax unrealized gain of $4 million to other comprehensive income. GM is exposed to market risk from changes in foreign currency exchange rates, interest rates, and certain commodity and equity security prices. In the normal course of business, GM enters into a variety of foreign exchange, interest rate, and commodity forward contracts, swaps, and options, with the objective of minimizing exposure arising from these risks. A risk management control system is utilized to monitor foreign exchange, interest rate, commodity and equity price risks, and related hedge positions.

Cash Flow Hedges

GM uses financial instruments designated as cash flow hedges to hedge the Corporation's exposure to foreign currency exchange risk associated with buying, selling, and financing in currencies other than the local currencies in which it operates, and its exposure to commodity price risk associated with changes in prices of commodities used in its automotive business, primarily non ferrous metals used in the manufacture of automotive components. For transactions denominated in foreign currencies, GM typically hedges forecasted and firm commitment exposure up to one year in the future. For commodities, GM hedges exposures up to six years in the future. For the years ended December 31, 2002 and December 31, 2001, hedge ineffectiveness associated with instruments designated as cash flow hedges increased cost of sales and other expenses by $0.1 million and $5 million, respectively; changes in time value of the instruments (which are excluded from the assessment of hedge effectiveness and exclude transition adjustment) increased cost of sales and other expenses by $19 million and $53 million, respectively. Derivative gains and losses included in other comprehensive income are reclassified into earnings at the time that the associated hedged transactions impact the income statement. For the year ended December 31, 2002, net derivative losses of $58 million were reclassified to cost of sales and other expenses. For the year ended December 31, 2001, net derivative gains of $2 million were likewise reclassified. These net losses/gains were offset by net gains/losses on the transactions being hedged. Approximately $6 million of net derivative losses included in other comprehensive income at December 31, 2002, will be reclassified into earnings within 12 months from that date. During 2002, there were net losses of approximately $4 million which were reclassified into earnings as a result of discontinuance of certain cash flow hedges.

Fair Value Hedges

GM uses financial instruments designated as fair value hedges to manage certain of the Corporation's exposure to interest rate risk. GM is subject to market risk from exposures to changes in interest rates due to its financing, investing, and cash management activities. A variety of instruments is used to hedge GM's exposure associated with its fixed rate debt and mortgage servicing rights (MSR's). For the year ended December 31, 2002, hedge ineffectiveness associated with instruments designated as fair value hedges, primarily due to hedging of MSRs, decreased selling, general, and administrative expenses by $458 million and increased selling, general, and administrative expenses by $218 million in 2001. Changes in time value of the instruments (which are excluded from the assessment of hedge effectiveness) decreased selling, general, and administrative expenses by $212 million in 2002 and $46 million in 2001.

Undesignated Derivative Instruments

Forward contracts and options not designated as hedging instruments under SFAS No. 133 are also used to hedge certain foreign currency, commodity, and interest rate exposures. Unrealized gains and losses on such instruments are recognized currently in earnings.

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NOTE 20. Fair Value of Financial Instruments

The estimated fair value of financial instruments has been determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value; therefore, the estimates are not necessarily

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair value amounts.

Book and estimated fair values of financial instruments, for which it is practicable to estimate fair value, were as follows (dollars in millions):

December 31, ------2002 2001 ------Automotive, Communications Services, Book Fair Book Fair and Other Operations Value Value Value Value ------Assets Other assets (1) $752 $582 $4,076 $4,040 Derivative assets $364 $364 $187 $187 Liabilities Long-term debt (2) $16,651 $15,595 $10,726 $11,817 Other liabilities (1) $531 $580 $487 $510 Derivative liabilities $298 $298 $281 $281

December 31, ------2002 2001 ------Book Fair Book Fair Financing and Insurance Operations Value Value Value Value ------Assets Finance receivables - net (3) $134,647 $135,890 $109,211 $110,877 Derivative assets $6,369 $6,369 $1,673 $1,673 Liabilities Debt (2) $183,773 $184,837 $153,186 $153,680 Derivative liabilities $843 $843 $2,942 $2,942

(1) Other assets include various financial instruments (e.g., long-term receivables and certain investments) that have fair values based on discounted cash flows, market quotations, and other appropriate valuation techniques. The fair values of retained subordinated interests in trusts and excess servicing assets (net of deferred costs) were derived by discounting expected cash flows using current market rates. Estimated values of Industrial Development Bonds, included in other liabilities, were based on quoted market prices for the same or similar issues. (2) Long-term debt has an estimated fair value based on quoted market prices for the same or similar issues or based on the current rates offered to GM for debt of similar remaining maturities. (3) The fair value was estimated by discounting the future cash flows using applicable spreads to approximate current rates applicable to each category of finance receivables.

Due to their short-term nature, the book value approximates fair value for cash and marketable securities, accounts and notes receivable (less allowances), accounts payable (principally trade), ACO' loans payable and Financing and Insurance Operations' debt payable within one year for the periods ending December 31, 2002 and 2001.

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NOTE 21. Stock Incentive Plans

Stock-Based Compensation`

GM applied the intrinsic value method of recognition and measurement under Accounting Principles Board Opinion No. 25 to its stock options and other stock-based employee compensation awards. Accordingly, no compensation expense related to employee stock options is reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of the grant. Refer to Note 1 for GM's pro forma net income, earnings attributable to common stocks, and basic and diluted earnings per share attributable to common stocks if compensation cost for all outstanding and unvested stock option and other stock-based employee compensation awards had been determined based on the fair value at the grant date, consistent with the method prescribed by SFAS No. 123. The effects of the Delphi spin-off adjustment

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document on the number of options and related exercise prices, as described below, are considered, under SFAS No. 123, to be modifications of the terms of the outstanding options. Accordingly, the pro forma disclosure includes compensation cost for the incremental fair value, under SFAS No. 123, resulting from such modifications. The pro forma amounts for compensation cost are not indicative of the effects on operating results for future periods. GM's stock incentive plans consist of the General Motors 2002 Stock Incentive Plan, formerly the 1997 General Motors Amended Stock Incentive Plan (the "GMSIP"), the Hughes Electronics Corporation Incentive Plan (the "Hughes Plan"), and the General Motors 1998 Salaried Stock Option Plan (the "GMSSOP"). The GMSIP is administered by the Executive Compensation Committee of the GM Board. The GMSSOP is administered by the Vice President of Global Human Resources. The Hughes Plan is administered by the Executive Compensation Committee of the Board of Directors of Hughes. Under the GMSIP, as of December 31, 2002, 28 million shares of GM $1-2/3 par value common stock may be granted from June 1, 2002, through May 31, 2007, of which approximately 28 million were available for grants at December 31, 2002. Any shares granted and undelivered under the GMSIP, due primarily to expiration or termination, become again available for grant. Options granted prior to 1997 under the GMSIP generally are exercisable one-half after one year and one-half after two years from the dates of grant. Stock option grants awarded since 1997 vest ratably over three years from the date of grant. Option prices are 100% of fair market value on the dates of grant and the options generally expire 10 years from the dates of grant, subject to earlier termination under certain conditions. Under the Hughes Plan, Hughes may grant shares, rights, or options to acquire up to 159 million shares of GM Class H common stock through December 31, 2002, of which 5 million were available for grants at December 31, 2002. Option prices are 100% of fair market value on the dates of grant and the options generally vest over two to five years and expire 10 years from the dates of grant, subject to earlier termination under certain conditions. Under the GMSSOP, which commenced January 1, 1998 and ends December 31, 2007, the number of shares of GM $1-2/3 par value common stock that may be granted each year is determined by management. Approximately 6 million shares of GM $1-2/3 par value common stock were available for grants at December 31, 2002. Stock options vest one year following the date of grant and are exercisable two years from the date of grant. Option prices are 100% of fair market value on the dates of grant and the options generally expire 10 years and two days from the dates of grant subject to earlier termination under certain conditions.

(Column a) (Column b) (Column c) Number of securities Number of remaining Securities to be available for issued upon Weighted average future issuance exercise of exercise price under equity outstanding of outstanding compensation options, options, plans (excluding warrants and warrants and reflected in Plan Category rights rights column (Column a) ------Equity compensation plans approved by security holders: GMSIP 65,822,160 $56.45 28,108,941 GMSIP and Hughes Plan 95,195,978 $22.99 4,645,893 Equity compensation plans not approved by security holders (1): GMSSOP 18,957,199 $59.91 6,000,000 ------Total 179,975,337 $39.11 38,754,834 ------

(1) All equity compensation plans except the GMSSOP were approved by the shareholders. The GMSSOP was adopted by the Board of Directors in 1998 and expires December 31, 2007. The purpose of the plan is to recognize the importance and contribution of GM employees in the creation of stockholder value, to further align compensation with business success and to provide employees with the opportunity for long-term capital accumulation through the grant of options to acquire shares of General Motors common stock.

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NOTE 21. Stock Incentive Plans (continued)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 2002 2001 2000 ------GM Hughes GM GM Hughes GM GM Hughes GM SIP Plan SSOP SIP Plan SSOP SIP Plan SSOP ------

Interest rate 4.3% 4.7% 4.3% 4.6% 5.1% 4.6% 6.4% 6.5% 6.5% Expected life (years) 5.0 7.0 5.0 5.0 7.0 5.0 5.0 6.9 5.0 Expected volatility 34.6% 51.6% 34.6% 31.2% 51.3% 31.1% 27.8% 42.1% 27.6% Dividend yield 4.0% - 4.0% 3.8% - 3.8% 2.7% - 2.7%

Class H common stock share amounts and numbers of shares for 2000 have been adjusted to reflect the three-for-one stock split in the form of a 200% stock dividend paid on June 30, 2000.

Changes in the status of outstanding options were as follows:

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NOTE 21. Stock Incentive Plans (concluded)

The following table summarizes information about GM's stock option plans at December 31, 2002:

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Weighted- Average Weighted Weighted Range of Remaining -Average -Average Exercise Options Contractual Exercise Options Exercise Prices Outstanding Life (yrs.) Price Exercisable Price ------GMSIP $1-2/3 Par Value Common $21.00 to $39.99 1,113,007 2.3 $32.40 1,041,527 $32.13 40.00 to 49.99 15,551,259 4.2 $44.93 15,444,416 $44.93 50.00 to 59.99 28,560,745 8.6 $51.42 4,358,047 $52.57 60.00 to 83.50 20,597,149 6.5 $73.40 17,250,956 $73.03 ------$21.00 to $83.50 65,822,160 6.8 $56.45 38,094,946 $58.18 GMSIP and Hughes Plan Class H Common ------$3.00 to $8.99 1,600,977 1.8 $7.18 1,600,977 $7.18 9.00 to 16.99 29,469,411 5.0 $12.60 28,487,187 $12.54 17.00 to 24.99 22,917,549 7.6 $19.57 11,412,872 $19.10 25.00 to 32.99 17,519,754 8.0 $27.80 7,000,140 $28.34 33.00 to 41.99 23,688,287 7.3 $37.09 7,721,276 $40.33 ------$3.00 to $41.99 95,195,978 6.7 $22.99 56,222,452 $19.40 GMSSOP $1-2/3 Par Value Common ------$46.59 2,282,027 5.0 $46.59 2,282,027 $46.59 50.46 5,000,719 9.0 $50.46 - $- 52.35 3,857,486 8.0 $52.35 - $- 71.53 3,778,487 6.0 $71.53 3,778,487 $71.53 75.50 4,038,480 7.0 $75.50 4,038,480 $75.50 ------$46.59 to $75.50 18,957,199 7.3 $59.91 10,098,994 $67.48

------

NOTE 22: Hughes Transactions

On December 9, 2002, Hughes, GM and EchoStar Communications Corporation (EchoStar) entered into a Termination, Settlement and Release Agreement (Termination Agreement), in which these parties agreed to terminate the Agreement and Plan of Merger, dated as of October 28, 2001, as amended, between Hughes and EchoStar (Merger Agreement) and certain related agreements. Under the terms of the Termination Agreement, EchoStar paid Hughes $600 million in cash and Hughes retained its 81% ownership position in PanAmSat. This resulted in a gain of $600 million ($372 million after-tax), or $0.21 diluted earnings per share of GM $1-2/3 par value common stock, recorded in total net sales and revenue. The companies entered into the Termination Agreement because the Merger could not be completed within the time allowed by the Merger Agreement due to regulatory opposition. GM has announced that it is currently evaluating a variety of strategic options for Hughes, including a reduction or elimination of its retained economic interest in Hughes, transactions that would involve strategic investors and public offerings of GM Class H common stock or related securities for cash or in exchange for outstanding GM debt obligations (see Note 26). Any such transaction might involve the separation of Hughes from GM. GM and Hughes have engaged in preliminary discussions with some parties. No decisions have been made regarding which options or combinations of options, if any, GM will pursue. Due to the numerous uncertainties involved in these matters, there can be no assurance that any transaction or offering will be announced or completed or as to the time at which such a transaction or offering might be completed.

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NOTE 23. Other Income

Other income (included in total net sales and revenues) consisted of the following (dollars in millions):

Years Ended December 31, ------2002 2001 2000 ------Automotive, Communications Services, and Other Operations Other income Interest income $929 $771 $619 Rental car lease revenue 1,214 1,424 1,584

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Gain on EchoStar termination payment (Note 22) 600 - - Gain on sale of Hughes' satellite systems (1) - - 2,036 Claims, commissions, and grants 781 767 756 Other 239 369 247 ------Total other income $3,763 $3,331 $5,242 ======

(1) Represents the gain on the sale of Hughes' satellite systems manufacturing businesses to The Boeing Company for $3.8 billion in cash.

Other income (included in total revenues) consisted of the following (dollars in millions):

Years Ended December 31, ------2002 2001 2000 ------Financing and Insurance Operations Other income Interest income $2,951 $2,269 $1,794 Insurance premiums 2,188 1,524 1,394 Mortgage banking income 2,064 1,862 1,518 Automotive securitization income 1,352 1,179 786 Other 3,035 2,841 2,011 ------Total other income $11,590 $9,675 $7,503 ======

NOTE 24. European Matters

During 2001, GME announced its plan to turn around its business with the implementation of Project Olympia. The initial stages of Project Olympia sought to identify initiatives that could deliver: . Solid and profitable business performance as of 2003 . A strengthened and optimized sales structure . A revitalized Opel/Vauxhall brand . Further market growth opportunities . Continuous improvement by refocusing the organizational structure The project identified several initiatives which aim to address the goals mentioned above. These initiatives include, among other things, reducing GME's manufacturing capacity, restructuring the dealer network in Germany, and redefining the way vehicles are marketed. These initiatives resulted in a decrease to GM's pre-tax earnings and were recorded in the GME segment in the first quarter of 2002 as follows: (1) $298 million related to employee separation costs for approximately 4,000 employees; (2) $235 million related to asset write-downs; and (3) $108 million related to the dealer network restructuring in Germany. The net income impact of these charges in the first quarter of 2002 was $407 million, or $0.72 per diluted share of GM $1-2/3 par value common stock ($553 million included in cost of sales and other expenses; $88 million included in selling, general, and administrative expenses; and $(234) million included in income tax expense). During September 2000, the European parliament passed a directive requiring member states to adopt legislation regarding end-of-life vehicles and the responsibility of manufacturers for dismantling and recycling vehicles they have sold. European Union member states were required to transform the concepts detailed in the directive into national law in 2002. Under the directive, manufacturers are financially responsible for at least a portion of the cost of the take-back of vehicles placed in service after July 2002 and all vehicles placed in service prior to July 2002 that are still in operation in January 2007. The laws developed in the individual national legislatures throughout Europe will have a significant impact on the amount ultimately paid by the manufacturers for this issue. GM recorded, in cost of sales and other expenses in the GME segment, an after-tax charge of $55 million ($0.10 per diluted share of GM $1-2/3 par value common stock) in 2002 for those member states that have passed national laws through December 31, 2002. Management is assessing the impact of this potential legislation on GM's financial position and results of operations, and may include charges to earnings in future periods as additional national laws are passed.

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NOTE 25: Segment Reporting

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", established standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. GM's

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document chief operating decision maker is the Chief Executive Officer. The operating segments are managed separately because each operating segment represents a strategic business unit that offers different products and serves different markets. GM's reportable operating segments within its ACO business consist of General Motors Automotive (GMA) (which is comprised of four regions: GMNA, GME, GMLAAM, GMAP), Hughes, and Other. GMNA designs, manufactures, and/or markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, Saturn, and HUMMER. GME, GMLAAM, and GMAP meet the demands of customers outside North America with vehicles designed, manufactured, and marketed under the following nameplates: Opel, Vauxhall, Holden, Saab, Buick, Chevrolet, GMC, and Cadillac. Hughes includes activities relating to digital entertainment, information and communications services, and satellite-based private business networks. The Other segment includes the design, manufacturing, and marketing of locomotives and heavy-duty transmissions, the elimination of intersegment transactions, certain non-segment specific revenues and expenditures, and certain corporate activities. GM's reportable operating segments within its FIO business consist of GMAC and Other. GMAC provides a broad range of financial services, including consumer vehicle financing, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, commercial and vehicle insurance, and asset-based lending. The Financing and Insurance Operations' Other segment includes financing entities operating in the U.S., Canada, Brazil, and Mexico which are not associated with GMAC. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that the disaggregated financial results have been prepared using a management approach, which is consistent with the basis and manner in which GM management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. GM evaluates performance based on stand-alone operating segment net income and generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Revenues are attributed to geographic areas based on the location of the assets producing the revenues.

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NOTE 25. Segment Reporting (continued)

See notes on next page

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NOTE 25. Segment Reporting (continued)

------

(a) Interest income is included in net sales and revenues from external customers. (b) The amount reported for Hughes excludes amortization of GM purchase accounting adjustments related to GM's acquisition of Hughes Aircraft Company (HAC) of approximately $3 million and $16 million for 2001 and 2000, respectively. There is no adjustment in 2002 because the related goodwill is no longer being amortized effective January 1, 2002 in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." (c) Net income (loss) for ACO Other includes a non-cash charge of $1.4 billion after tax related to the write-down of GM's investment in FAH. See Note 11. (d) Excludes satellite expenditures totaling $732 million, $944 million, and $777 million in 2002, 2001, and 2000, respectively. (e) The amount reported for Hughes includes the write-off of approximately $329 million of unamortized goodwill related to the satellite systems manufacturing businesses at the time of the sale to The Boeing Company. (f) The amount reported for Hughes excludes the unamortized GM purchase accounting adjustments of approximately $57 million at December 31, 2002, $57 million at December 31, 2001, and $60 million at December 31, 2000. (g) The amount reported for Hughes excludes a writeoff of $739 million that was

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document recorded in the fourth quarter of 2002 by Hughes in its stand alone financial statements for goodwill impairments at DIRECTV Latin America and DIRECTV Broadband; however, in accordance with SFAS No. 142, GM evaluated the carrying value of goodwill associated with its Hughes Direct-to-Home Broadcast reporting unit in the aggregate and determined that the goodwill was not impaired.

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NOTE 25. Segment Reporting (concluded)

Information concerning principal geographic areas was as follows (dollars in millions):

(1) Primarily consist of property (Note 9), equipment on operating leases (Note 7), and satellites (Note 11) net of accumulated depreciation.

NOTE 26. Subsequent Events

In the fourth quarter of 2002, the Corporation announced its agreement to sell its GM Defense operations (light armored vehicle business) to General Dynamics Corporation for approximately $1.3 billion in cash. The transaction closed on March 1, 2003 and is estimated to result in an after-tax gain of approximately $600 million. 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. The shares will be held by United States Trust Company of New York as trustee for the employee benefit plans. An independent valuation firm that was retained to value the shares applied a discount to the market value due to, among other things, various restrictions on the transfer of the shares provided for in the agreements between GM and the trustee, resulting in an aggregate contribution value of approximately $1.24 billion. The contribution increased the amount of GM Class H common stock held by GM's employee benefit plans to approximately 330 million shares, and reduced GM's retained economic interest in Hughes to approximately 19.9% from 30.7%. As a consequence of the contribution, GM now expects that its 2003 U.S. pre-tax pension expense will be approximately $2.8 billion instead of the $2.9 billion originally estimated. In the first quarter of 2003, Hughes completed a series of financing transactions to replace its previous credit facilities with a capital structure that is more long-term in nature. On February 28, 2003, DIRECTV issued $1.4

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document billion in senior notes due in 2013. The ten-year senior notes are unsecured indebtedness and bear interest at 8.375%. In addition, on March 6, 2003, DIRECTV entered into a new senior secured credit facility with total term loan and revolving loan commitments of $1.7 billion. The new senior secured credit facility is comprised of a $375 million Tranche A Term Loan, $200 million of which was undrawn at March 12, 2003, a $1.1 billion Tranche B Term Loan and a $250 million revolving credit facility which were undrawn at March 12, 2003. The new senior secured credit facility has a term of five to seven years and is secured by substantially all of DIRECTV's assets. The revolving credit facility and the term loans bear interest at LIBOR plus 3.5%. DIRECTV distributed to Hughes the net proceeds from the senior secured credit facility and the sale of the senior notes totaling $2.6 billion. The $200 million undrawn portion of the Tranche A Term Loan is expected to be drawn by December 31, 2003 with the net proceeds distributed to Hughes. The revolving portion of the senior secured credit facility will be available to DIRECTV to fund working capital and other requirements. The above distribution enabled Hughes to repay all amounts outstanding under its previous credit facilities, which were terminated on February 28, 2003.

Il-66

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

SUPPLEMENTARY INFORMATION

Selected Quarterly Data (Unaudited)

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

SUPPLEMENTARY INFORMATION - continued

Selected Quarterly Data (Unaudited) - continued

(1) First quarter 2002 results include the following: o a $407 million after-tax restructuring charge related to severance payments and asset impairments at GME that were part of the restructuring of GM's automotive operations in Europe; o a $59 million after-tax favorable adjustment related to Hughes' resolution of a lawsuit that was filed against the U.S. government relating to the National Aeronautics and Space Administration's (NASA) breach of contract to launch ten satellites on the Space Shuttle; o a $51 million after-tax charge related to Hughes' expected loss associated with a contractual dispute with General Electric Capital Corporation; and o a $18 million after-tax charge related to Hughes' loan guarantee for a Hughes Network Systems' affiliate in India. (2) Second quarter 2002 results include a $55 million after-tax charge at GME related to the European Union's directive requiring member states to enact legislation regarding end-of-life vehicles to be the responsibility of manufacturers for dismantling and recycling vehicles they have sold. (3) Third quarter 2002 results include the following: o a $1.4 billion after-tax charge related to the write-down of GM's investment in Fiat Auto Holdings, B.V. as a result of the completion of an impairment study of the carrying value of GM's investment; o a $116 million after-tax charge primarily related to GM's costs associated with the transfer of commercial truck production from Janesville, Wisconsin, to Flint, Michigan; and o a $68 million after-tax favorable adjustment related to Hughes' sale of equity interests primarily related to the investment in the Thomson multimedia S.A.; (4) Fourth quarter 2002 results include the following: o a $372 million after-tax gain related to Hughes' receipt of $600 million EchoStar paid in connection with the termination of the October 28, 2001, merger agreement between Hughes and EchoStar; o a $27 million after-tax charge related to Hughes' write-down of their investment in Crown Media as a result of an other than temporary decline in the market value of their investment; o a $63 million after-tax charge related to Hughes' write-down of their investment in XM Satellite Radio as a result of an other than temporary decline in the market value of their investment; o a $97 million after-tax charge related to Hughes' shut-down of DIRECTV Broad-band Business Services for costs to close the business including contract termination payments, write-offs of equipment, and severance payments; and o a $15 million after-tax charge related to Hughes' loss in the exchange of Hughes' ownership in Hughes Tele.com (India) Limited for an equity interest in and long-term receivables from Tata Teleservices Limited.

II-68

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

SUPPLEMENTARY INFORMATION

Selected Quarterly Data (Unaudited)

II-69

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

SUPPLEMENTARY INFORMATION - continued

Selected Quarterly Data (Unaudited) - continued

(5) First quarter 2001 results include a $12 million after-tax increase to income for the net impact from initially adopting SFAS No. 133, "Accounting for Derivatives and Hedging Activities." (6) Second quarter 2001 results include a $133 million after-tax restructuring charge related to General Motors' portion of severance payments and asset impairments that were part of the second quarter restructuring of its affiliate Isuzu Motors Ltd. (7) Third quarter 2001 results include the following: o a $194 million after-tax charge for the announced closing of the Ste.Therese, Quebec, assembly plant; o a $474 million after-tax charge related to Hughes' settlement with Raytheon on a purchase price adjustment related to Raytheon's 1997 merger with Hughes defense; o a $67 million after-tax gain related to Hughes' sale of 4.1 million shares of Thomson multimedia S.A.common stock; o a $133 million after-tax charge related to Hughes' non-cash charge from the revaluation of its Sky Perfect investment; o a $40 million after-tax severance charge related to Hughes' 10% company-wide work force reduction in the United States; and o a $21 million after-tax favorable adjustment for the expected costs associated with the shutdown of Hughes' DIRECTV Japan business.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

ITEM 9. Changes in and disagreements with accountants on accounting and financial disclosure

None

II-71

PART III

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

ITEMS 10, 11, 12, and 13

Information required by Part III (Items 10, 11, 12, and 13) of this Form 10-K is incorporated by reference from General Motors Corporation's definitive Proxy Statement for its 2003 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year, all of which information is hereby incorporated by reference in, and made part of, this Form 10-K, except that the information required by Item 10 with respect to executive officers of the Registrant is included in Item 4A of Part I of this report.

* * * * * * *

ITEM 14. Controls and Procedures

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The Corporation maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. Within 90 days prior to the date of this report, the Corporation's Chief Executive Officer and Chief Financial Officer evaluated, with the participation of GM's management, the effectiveness of the Corporation's disclosure controls and procedures. Based on the evaluation, which disclosed no significant deficiencies or material weaknesses, the Corporation's Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective. There were no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.

* * * * * * *

III-1

PART IV

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

ITEM 15. Exhibits, Financial Statement Schedule, and Reports on Page Form 8-K Number ------

(a) 1. All Financial Statements See Part II 2. Financial Statement Schedule II - Allowances for the Years Ended December 31, 2002, 2001, and 2000 IV-3 3. Exhibits (Including Those Incorporated by Reference)

Exhibit Number ------(3)(a) Restated Certificate of Incorporation filed as Exhibit 3(i) to the Current Report on Form 8-K of General Motors Corporation dated June 24, 1999, as amended by the amendment filed as Exhibit 3(i) to the Current Report on Form 8-K of General Motors Corporation dated June 6, 2000, and Amendment to Article Four of the Certificate of Incorporation - Division III - Preference Stock, by reason of the Certificates of Designations filed with the Secretary of State of the State of Delaware on September 14, 1987 and the Certificate of Decrease filed with the Secretary of State of the State of Delaware on September 29, 1987 (pertaining to the Six Series of Preference Stock contributed to the General Motors pension trusts), incorporated by reference to Exhibit 19 to the Quarterly Report on Form 10-Q of General Motors Corporation for the quarter ended June 30, 1990 in the Form SE of General Motors Corporation dated August 6, 1990; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on June 28, 1991 (pertaining to Series A Conversion Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-8 Registration Statement No. 33-43744 in the Form SE of General Motors Corporation dated November 1, 1991; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on December 9, 1991 (pertaining to Series B 9-1/8% Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-3 Registration Statement No. 33-45216 in the Form SE of General Motors Corporation dated January 27, 1992; as further amended by the Certificate of Designations filed

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document with the Secretary of State of the State of Delaware on February 14, 1992 (pertaining to Series C Convertible Preference Stock), incorporated by reference to Exhibit (3)(a) to the Annual Report on Form 10-K of General Motors Corporation for the year ended December 31, 1991 in the Form SE of General Motors Corporation dated March 20, 1992; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on July 15, 1992 (pertaining to Series D 7.92% Preference Stock), incorporated by reference to Exhibit 3(a)(2) to the Quarterly Report on Form 10-Q of General Motors Corporation for the quarter ended June 30, 1992 in the Form SE of General Motors Corporation dated August 10, 1992; as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on December 15, 1992 (pertaining to Series G 9.12% Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-3 Registration Statement No. 33-49309 in the Form SE of General Motors Corporation dated January 25, 1993; and as further amended by the Certificate of Designations filed with the Secretary of State of the State of Delaware on June 24, 1999 (pertaining to Series H 6.25% Automatically Convertible Preference Stock), incorporated by reference to Exhibit 4(a) to Form S-8 Registration Statement No. 333-31846 in the Form SE of General Motors Corporation dated March 6, 2000. N/A (3)(b) By-Laws, of General Motors Corporation, as amended, incorporated by reference to Exhibit 3(ii) to the Current Report on Form 8-K of General Motors Corporation dated March 2, 1998; as further amended, incorporated by reference to Exhibit 3(ii) to the Current Reports on Form 8-K of General Motors Corporation dated June 24, 1999, August 2, 1999, March 6, 2000, June 6, 2000, October 3, 2000, June 5, 2001, December 4, 2001 and December 3, 2002. N/A

IV-1

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

PART IV - continued

ITEM 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (continued)

Exhibit Page Number Number ------(4)(a) Form of Indenture relating to the $500,000,000 8-1/8% Debentures Due April 15, 2016 dated as of April 1, 1986 between General Motors Corporation and Citibank, N.A., Trustee, incorporated by reference to Exhibit 4 to Amendment No. 1 to Form S-3 Registration Statement No. 33-4452 N/A and resolutions adopted by the Special Committee on April 15, 1986, incorporated by reference to Exhibit 4(a) to the Current Report on Form 8-K of General Motors Corporation dated April 24, 1986. N/A (4)(c) Form of Indenture relating to the $377,377,000 7.75% Debentures Due March 15, 2036 dated as of December 7, 1995 between General Motors Corporation and Citibank, N.A., Trustee, filed as Exhibit 4(a) to Amendment No. 1 to Form S-3 Registration Statement No. 33-64229. N/A (4)(d) Instruments defining the rights of holders of nonregistered debt of the Registrant have been omitted from this exhibit index because the amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its subsidiaries. The Registrant agrees to furnish a copy of any such instrument to the Commission upon request. N/A (4)(f)(i) Indenture between General Motors Corporation and Wilmington Trust Company, incorporated by reference to Exhibit 4(d)(i) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (4)(f)(ii)First Supplemental Indenture, dated March 4, 2002, between General Motors Corporation and Citibank, N.A. With Respect To The 4.50% Series A Convertible Senior Debentures due 2032 and 5.25% Series B Convertible Senior Debentures due 2032, incorporated by reference to Exhibit 2 to the Current Report on Form 8-K of General Motors Corporation dated March 6, 2002. N/A

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (10)(a)** General Motors 2002 Annual Incentive Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 18, 2002. N/A (10)(b)** General Motors 2002 Stock Incentive Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 18, 2002. N/A (10)(c)** General Motors 2002Long-term Incentive Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 18, 2002. N/A (10)(d)** Compensation Plan for Nonemployee Directors, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 16, 1997. N/A (10)(f) Employment Contract with Robert A. Lutz dated September 1, 2001, incorporated by reference N/A (10)(g) Extension to Employment Contract with Robert A. Lutz dated December 20, 2002 IV-9 (12) Computation of Ratios of Earnings to Fixed Charges for the Years Ended December 31, 2002, 2001, and 2000. IV-10

(21) Subsidiaries of the Registrant as of December 31, 2002 IV-11 (23) Consent of Independent Auditors IV-18 (99) Hughes Electronics Corporation Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations IV-19 (99.1) Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 IV-104 (99.2) Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 IV-105

------* The registrant hereby undertakes to furnish supplementally a copy of any omitted schedule or other attachment to the Securities and Exchange Commission upon request. ** Required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.

IV-2

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

PART IV - continued

ITEM 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (concluded)

(b) Reports on Form 8-K Fifteen reports on Form 8-K, were filed October 1, 2002, October 8, 2002*, October 15, 2002, October 17, 2002, October 23, 2002, November 1, 2002, November 4, 2002, November 27, 2002, December 3, 2002 (3), December 10, 2002, December 16, 2002*, December 19, 2002, and December 19, 2002* during the quarter ended December 31, 2002 reporting matters under Item 5, Other Events, reporting certain agreements under Item 7, Financial Statements, Pro Forma Financial Information, and Exhibits.

------* Reports submitted to the Securities and Exchange Commission under Item 9, Regulation FD Disclosure. Pursuant to General Instruction B of Form 8-K the reports submitted under Item 9 are not deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 and we are not subject to the liabilities of that section. We are not incorporating, and will not incorporate by reference these reports into a filing under the Securities Act or the Exchange Act.

GENERAL MOTORS CORPORATION AND SUBSIDIARIES SCHEDULE II - ALLOWANCES

Notes: (a) Primarily reflects the recovery of accounts previously written-off. (b) Accounts written off. (c) Represents net change of inventory allowances.

Reference should be made to the notes to the GM consolidated financial statements.

IV-4

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

GENERAL MOTORS CORPORATION ------(Registrant)

Date: March 5, 2003 By: /s/JOHN F. SMITH, JR. ------(John F. Smith, Jr. Chairman of the Board of Directors)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 5th day of March 2003 by the following persons on behalf of the Registrant and in the capacities indicated.

Signature Title ------

/s/JOHN F. SMITH, JR. Chairman of the Board of Directors ------(John F. Smith, Jr.)

/s/G. RICHARD WAGONER, JR. President, Chief Executive Officer, ------and Director (G. Richard Wagoner, Jr.)

/s/JOHN M. DEVINE Vice Chairman and ------Chief Financial Officer (John M. Devine)

/s/WALTER G. BORST Treasurer ------(Walter G. Borst)

/s/PAUL W. SCHMIDT Controller ------(Paul W. Schmidt)

/s/PETER R. BIBLE Chief Accounting Officer ------(Peter R. Bible)

IV-5

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

SIGNATURES - concluded

Signature Title ------

/s/PERCY BARNEVIK Director ------(Percy Barnevik)

/s/JOHN H. BRYAN Director ------(John H. Bryan)

/s/GEORGE M. C. FISHER Director ------(George M. C. Fisher)

/s/NOBUYUKI IDEI Director ------(Nobuyuki Idei)

/s/KAREN KATEN Director ------(Karen Katen)

/s/ALAN G. LAFLEY Director ------(Alan G. Lafley)

/s/PHILIP A. LASKAWY Director ------(Philip A. Laskawy)

/s/E. STANLEY O'NEAL Director ------(E. Stanley O'Neal)

/s/ECKHARD PFEIFFER Director ------(Eckhard Pfeiffer)

/s/ Director ------(Lloyd D. Ward)

IV-6

CERTIFICATION

I, G. Richard Wagoner, Jr., President and Chief Executive Officer, certify that:

1. I have reviewed this annual report on Form 10-K of General Motors Corporation;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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 annual report is being

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent 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 annual 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: March 13, 2003

/s/ G. RICHARD WAGONER, JR. ------G. Richard Wagoner, Jr. President and Chief Executive Officer

IV-7

CERTIFICATION

I, John M. Devine, Vice Chairman and Chief Financial Officer, certify that:

1. I have reviewed this annual report on Form 10-K of General Motors Corporation;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

Date: March 13, 2003

/s/ JOHN M. DEVINE ------John M. Devine Vice Chairman and Chief Financial Officer

IV-8

December 20, 2002

Mr. Robert A, Lutz

Dear Bob:

I am extremely pleased that you have agreed to remain for one year beyond our previous agreement through year-end 2005. Our intent would be that after that date your compensation and benefits would be under the continual review of the Executive Compensation Committee (ECC).

Your base salary, and other components of incentive pay and benefits will be reviewed periodically by the ECC of the Board of Directors and, based on that review, may be adjusted. We will extend your bonus guarantee for one additional year so that in no case will your bonus for calendar year 2004 be less than $500,000.

Your participation in all compensation and benefits plans will be controlled by the terms of those plans. Whenever we mutually agree that you would retire from General Motors, we will work with you on a mutually satisfactory severance arrangement as appropriate.

Please indicate your acceptance of the extended employment agreement by signing below. Also, reflecting the extension of the employment term, you should achieve a stock ownership level of at least four times your base salary.

I look forward to our continuing relationship.

Sincerely,

(Signed by G. R. Wagoner, Jr.)

AGREED AND ACCEPTED BY:

/s/ Robert A. Lutz 12-20-02 ------Robert A. Lutz Date

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES

Years Ended December 31, ------2002 2001 2000 ------(dollars in millions)

Net income $1,736 $601 $4,452 Income taxes 533 768 2,393 (Income)/losses of and dividends from nonconsolidated associates (43) 183 350 Amortization of capitalized interest 73 73 69 ------

Income before income taxes, undistributed income of nonconsolidated associates, and capitalized interest 2,299 1,625 7,264 ------

Fixed charges included in income Interest and related charges on debt 8,327 8,770 9,475 Portion of rentals deemed to be interest 318 330 341 ------Total fixed charges included in income 8,645 9,100 9,816 ------

Earnings available for fixed charges $10,944 $10,725 $17,080 ======

Fixed charges Fixed charges included in income $8,645 $9,100 $9,816 Interest capitalized in the period 191 171 137 ------Total fixed charges $8,836 $9,271 $9,953 ======

Ratios of earnings to fixed charges 1.24 1.16 1.72 ======

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 2002

Subsidiary companies of the Registrant are listed below. State or Sovereign Power Name of Subsidiary of Incorporation ------

Subsidiaries included in the Registrant's consolidated financial statements Adam Opel Aktiengesellschaft Germany Adam Opel Unterstuetzungskasse GmbH Germany Autohaus am Nordring GmbH, Berlin Germany Carus Grundstucks-Vermietungsgesellschaft mbH & Co. Object Kuno 65 KG Germany Carus Grundstucks-Vermietungsgesellschaft mbH & Co. Object Leo 40 KG Germany GM Europe GmbH Germany GM Locomotive Group India Private Limited India General Motors CIS Russia General Motors GmbH & Co. OHG Germany General Motors Poland Spolka, zo.o. Poland GMAC Bank GmbH Germany GMAC Leasing GmbH Germany OPEL Guangzhou Precision Machining Co. Ltd China Opel Hellas, S.A. Greece Opel Hungary Consulting Service Limited Liability Company Hungary Opel International GmbH France Opel Live GmbH Germany Opel Performance Center GmbH Germany Opel Polen GmbH Germany Opel Restrukturierungsgesellschaft mbH Germany Opel Southeast Europe Automotive Distribution Limited Liability Company Hungary Opel Special Vehicles GmbH Germany Opel Turkiye Limited Sirketi Turkey Aisin GM Allison Co., Ltd. Japan Annunciata Corporation Delaware Argonaut Holdings, Inc. Delaware Auto Lease Payment Corporation Cayman Islands North American New Cars, Inc Delaware Automotive Air Charter, Inc. Delaware Chevrolet Sociedad Anonima de Ahorro para Fines Determinados Argentina Controladora General Motors, S.A. de C.V. Mexico

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Electro-Motive de Mexico, S.A. de C. V. Mexico General Motors de Mexico, S. de R.L. de C.V. Mexico GMAC Holding S.A. de C.V. Mexico Sistemas Para Automotores de Mexico, S.A. de C.V. Mexico Convesco Vehicle Sales GmbH Germany Dealership Liquidations, Inc. Delaware Dmax, Ltd.* Ohio Doraville Bond Corporation Delaware Electro-Motive Maintenance Operations Pty Ltd. Australia EL-MO Leasing II Corporation Delaware EL-MO Leasing III Corporation Delaware El-Mo-Mex, Inc. Delaware Edmun, Inc. Canada EMD Argentina, Inc. Delaware EMD Holding Corporation Delaware Environmental Corporate Remediation Company, Inc Delaware Fiat GM Powertrain Ltda Brazil GM Powertrain Ltda Brazil Opel Powertrain GmbH Germany Opel Powertrain Holding B.V. Netherlands

* Joint Venture Partnership

IV-11

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

State or Sovereign Power Name of Subsidiary of Incorporation ------

GMAC Auto Lease Payment Corporation Cayman Islands GM Auslandsprojekte GmbH Germany GM Automotive Services Belgium Belgium GM Auto Receivables Co Delaware GM Automotive UK Limited England GM Credit AB Sweden GMC Truck Motors Development Corporation Delaware GM-DI Leasing Corporation Delaware GM-Fiat Worldwide Purchasing Opel Hungary Limited Liability Company Ltd. Hungary GMI Diesel Engineering Limited Japan GM Imports & Trading Ltd. Bermuda GM International Sales Ltd. Cayman Islands GM Plats (Proprietary ) Limited South Africa General International Limited Bermuda General Motors Acceptance Corporation Delaware

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document AccuTel, Inc. Delaware Bankruptcy Solutions, Inc. Delaware Basic Credit Holding Company, L.L.C. Delaware Alexium Financial Services, Inc. Delaware Nuvell Credit Corporation Delaware Nuvell Financial Services Corp. Delaware Saab Financial Services Corporation Delaware Capital Auto Receivables, Inc. Delaware Facilities Real Estate LLC Delaware GMAC, a.s. Czech Republic GMAC Arrendamiento S.A. de C.V. Mexico GMAC, Australia (Finance) Limited Australia GMAC Bank GmbH (Austrian) Austria GMAC Bank GmbH (German) Germany GMAC Bank Polska S.A Poland GMAC Banque S.A. France GMAC Bank Hungary Rt. Hungary GMAC Comercial Automotriz Chile S.A. Chile GMAC Automotriz Limitada Chile GMAC Commercial Corporation Delaware GMAC Commercial Credit Corporation-Canada/Societe De Credit Canada Commercial GMAC-Canada GMAC Commercial Finance LLC Delaware GMAC Business Credit, L.L.C. Delaware GMAC Commercial Credit LLC New York G.M.A.C. Comercio e Aluguer de Veiculos, Lta. Portugal GMAC Compania Financiera S.A. Argentina GMAC del Ecuador S.A. Ecuador GMAC d.o.o. Croatia GMAC d.o.o. Slovenia GMAC Insurance Holdings, Inc. Delaware ABA Seguros, S.A. de C.V. Mexico CoverageOne Corporation / Compagnie Protection Premiere Canada CoverageOne, Inc. Delaware CoverageOne Purchasing Group, Inc. Michigan GMAC RE Corp. Delaware GMAC Risk Services, Inc, Delaware GMAC Securities Corporation, Inc. Delaware GMAC Service Agreement Corporation Michigan GM Motor Club, Inc. North Carolina Integon Corporation Delaware Motors Insurance Corporation Michigan Motors Mechanical Reinsurance Company Limited Barbados MRP Service Agreement Corporation Michigan SmartCoverage Insurance Agency Inc. Canada Trinity General Agency, Inc. Texas Universal Warrenty Corporation Michigan GMAC International Corporation Delaware GMAC International Finance B.V. Netherlands GMAC Italia Leasing S.p.A. Italy

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

State or Sovereign Power Name of Subsidiary of Incorporation ------

GMAC Lease B.V. Netherlands GMAC Leasing Corporation Delaware Patlan Corporation Delaware GMAC Mexicana, S.A. de C.V. Sociedad Financiera de Objeto Limitado Filial Mexico GMAC Mortgage Group, Inc. Michigan GMAC Commercial Holding Corp. Nevada GMAC Mortgage Holdings, Inc. Delaware GMAC Residential Holding Corp. Nevada GMAC-RFC Holding Corp. Michigan HELM Company, LLC Delaware GMAC Sverige AB Sweden GMAC Taiwan, Inc. Delaware Masterlease Motors, Inc. Taiwan GMAC-TCFC Finance Limited India GMAC (UK) plc England General Motors Acceptance Corporation, Australia Delaware Interleasing (Australia) Limited Australia General Motors Acceptance Corporation of Canada, Limited Canada GMAC Leaseco Limited Canada General Motors Acceptance Corporation, Colombia S.A. Delaware G.M.A.C. Financiera de Colombia S.A. Compania de Financiamiento Comercial Colombia General Motors Acceptance Corporation, Continental Delaware GMAC Finansiering A/S Denmark GM Finance HB Sweden General Motors Acceptance Corporation Hungary Commercial Limited Liability Company Hungary General Motors Acceptance Corporation Italia S.p.A. Italy General Motors Acceptance Corporation Nederland N.V. Netherlands GMAC Espana, Sociedad Anonima de Financiacion, E.F.C Spain General Motors Acceptance Corporation, North America Delaware General Motors Acceptance Corporation (N.Z.) Limited New Zealand General Motors Acceptance Corporation de Portugal - Servicos Financeiros, S.A. Portugal General Motors Acceptance Corporation, South America Delaware General Motors Acceptance Corporation de Venezuela, C.A. Venezuela Servicios, Representacion y Asesoramiento de Personal

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Persoserv S.A. Ecuador General Motors Acceptance Corporation Suisse S.A. Switzerland General Motors Acceptance Corporation (Thailand) Limited Thailand Lease Auto Receivables, Inc. Delaware Master Lease Austria GmbH Germany On:Line Finance Holdings Limited England Arros Finance Limited England Coast to Coast (Legal Recoveries) Limited England On:Line Finance Limited England P.T. GMAC Lippo Finance* Indonesia SA Holding One LLC Delaware SA Holding Two LLC Delaware Servicios GMAC S.A. de C.V. Mexico Wholesale Auto Receivables Corporation Delaware General Motors Asia, Inc. Delaware GM Autoworld Korea Company, Ltd. Japan General Motors Asia Pacific (Pte) Ltd. Singapore General Motors Asia Pacific Holdings, LLC Delaware General Motors Automobiles Philippines, Inc. Philippines General Motors Automotive Holdings, S.L. Spain General Motors de Argentina S.A. Argentina General Motors do Brasil Ltda. Brazil Banco General Motors S.A. Brazil Consorcio Nacional GM Ltda. Brazil Brazauto Trading (Cayman) Limited Cayman Islands Funcap-Comerico e Administracao de Ben Movies e Valores Ltda Brazil

* Joint Venture Partnership

IV-13

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

State or Sovereign Power Name of Subsidiary of Incorporation ------

General Motors Prestadorade de Servicos Ltda. Brazil GM Factoring Sociedade de Fomento Comercial Ltda. Brazil General Motors of Canada Limited (Active) Canada General Motors Coordination Center N.V. Belgium MOWAG Motorwagenfabrik AG Switzerland Saab Automobile AB Sweden Saab Financial Auto Receivables Corp III Delaware General Motors Chile S.A., Industria Automotriz Chile General Motors China, Inc. Delaware General Motors Warehousing and Trading (Shanghai) Co. Ltd. China

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document General Motors (China) Investment Company Limited China TaiJin International Automotive Distribution Co., Ltd. Taiwan General Motors Colmotores, S.A. Colombia General Motors Commercial Corporation Delaware General Motors del Ecuador S.A. Ecuador General Motors Europe Holdings, S.L. Spain General Motors Europe AG Switzerland General Motors Netherlands, B.V. Netherlands General Motors Nordiska AB Sweden General Motors Norge AS Norway Opel Austria GmbH Austria Opel Ireland Limited Ireland Opel Italia S.p.A. Italy Opel Oy Finland Opel Suisse S.A. Switzerland General Motors Export Corporation Delaware General Motors Foreign Sales Corporation Virgin Islands General Motors Finance (Barbados) Ltd. Barbados General Motors Global Industries Co. Ltd. Taiwan General Motors Holding Espana, S.A. Spain Opel Espana de Automoviles, S.A. Spain Opel Polska Sp. Z oo. Poland General Motors Holdings (U.K.) Limited England Fit4Fleet Holdings (U.K.) Limited England Fit4Fleet Limited England General International (UK) Limited England General Motors Acceptance Corporation (U.K.) plc England General Motors Acceptance Corporation (U.K.) Finance plc England GMAC Leasing (U.K.) Limited England GMAC Leasing (U.K.) (No. 1) Limited England GMAC Leasing (U.K.) (No. 2) Limited England GMAC Leasing (U.K.) (No. 3) Limited England Saab Finance Limited England GM Automotive UK (No. 3) Limited England GM Automotive UK (No. 4) Limited England GM Investments UK Limited England IBC Vehicles Limited England Millbrook Land and Co. Ltd. England Millbrook Pension Management Ltd. England Millbrook Proving Ground Ltd. England VHC Sub-Holdings (UK) England Vauxhall Motors (Finance) Plc England Vauxhall Motors Limited England General Motors India Private Limited India General Motors Indonesia, Inc. Delaware General Motors Interamerica Corporation Delaware General Motors International Holdings, Inc. Delaware General Motors International Operations, Inc. Delaware General Motors Investment Management Corporation Delaware General Motors Investment Services Company N.V. Belgium General Motors Japan Ltd. Japan

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document General Motors Kenya Limited Kenya General Motors Korea, Inc. Delaware GM Korea Co., Ltd. Korea General Motors Limited (active) England ISPOL-IMG Holdings B.V.* Netherlands

IV-14

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

State or Sovereign Power Name of Subsidiary of Incorporation ------

General Motors Nova Scotia Finance Company Canada General Motors Nova Scotia Investments Ltd. Canada General Motors Overseas Corporation Delaware GMOC Administrative Services Corporation Delaware General Motors Defense Australia Pty. Ltd. Australia General Motors Overseas Commercial Vehicle Corporation Delaware General Motors Venezolana, C.A. Venezuela Holden Ltd. Australia General Motors-Holden's Sales Pty Limited Australia GM Daewoo Australia Pty. Ltd. Australia Lidlington Engineering Company, Ltd. Delaware Truck and Bus Engineering U.K., Limited Delaware General Motors Overseas Distribution Corporation Delaware GMODC Finance N.V. Netherlands Antilles General Motors Peru S.A. Peru General Motors Product Services, Inc. Delaware General Motors Receivables Corporation Delaware General Motors (Thailand) Ltd. Thailand General Motors Trust Company New Hampshire General Motors Uruguay, S.A. Uruguay General Motors U.S. Trading Corp. Nevada Hughes Electronics Corporation Delaware DIRECTV Broadband, Inc. Delaware Aspen Internet Systems, Inc. California PDO Communications, Inc. California DIRECTV Enterprises, LLC. Delaware DIRECTV Global, Inc. Delaware DIRECTV Global Digital Media, Inc. Delaware DIRECTV Holdings, LLC Delaware Hughes Aircraft Holdings Canada Ltd England Hughes-Avicom International, Inc. California Hughes Electronics Foreign Sales Corporation Barbados

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Hughes Electronics International Corporation Delaware Hughes Electronics Realty, Inc. Delaware Hughes Electronics Systems International California Hughes Foreign Sales Corporation* Virgin Islands Hughes Investment Management Company California Hughes Network Systems, Inc. Delaware Baja Hughes S. de R.L. de C.V. Mexico First HNS Mauritius , Ltd. Mauritius HNS-Clairtel CP, Inc. Delaware HNS de Mexico, S.A. de C.V. Mexico HNS Europe S.r.L. Italy HNS-India, Inc. Delaware HNS India Private Limited (India) India HNS-India VSAT, Inc. Delaware HNS-Shanghai, Inc. Delaware Hughes do Brasil Electronics e Comunicacoes S.A. Brazil Hughes International de Mexico, S.A. de C.V. Mexico Hughes Network Systems France S.a.r.L. France Hughes Network Systems International Service Compan Delaware Hughes Network Systems Limited England One Touch Systems, Inc. Delaware P.T. Hughes Network Systems Co., Ltd. Indonesia Hughes Telecommunications & Space Company Delaware Hughes Communications, Inc. California Hughes Global Services, Inc. Delaware Holden New Zealand Limited New Zealand General Motors New Zealand Pensions Limited New Zealand IBC Vehicles (Distribution) Limited England Jennings Motors, Inc. Delaware Metal Casting Technology, Inc. Delaware

* Joint Venture

IV-15

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

State or Sovereign Power Name of Subsidiary of Incorporation ------

Motors Enterprise, Inc. Delaware Motors Holding San Fernando Valley, Inc. Delaware Multiple Dealerships Holdings of Albany, Inc. Delaware GMRH Kansas City, Inc. Delaware GMRH Philadelphia, Inc. Delaware GMRH Pittsburgh, Inc. Delaware

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document GMRH Seattle, Inc. Delaware GMRH St. Louis, Inc. Delaware GMRHLA, Inc. Delaware Omnibus BB Transportes, S. A. Ecuador Elasto S.A. Ecuador HOLDCORP S.A. Ecuador OnStar Corporation Delaware Opel Belgium N.V. Belgium Opel Portugal - Comerico e Industria de Veiculos S.A. Portugal Pims Co Delaware Premier Investment Group, Inc. Delaware PT General Motors Indonesia Indonesia Radiadores Richard, S.A. Argentina Renaissance Center Management Company Michigan Riverfront Development Corporation Delaware Riverfront Holdings, Inc. Delaware Riverfront Holdings Phase II, Inc. Delaware Saab Cars USA, Inc. Connecticut Saab Cars Holding Corp. Delaware Saab Opel Sverige AB Sweden Saturn Corporation Delaware Daniels/Florida Automotive Group, LLC Delaware East Bay Auto Group, LLC Delaware LDG Acquisition Corporation Texas Saturn Distribution Corp. Delaware Smith/Florida Group, LLC. Delaware Saturn County Bond Corporation Delaware Sistemas de Compra Programada Chevrolet, CA Venezuela TX Holdco, LLC Delaware WRE, Inc. Michigan Grand Pointe Holdings, Inc. Michigan

339 directly or indirectly owned subsidiaries

Companies not included in the Registrant's consolidated financial statements, for which no financial statements are submitted: 43 other directly or indirectly owned domestic and foreign subsidiaries 6 active subsidiaries 37 inactive subsidiaries 11 fifty-percent owned companies and 70 less than fifty-percent owned companies the investments in which are accounted for by the equity method.

In addition, the Registrant owns 100% of the voting control of the following companies: 218 dealerships, including certain dealerships operating under dealership assistance plans, engaged in retail distribution of General Motors products 159 dealerships operating in the United States

The number of dealerships operating under dealership assistance plans decreased by a net of 57 during 2002.

* * * * * * *

IV-16

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

Companies not shown by name, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary.

During 2002, there were changes in the number of subsidiaries and companies of the Registrant, as follows:

1 directly and 29 indirectly owned domestic subsidiaries, and 2 directly and 55 indirectly owned foreign subsidiaries were organized or acquired. No direct owned and 7 indirectly owned domestic subsidiaries, and no direct owned and 10 indirectly owned foreign subsidiaries were dissolved, sold, or spun-off. 1 domestic and no foreign 50% owned company were organized or acquired. A less than 50% interest was acquired in 8 companies, while interests in no 50% owned and 3 less than 50% owned companies were terminated. 1 indirectly owned domestic company went from less than 50% owned to over 50% owned, while 5 indirectly owned foreign companies moved from 100% owned to less than 50% owned. I indirectly owned foreign company moved from inactive to active, while 3 indirectly owned foreign companies moved from 100% owned to inactive. 2 indirectly owned foreign companies went from 100% owned to less than 50% owned, while 4 foreign companies went from less than 50% owned to 100% owned. 10 domestic and 20 foreign companies had changes in ownership. 1 foreign company moved to less than 20% owned. There were 20 company name changes in domestic and foreign subsidiaries.

* * * * * * *

GENERAL MOTORS CORPORATION AND SUBSIDIARIES

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors General Motors Corporation:

We consent to the incorporation by reference of our report on page II-20 dated January 16, 2003 (March 12, 2003 as to Note 26) and of our report in Section IV dated January 15, 2003 (March 6, 2003 as to Note 22) appearing in this Annual Report on Form 10-K of General Motors Corporation for the year ended December 31, 2002, in the following Registration Statements:

Registration Form Statement No. Description ------

S-3 333-88508 General Motors Corporation and GM Nova Scotia Finance Company Debt Securities, Preferred Stock, Preference Stock and Common Stock

S-3 33-56671 General Motors Corporation $1-2/3 Par Value Common (Amendment No. 1) Stock

S-3 33-49309 General Motors Corporation Dividend Reinvestment Plan

S-3 333-45104 General Motors Corporation $1-2/3 Par Value Common Stock

S-8 333-100268 The General Motors Personal Savings Plan for Hourly-Rate Employees in the United States

S-8 333-90097 General Motors Stock Incentive Plan

S-8 333-100269 General Motors Savings-Stock Purchase Program for Salaried Employees in the United States

S-8 333-76441 The Hughes Non-Bargaining Employees Thrift and Savings Plan The Hughes Bargaining Employees Thrift and Savings Plan

S-8 333-100271 The GMAC Mortgage Group Savings Incentive Plan

S-8 333-90087 Hughes Electronics Corporation Incentive Plan

S-8 333-17937 Saturn Personal Choices Savings Plan for Non-Represented Members

S-8 333-44957 General Motors 1998 Stock Option Plan

S-8 333-66653 ASEC Manufacturing Savings Plan

S-8 333-31846 General Motors Deferred Compensation Plan for Executive Employees

S-8 333-55118 The GMAC Insurance Personal Lines Retirement Savings Plan

S-8 333-55122 The Holden Employee Share Ownership Plan

S-8 333-100270 GMAC Mortgage Group Deferred Compensation Plan for Executive Employees

/s/DELOITTE & TOUCHE LLP ------DELOITTE & TOUCHE LLP

Detroit, Michigan March 12, 2003

IV-18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SUMMARY DATA

December 31, ------

2002 2001 ------(Dollars in Millions) Consolidated Balance Sheet Data: Cash and cash equivalents...... $1,128.6 $700.1 Total current assets...... 3,656.4 3,341.1 Total assets...... 17,885.1 19,210.1 Total current liabilities...... 3,203.1 4,406.5 Long-term debt...... 2,390.0 988.8 Minority interests...... 555.3 531.3 Preferred stock...... 914.1 1,498.4 Total stockholder's equity...... 9,977.1 11,071.9

IV-19

HUGHES ELECTRONICS CORPORATION

Years Ended December 31, ------2002 2001 2000 ------(Dollars in Millions) Other Data: EBITDA(1)...... $668.0 $389.9 $594.0 EBITDA Margin(1)...... 7.5% 4.7% 8.2% Cash flows from operating activities $1,126.1 $190.3 $1,090.7 Cash flows from investing activities (887.2) (1,741.2) 2,210.8 Cash flows from financing activities 189.6 742.9 (849.6) Depreciation and amortization...... 1,067.1 1,147.7 948.1 Capital expenditures...... 1,298.1 1,743.5 1,716.1

(1) EBITDA is defined as operating profit (loss), plus depreciation and amortization. EBITDA is not presented as an alternative measure of operating results or cash flow from operations, as determined in accordance with accounting principles generally accepted in the United States of America. Hughes management uses EBITDA to evaluate the operating performance of Hughes and its business segments, to allocate resources and capital to its business segments and as a measure of performance for incentive compensation purposes. Hughes believes EBITDA is a measure of performance used by some investors, equity analysts and others to make informed investment decisions. EBITDA is used as an analytical indicator of income generated to service debt and fund capital expenditures. In addition, multiples of current or projected EBITDA are used to estimate current or prospective enterprise value. Hughes management believes that EBITDA is a common measure used to compare Hughes' operating performance and enterprise value to other communications, entertainment and media service providers. EBITDA does not give effect to cash used for debt service requirements consisting of interest payments of $398.0 million, $268.4 million and $312.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. As a result, EBITDA does not reflect funds available for investment in the business of Hughes, dividends or other discretionary uses. EBITDA margin is calculated by dividing EBITDA by total revenues. EBITDA and EBITDA margin as presented herein may not be comparable to similarly titled measures reported by other companies.

IV-20

HUGHES ELECTRONICS CORPORATION

SUMMARY DATA -- (concluded)

Selected Segment Data

Years Ended December 31, ------2002 2001 2000 ------(Dollars in Millions) Direct-To-Home Broadcast Total Revenues...... $7,193.3 $6,306.4 $5,238.0 % of Total Revenues...... 80.5 % 76.3 % 71.9 % Operating Loss...... $(505.2) $(749.9) $(557.9) EBITDA...... 160.8 (74.8) (24.5) EBITDA Margin...... 2.2 % N/A N/A Depreciation and Amortization $666.0 $675.1 $533.4 Segment Assets...... 7,957.2 9,484.1 9,278.3 Capital Expenditures...... 524.1 734.3 913.5 Satellite Services Total Revenues...... $812.3 $870.1 $1,023.6 % of Total Revenues...... 9.1 % 10.5 % 14.0 % Operating Profit...... $255.9 $165.3 $356.6 Operating Profit Margin...... 31.5 % 19.0 % 34.8 % EBITDA...... $591.6 $580.0 $694.0 EBITDA Margin...... 72.8 % 66.7 % 67.8 % Depreciation and Amortization $335.7 $414.7 $337.4 Segment Assets...... 6,487.7 6,296.8 6,178.4

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Capital Expenditures...... 294.3 338.2 449.5 Network Systems Total Revenues...... 1,169.9 $1,325.8 $1,409.8 % of Total Revenues...... 13.1 % 16.0 % 19.3 % Operating Loss...... $(160.7) $(171.8) $(63.5) EBITDA...... (87.0) (111.8) 0.1 Depreciation and Amortization 73.7 60.0 63.6 Segment Assets...... 2,526.9 2,339.1 1,789.9 Capital Expenditures...... 400.4 664.6 369.5 Eliminations and Other Total Revenues...... $(240.6) $(238.3) $(383.8) Operating Profit (Loss)...... 10.9 (1.4) (89.3) EBITDA...... 2.6 (3.5) (75.6) Depreciation and Amortization (8.3) (2.1) 13.7 Segment Assets...... 913.3 1,090.1 2,032.7 Capital Expenditures...... 79.3 6.4 (16.4) Total Total Revenues...... $8,934.9 $8,264.0 $7,287.6 Operating Loss...... (399.1) (757.8) (354.1) EBITDA...... 668.0 389.9 594.0 EBITDA Margin...... 7.5 % 4.7 % 8.2 % Depreciation and Amortization $1,067.1 $1,147.7 $948.1 Total Assets...... 17,885.1 19,210.1 19,279.3 Capital Expenditures...... 1,298.1 1,743.5 1,716.1

IV-21

HUGHES ELECTRONICS CORPORATION

The following discussion excludes purchase accounting adjustments related to General Motors acquisition of Hughes.

Merger Transaction and Strategic Options

On October 28, 2001, Hughes Electronic Corporation ("Hughes") and General Motors Corporation ("GM"), together with EchoStar Communications Corporation ("EchoStar"), announced the signing of definitive agreements that provided for the split-off of Hughes from GM and the subsequent merger of the Hughes business with EchoStar (the "Merger"). Hughes, GM and EchoStar entered into a termination agreement on December 9, 2002, pursuant to which GM, Hughes and EchoStar agreed to terminate the merger agreement and certain related agreements. Under the terms of the termination agreement, EchoStar paid Hughes $600 million in cash and Hughes retained its 81% ownership position in PanAmSat Corporation ("PanAmSat").

GM has announced that it is currently evaluating a variety of strategic options for Hughes, including a reduction or elimination of its retained economic interest in Hughes, transactions that would involve strategic investors and public offerings of GM Class H common stock or related securities for cash or in exchange for outstanding GM debt obligations. Any such transaction might involve the separation of Hughes from GM. GM and Hughes have engaged in preliminary discussions with some parties. No other decisions have been made regarding which options or combinations of options, if any, GM will pursue. Due to the numerous uncertainties involved in these matters, there can be no assurance that any transaction or offering will be announced or completed or as to the time at which such a transaction or offering might be completed.

On February 28, 2003, GM announced plans to contribute approximately 150 million shares of GM Class H common stock to certain of its United States ("U.S.") employee benefit plans. GM expects to make the contribution during the month of March 2003. The contribution would increase the amount of GM Class H common stock held by GM's employee benefit plans to approximately 330 million shares and reduce GM's retained economic interest in Hughes to approximately 20.0% from 30.7%.

Use of Estimates in the Preparation of the Consolidated Financial Statements

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, judgments and assumptions that affect amounts reported therein. Management bases its estimates, judgments and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates. The following represent what Hughes believes are the critical accounting policies that may involve a higher degree of estimation, judgment and complexity.

Valuation of Long-Lived Assets. Hughes evaluates the carrying value of long-lived assets to be held and used, other than goodwill and intangible assets with indefinite lives, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the estimated cash flows associated with the asset under review, discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal. Changes in estimates of future cash flows could result in a write-down of the asset in a future period.

IV-22

HUGHES ELECTRONICS CORPORATION

Valuation of Goodwill and Intangible Assets with Indefinite Lives. Hughes evaluates the carrying value of goodwill and intangible assets with indefinite lives on an annual basis, and when events and circumstances warrant such a review in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which is described in "Accounting Changes," below. SFAS No. 142 requires the use of fair value in determining the amount of impairment, if any, for recorded goodwill and intangible assets with indefinite lives. Fair value is determined primarily using the estimated future cash flows associated with the asset under review, discounted at a rate commensurate with the risk involved. Changes in estimates of future cash flows could result in a write-down of the asset in a future period.

Financial Instruments and Investments. Hughes maintains investments in equity securities of unaffiliated companies. Marketable equity securities are considered available-for-sale and carried at current fair value based on quoted market prices with unrealized gains or losses (excluding other-than-temporary losses), net of taxes, reported as part of accumulated other comprehensive income (loss) ("OCI"), a separate component of stockholder's equity. Hughes continually reviews its investments to determine whether a decline in fair value below the cost basis is "other-than-temporary." Hughes considers, among other factors: the magnitude and duration of the decline; the financial health and business outlook of the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors; and Hughes' intent and ability to hold the investment. If the decline in fair value is judged to be other-than-temporary, the cost basis of the security is written-down to fair value and the amount is recognized in the consolidated statements of operations as part of "Other, net" and recorded as a reclassification adjustment from OCI. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover an investment's carrying value, thereby possibly requiring a charge in a future period.

Reserves for Doubtful Accounts. A significant amount of management estimate is required in determining the amount of reserves required for the potential non-collectibility of accounts receivable. Management estimates the amount of required reserves based upon past experience of collection and consideration of other relevant factors; however, past experience may not be indicative of future collections and therefore additional charges could be incurred in the future to reflect differences between estimated and actual collections.

Contingent Matters. A significant amount of management estimate is required in determining when, or if, an accrual should be recorded for a contingent matter and the amount of such accrual, if any. Due to the uncertainty of determining the likelihood of a future event occurring and the potential financial statement impact of such an event, it is possible that upon further development or resolution of a contingent matter, a charge could be recorded in a future period that would be material to Hughes' consolidated results of operations and financial position.

The continuing operations of Hughes are comprised of the following segments: Direct-To-Home Broadcast, Satellite Services and Network Systems. The satellite systems manufacturing businesses ("Satellite Businesses"), which Hughes sold to The Boeing Company ("Boeing") on October 6, 2000, are reported as discontinued operations for 2000. This transaction is discussed more fully in "Liquidity and Capital Resources--Acquisitions and Divestitures," below. Hughes' business segments are described in more detail below, including a discussion of significant transactions affecting the comparability of operating results for each of the three years ended December 31, 2002, 2001 and 2000.

IV-23

HUGHES ELECTRONICS CORPORATION

Direct-To-Home Broadcast Segment

The Direct-To-Home Broadcast segment consists primarily of the DIRECTV digital multi-channel entertainment businesses located in the United States and Latin America and DIRECTV Broadband, Inc. ("DIRECTV Broadband"), formerly known as Telocity Delaware, Inc. ("Telocity"), which was acquired in April 2001. Hughes announced, in December of 2002, that DIRECTV Broadband would close its high-speed Internet service business in the first quarter of 2003 and transition its existing customers to alternative service providers. See further discussion of this item in "Liquidity and Capital Resources--Acquisitions and Divestitures," below.

In December 2002, DIRECTV announced a five-year agreement with The National Football League ("NFL") for the exclusive Direct Broadcast Satellite television rights to the NFL SUNDAY TICKET through 2007 and the exclusive multi-channel television rights through 2005. The agreement with the NFL will allow DIRECTV to distribute expanded programming to its NFL SUNDAY TICKET subscribers, including the NFL CHANNEL on DIRECTV.

On June 4, 2002, DIRECTV and General Electric Capital Corporation ("GECC") executed an agreement to settle, for $180 million, a claim arising from a contractual arrangement whereby GECC managed a credit program for consumers who purchased DIRECTV(R) programming and related hardware. As a result, in 2002 DIRECTV increased its provision for loss related to this matter by $130 million, of which $56 million was recorded as a charge to "Selling, general and administrative expenses" and $74 million ($27 million in the first quarter of 2002 and $47 million in the second quarter of 2002) was recorded as a charge to "Interest expense." See Item 3. Legal Proceedings under Part I for further information.

The Direct-To-Home Broadcast segment also includes the operating results of the Latin America DIRECTV businesses, which include DIRECTV Latin America, LLC ("DLA"), Hughes' 74.7% owned subsidiary that provides DIRECTV programming to local operating companies ("LOC's") located in Latin America and the Caribbean basin; the exclusive distributors of DIRECTV located in Mexico, Brazil, Argentina, Colombia, Trinidad and Tobago and Uruguay; and SurFin Ltd. ("SurFin"), a company that provides financing of subscriber receiver equipment to certain DLA LOC's. The non-operating results of the Latin America DIRECTV businesses include Hughes' share of the results of unconsolidated LOC's that are the exclusive distributors of DIRECTV in Venezuela and Puerto Rico and are included in "Other, net." During 2001, Hughes began recording 100.0% of the net losses incurred by DLA and certain other consolidated LOC's due to the accumulation of net losses in excess of the minority investors' investment and Hughes' continued funding of those businesses.

In May 2001, due to the acquisition of a majority interest of Galaxy Entertainment Argentina S.A. ("GEA"), DLA began to consolidate the results of GEA. Previously, DLA's interest in GEA was accounted for under the equity method. See "Liquidity and Capital Resources--Acquisitions and Divestitures," below, for further discussion of this transaction.

Also in 2001, DLA secured a contract for the exclusive rights to broadcast and re-sell the FIFA World Cup soccer tournaments, occurring in 2002 and 2006, in Argentina, Chile, Colombia, Mexico, Uruguay and Venezuela. The costs of the live sporting events are recorded in the period the events are broadcast. As a result, the cost of the June 2002 competitions of $135 million was charged to operations in 2002. Because of weak economic conditions in several of its

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document largest markets, DLA was unable to recover the entire cost of the programming, resulting in an $80 million loss on the contract in 2002.

IV-24

HUGHES ELECTRONICS CORPORATION

DLA's 2002 operating results have been adversely affected by the economic and political instability throughout Latin America, as well as the ongoing devaluation of several local currencies. The unfavorable and volatile conditions in certain Latin American countries has made it difficult for DLA to continue to develop its business, generate additional revenues, add new subscribers or achieve profitability. DLA has implemented steps in an attempt to improve its financial results. DLA has, among other steps, (i) renegotiated major supplier contracts, including programming contracts, (ii) reduced general and administrative expenses, (iii) attempted to eliminate all non-critical business activities, (iv) reduced investment in subscriber acquisition costs, as appropriate, in each market, (v) slowed subscriber growth, (vi) implemented local currency price adjustments to increase average monthly revenue per subscriber ("ARPU") to offset devaluation and (vii) minimized capital expenditures. DLA's business could deteriorate if conditions worsen, continue for a sustained period or spread to other Latin American countries. Further, changes in the leadership or in the ruling party in the countries in which DLA operates may affect the economic programs developed under the prior administration, which in turn may adversely affect DLA's business, operations and prospects in these countries.

In January 2003, DLA announced the commencement of further discussions with certain programmers, suppliers and business associates to address DLA's current financial and operational challenges. The agreements which DLA is seeking to restructure include certain long-term or exclusive programming agreements which have resulted in payment obligations substantially in excess of the current economic value of the programming to DLA. DLA has ceased making payments under certain of these agreements and has received notices of default relating to approximately $32 million claimed to be owed to programmers and a claim that DLA's restructuring had resulted in an acceleration of an obligation to repurchase a 4% equity interest in DLA for $195 million. DLA does not believe that the purchase obligation has been accelerated. All such amounts correspond to agreements that are currently under renegotiation. If DLA does not comply with its obligations under its programming contracts and is unsuccessful in reaching a settlement with the relevant programmers, such programmers could seek to terminate the programming contracts, which would result in a loss of such programming to DLA. If the discussions do not result in a reasonable agreement in the near future, DLA has indicated that it would consider other options, including restructuring the company under Chapter 11 of the U.S. bankruptcy law. If DLA initiates proceedings under Chapter 11 of the U.S. bankruptcy law, it could reject some or all of its long-term programming agreements (as well as other non-essential executory contracts), in which event the programming related to such rejected agreements would no longer be available to DLA. This could result in increased churn or reduced demand for the DLA service, which would be a consideration for DLA in determining which programming contracts to reject in the event of Chapter 11 bankruptcy proceedings. A filing under Chapter 11 of the U.S. bankruptcy law could result in a charge in a future period that could be material to Hughes' consolidated results of operations and financial position.

The results of operations for DIRECTV Broadband, formerly a provider of digital subscriber line ("DSL") services, have been included in Hughes' financial information since April 4, 2001, the date of its acquisition.

On December 13, 2002, Hughes announced that DIRECTV Broadband would close its high-speed Internet service business in the first quarter of 2003 and transition its existing customers to alternative service providers. As a result, in December 2002, Hughes notified approximately half of DIRECTV Broadband's 400 employees of a layoff, with a minimum of 60 days notice during which time they were paid, followed by receipt of a severance package. The remaining employees worked with customers during the transition and assisted with the closure of the business, which occurred on February 28, 2003. As a result, Hughes recorded a fourth quarter 2002 charge of $92.8 million related to accruals for employee severance benefits, contract termination payments and write-off of customer premise equipment. This charge was recorded in "Selling, general and administrative expenses" in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss).

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document See "Liquidity and Capital Resources--Acquisitions and Divestitures" below, for further discussion of the DIRECTV Broadband transactions described above.

IV-25

HUGHES ELECTRONICS CORPORATION

Also included as part of the non-operating results of the Direct-To-Home Broadcast segment is DIRECTV Japan Management, Inc., DIRECTV Japan, Inc., certain related companies (collectively "DIRECTV Japan") and Hughes affiliates that provided DIRECTV services in Japan. DIRECTV Japan's operations were discontinued and ceased broadcasting on September 30, 2000. See "Liquidity and Capital Resources--Acquisitions and Divestitures," below, for further discussion.

Satellite Services Segment

The Satellite Services segment represents the results of PanAmSat, Hughes' approximately 81% owned subsidiary. PanAmSat is a leading provider of video, broadcasting and network services via satellite. PanAmSat leases transponder capacity on its satellites, and is the distribution platform for the delivery of entertainment and information to cable television systems, television broadcast affiliates, direct-to-home television operators, ISP's, telecommunications companies and other corporations and governments. PanAmSat provides satellite services to its customers primarily through long-term operating lease contracts for the full or partial use of satellite transponder capacity. From time to time, and in response to customer demand, PanAmSat sells transponders to customers through outright sales and sales-type lease transactions.

In October 2001, PanAmSat filed a proof of loss under an insurance policy on PAS-7 related to circuit failures, which occurred in September 2001 and resulted in a reduction of 28.9% of the satellite's total power available for communications. During 2002, PanAmSat's insurers settled the claim by payment to PanAmSat of $215.0 million. PanAmSat recorded a net gain of approximately $40.1 million related to this insurance claim in the first quarter of 2002.

Network Systems Segment

The Network Systems segment represents the results of Hughes Network Systems, Inc. ("HNS"), which is a leading supplier of broadband satellite services and products to both enterprises and consumers through its DIRECWAY(R) services. HNS designs, manufactures and installs advanced networking solutions for businesses worldwide using very small aperture terminals. HNS is a premier broadband products and services company with particular emphasis on providing broadband access. HNS is also a leading supplier of DIRECTV(R) receiving equipment (set-top boxes and antennas).

Other

During the first quarter of 2003, Hughes and America Online, Inc. ("AOL") agreed to terminate their strategic alliance, which the companies had entered into in June 1999. In connection with the termination of the alliance, Hughes recorded a pre-tax charge of $23 million in the fourth quarter of 2002 to "Selling, general and administrative expenses" and was released from its commitment to spend up to approximately $1 billion in additional sales, marketing, development and promotion efforts in support of certain specified products and services. Under the terms of the agreement, HNS will continue to provide services to current bundled AOL broadband subscribers using the HNS high-speed Internet satellite services as the companies develop a transition plan to an unbundled service.

During the first quarter of 2002, Hughes recorded a $95 million gain, net of legal costs, as an offset to "Selling, general and administrative expenses" as a result of the favorable resolution of a lawsuit filed against the United States Government on March 22, 1991. The lawsuit was based upon the National Aeronautics and Space Administration's ("NASA") breach of contract to launch ten satellites on the Space Shuttle. See Item 3. Legal Proceedings under Part I for further information.

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HUGHES ELECTRONICS CORPORATION

Hughes adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on January

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 1, 2002. SFAS No. 142 required that existing and future goodwill and intangible assets with indefinite lives not be amortized, but written-down, as needed, based upon an impairment analysis that must occur at least annually, or sooner if an event occurs or circumstances change that would more likely than not result in an impairment loss. All other intangible assets are amortized over their estimated useful lives. As a result, Hughes recognized amortization expense of $249 million for goodwill and intangible assets with indefinite lives for the year ended December 31, 2001 for which there is no comparable amount in 2002. In addition, as a result of adopting SFAS No. 142, Hughes recorded a cumulative effect of accounting change, net of taxes, of $681.3 million ($755.7 million pre-tax) as of January 1, 2002 in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) primarily related to the write-off of goodwill at DLA and DIRECTV Broadband. See further discussion under "Accounting Changes" below.

During the second and third quarters of 2001, Hughes announced a nearly 10% reduction of its approximately 7,900 employees, excluding DIRECTV customer service representatives, located in the United States. As a result, 750 employees across all business disciplines were given notification of termination that resulted in an expense of $22.2 million in the second quarter of 2001 and $65.3 million in the third quarter of 2001 for a total charge to "Selling, general and administrative expenses" of $87.5 million. Of that charge, $80.0 million was related to employee severance benefits and $7.5 million was for other costs primarily related to a remaining lease obligation associated with excess office space and employee equipment. The remaining accrual amounted to $14.1 million at December 31, 2002 and related to long-term employee severance benefits.

In addition to the significant operating gains and losses described above, Hughes has recognized a number of significant non-operating gains and losses during the years ended December 31, 2002, 2001 and 2000. These transactions are more fully described below in "Liquidity and Capital Resources--Acquisitions and Divestitures" and "Liquidity and Capital Resources--Investments in Marketable Securities."

In October 2001, Hughes reached a settlement with Raytheon Company ("Raytheon") on a purchase price adjustment related to the 1997 spin-off of Hughes' defense electronics business and the subsequent merger of that business with Raytheon. Under the terms of the settlement, Hughes agreed to reimburse Raytheon for a portion of the original $9.5 billion purchase price. Hughes paid $500 million of the settlement amount in October 2001 and the remainder, $134.2 million, was paid during February 2002. In the third quarter of 2001, Hughes recorded a decrease to "Capital stock and additional paid-in capital" of $574.2 million as a result of the settlement.

At December 31, 2002, Hughes had a cash balance of $1,128.6 million and unused debt capacity of $1,532.9 million, which includes $248.9 million of debt capacity at PanAmSat. Included as part of Hughes' cash balance of $1,128.6 at December 31, 2002 was $784.0 million of cash at PanAmSat, which is generally not available for use by Hughes. Hughes believes it has adequate liquidity to fund cash requirements for its continuing operations in 2003 of about $200 million to $300 million. In addition, in the first quarter of 2003, Hughes completed a series of financing transactions designed to provide sufficient liquidity to fund Hughes' business plan through cash flow breakeven. See further discussion under "Liquidity and Capital Resources--Notes Payable and Credit Facilities" below.

On June 6, 2000, the GM Board of Directors ("GM Board") declared a three-for-one stock split of the GM Class H common stock. The stock split was in the form of a 200% stock dividend, paid on June 30, 2000 to GM Class H common stockholders of record on June 13, 2000. As a result, the numbers of shares of GM Class H common stock presented for all periods prior to the stock split have been adjusted to reflect the stock split, unless otherwise noted.

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HUGHES ELECTRONICS CORPORATION

Satellite Fleet

Hughes has a fleet of 28 satellites, seven owned by DIRECTV and 21 owned and operated by PanAmSat. Eight additional satellites are currently under construction, including one for DIRECTV, four for PanAmSat and three for the

In the fourth quarter of 2001, DIRECTV successfully launched and commenced service from the DIRECTV 4S high-power spot-beam satellite. In the second quarter of 2002, DIRECTV successfully launched DIRECTV 5, which is currently providing services from the 119 degrees west longitude orbital location previously provided by DIRECTV 6, which is now serving as a backup at that location. The DIRECTV 4S and DIRECTV 5 satellites enabled DIRECTV to increase its capacity to approximately 800 channels, including the capacity to transmit more than 530 local channels.

DIRECTV U.S. currently has one satellite under construction, the DIRECTV 7S satellite, a high-powered spot-beam, which is expected to be launched in the fourth quarter of 2003. DIRECTV 7S will be positioned at 119 degrees west longitude and will provide additional capacity, enabling DIRECTV to further expand its services, including local channel coverage.

PanAmSat completed a three-year, $2.0 billion, seven-satellite fleet modernization program in 2002. The program added approximately 400 36-megahertz equivalent transponders, bringing the total number of transponders to 913. PanAmSat's satellite fleet was expanded in 2000 with the commencement of service on Galaxy XR, Galaxy XI, Galaxy IVR and PAS-9. Also during 2000, PanAmSat completed the planned retirement of its SBS-4 and SBS-5 satellites. In 2001, PanAmSat commenced service on PAS-1R and PAS-10. In 2002, PanAmSat commenced service on its Galaxy IIIC satellite. Galaxy IIIC supports direct-to-home services for DLA as well as video and broadcast services for other customers.

PanAmSat is currently constructing and expects to launch up to four satellites by 2006. PanAmSat expects to launch Galaxy XII in the second quarter of 2003 and expects to launch the Galaxy XIII/Horizons-1 satellite in mid-2003. PanAmSat is currently scheduled to launch a third satellite to replace Galaxy V prior to the end of its useful life in 2005. The fourth satellite is scheduled to replace Galaxy 1R prior to the end of its useful life in 2006.

HNS is currently developing the SPACEWAY platform for DIRECWAY's next generation of services. SPACEWAY will eventually include three satellites, which are currently under construction. SPACEWAY is expected to begin its North American service in 2004.

Results of Operations

2002 compared to 2001

Overall

Revenues. Revenues increased 8.1% to $8,934.9 million in 2002 compared with $8,264.0 million in 2001. The increase in revenues resulted primarily from $886.9 million of higher revenues in the Direct-To-Home Broadcast segment from the addition of new DIRECTV subscribers in the United States and higher ARPU. The increased revenues from the Direct-To-Home Broadcast segment were partially offset by a decrease in revenues of $155.9 million in the Network Systems segment and $57.8 million at the Satellite Services segment. The decrease in revenues from the Network Systems segment resulted from the substantial completion in late 2001 of two significant customer contracts for the sale of phones and systems for mobile satellite programs. The decrease in revenues from the Satellite Services segment was primarily due to a sales-type lease transaction executed during 2001 for which there was no comparable transaction in 2002.

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HUGHES ELECTRONICS CORPORATION

Operating Costs and Expenses. Operating costs and expenses increased to $9,334.0 million in 2002 from $9,021.8 million in 2001. Broadcast programming and other costs increased by $851.8 million during 2002 due to higher costs at the Direct-To-Home Broadcast segment resulting from higher programming costs associated with the increase in subscribers and programming rate increases, higher subscriber service expenses and the $135 million cost of the 2002 World Cup, partially offset by decreased costs at the Satellite Services segment associated with a sales-type lease transaction executed during 2001 for which there was no comparable transaction in 2002. Costs of products sold decreased by $81.6 million in 2002 from 2001 due to the decreased equipment sales at the

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Network Systems segment discussed above, partially offset by increased shipments of DIRECTV receiving equipment. Selling, general and administrative expenses decreased by $377.4 million in 2002 from 2001 due primarily to a $95 million net gain recorded from the NASA claim, a $40.1 million net gain related to the PAS-7 insurance claim, lower expenses resulting from cost saving initiatives, lower third-party customer acquisition costs and an $87.5 million charge, primarily for severance, recorded in 2001. These decreases were partially offset by a $92.8 million charge related to the shutdown of the DIRECTV Broadband business, the $56 million loss recorded for the GECC settlement at DIRECTV U.S. and the $23 million loss recorded in connection with the termination of the AOL alliance. Depreciation and amortization decreased by $80.6 million in 2002 over 2001 due to the discontinuation of amortization expense related to goodwill and intangible assets with indefinite lives in accordance with SFAS No. 142, which amounted to $249.0 million for 2001, partially offset by added depreciation expense related to capital expenditures for property and satellites placed into service since December 31, 2001, the consolidation of GEA in May 2001 and the acquisition of DIRECTV Broadband in April 2001.

EBITDA. EBITDA is defined as operating profit (loss), plus depreciation and amortization. EBITDA is not presented as an alternative measure of operating results or cash flow from operations, as determined in accordance with accounting principles generally accepted in the United States of America. Hughes management uses EBITDA to evaluate the operating performance of Hughes and its business segments, to allocate resources and capital to its business segments and as a measure of performance for incentive compensation purposes. Hughes believes EBITDA is a measure of performance used by some investors, equity analysts and others to make informed investment decisions. EBITDA is used as an analytical indicator of income generated to service debt and fund capital expenditures. In addition, multiples of current or projected EBITDA are used to estimate current or prospective enterprise value. Hughes management believes that EBITDA is a common measure used to compare Hughes' operating performance and enterprise value to other communications, entertainment and media service providers. EBITDA does not give effect to cash used for debt service requirements, and thus does not reflect funds available for investment in the business of Hughes, dividends or other discretionary uses. EBITDA margin is calculated by dividing EBITDA by total revenues. EBITDA and EBITDA margin as presented herein may not be comparable to similarly titled measures reported by other companies.

EBITDA for 2002 was $668.0 million and EBITDA margin was 7.5%, compared to EBITDA of $389.9 million and EBITDA margin of 4.7% for 2001. The increase in EBITDA and EBITDA margin resulted from the additional profit resulting from the DIRECTV U.S. revenue growth, lower subscriber acquisition costs, the $95 million net gain for the NASA claim, the $87.5 million charge primarily related to severance recorded in 2001 and the $40.1 million net gain related to the PAS-7 insurance claim. These increases were partially offset by the $92.8 million charge related to the shutdown of the DIRECTV Broadband business, the $80 million loss from the 2002 World Cup, the $56 million loss recorded for the settlement of the GECC dispute settlement and the $23 million loss recorded in connection with the termination of the AOL alliance.

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Operating Loss. Hughes' operating loss was $399.1 million in 2002, compared to $757.8 million in 2001. The decreased operating loss resulted from the additional profit resulting from the DIRECTV U.S. revenue growth, lower subscriber acquisition costs, lower amortization expense resulting from the discontinuation of amortization for goodwill and intangible assets with indefinite lives in accordance with SFAS No. 142, the $95 million net gain for the NASA claim, the $87.5 million charge primarily related to severance recorded in 2001 and the $40.1 million net gain related to the PAS-7 insurance claim. These increases were partially offset by higher depreciation expense due to capital expenditures since December 31, 2001, the $92.8 million charge related to the shutdown of DIRECTV Broadband, the $80 million loss from the 2002 World Cup, the $56 million loss recorded for the settlement of the GECC dispute settlement and the $23 million loss recorded in connection with the termination of the AOL alliance.

Over the past several years, Hughes has incurred operating losses, principally due to the costs of acquiring new subscribers in its Direct-To-Home Broadcast businesses. Hughes expects operating results to improve and, barring significant

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document changes in circumstances, to generate operating profit in the future as DIRECTV U.S.'s large subscriber base begins generating additional operating profit due to continued revenue growth and improved operating leverage. In addition, Hughes does not currently intend to increase the subscriber base aggressively for DLA and the DIRECWAY consumer business in the near term to avoid cash requirements for subscriber acquisition costs.

Interest Income and Expense. Interest income decreased to $24.5 million in 2002 compared to $56.7 million in 2001 due to a decrease in average cash balances. Interest expense increased to $336.2 million in 2002 from $195.9 million in 2001 primarily from the $74 million of interest recorded in connection with the settlement of the GECC dispute and interest expense associated with higher average outstanding borrowings in 2002. Interest expense is net of capitalized interest of $116.8 million and $76.3 million in 2002 and 2001, respectively. Changes in cash and cash equivalents and debt are discussed in more detail below under "Liquidity and Capital Resources."

Other, Net. Other, net increased to income of $425.5 million in 2002 compared to a loss of $92.7 million in 2001. Other, net for 2002 resulted primarily from the $600.0 million gain for the settlement on the terminated merger agreement with EchoStar, $136.2 million of net gains from the sale of certain marketable equity securities, including a $158.6 million gain related to the sale of the investment in Thomson multimedia S.A. ("Thomson") and a $24.5 million loss recorded from the sale of the Sky Perfect Communications, Inc. ("Sky Perfect") investment, and the reversal of $41.1 million of accrued exit costs related to the DIRECTV Japan business upon the resolution of all remaining claims. These gains were partially offset by $148.9 million of losses recognized for the other-than-temporary decline in the fair value of marketable equity securities, $52.1 million of charges recorded for the Hughes Tele.com (India) Limited ("HTIL") transactions, and $70.1 million of equity method investee losses. Other, net for 2001 resulted primarily from $226.1 million of losses recognized for the other-than-temporary decline in the fair value of certain marketable equity securities, which included a $212.0 million write-down related to the Sky Perfect investment, and equity method investee losses of $61.3 million, partially offset by $130.6 million of net gains from the sale of certain marketable equity securities, primarily Thomson, and the reversal of $32.0 million of accrued exit costs related to the DIRECTV Japan business. See "Liquidity and Capital Resources--Acquisitions and Divestitures" and "Liquidity and Capital Resources--Investment in Marketable Securities" below for additional information regarding the transactions discussed above.

Income Taxes. Hughes recognized an income tax benefit of $94.4 million in 2002 compared to $325.6 million in 2001. The lower tax benefit in 2002 was primarily due to lower pre-tax losses and a

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HUGHES ELECTRONICS CORPORATION lower benefit associated with the shutdown of the DIRECTV Broadband business. These decreases were partially offset by the favorable resolution of certain tax contingencies and the discontinuation of amortization of non-deductible goodwill in 2002.

Loss Before Cumulative Effect of Accounting Changes. Hughes reported a loss from continuing operations before cumulative effect of accounting changes of $212.5 million in 2002, compared to $614.2 million in 2001.

Cumulative Effect of Accounting Changes. Hughes adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002. The adoption of this standard resulted in the discontinuation of amortization of goodwill and intangible assets with indefinite lives. In accordance with the transition provisions of SFAS No. 142, Hughes recorded a one-time after-tax charge of $681.3 million related to the initial impairment test on January 1, 2002 as a cumulative effect of accounting change. See "Accounting Changes" below for additional information.

Hughes adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001. SFAS No. 133 required Hughes to carry all derivative financial instruments on the balance sheet at fair value. In accordance with the transition provisions of SFAS No. 133, Hughes recorded a one-time after-tax charge of $7.4 million on January 1, 2001 as a cumulative effect of accounting change and an after-tax unrealized gain of $0.4 million in "Accumulated other comprehensive income (loss)."

Direct-To-Home Broadcast segment revenues increased 14.1% to $7,193.3 million in 2002 from $6,306.4 million in 2001. The Direct-To-Home Broadcast segment had positive EBITDA of $160.8 million in 2002 compared with negative EBITDA of $74.8 million in 2001. The operating loss for the segment decreased to $505.2 million in 2002 from $749.9 million in 2001.

United States. Revenues for DIRECTV U.S. grew to $6,445 million in 2002, a 16% increase over 2001 revenues of $5,552 million. The increase in revenues resulted primarily from an increased number of DIRECTV subscribers and an increase in ARPU. As of December 31, 2002, DIRECTV had approximately 11.2 million subscribers compared to about 10.3 million subscribers as of December 31, 2001. Excluding subscribers in the National Rural Telecommunications Cooperative ("NRTC") territories, DIRECTV owned and operated subscribers totaled 9.5 million and 8.4 million at December 31, 2002 and 2001, respectively. DIRECTV added 1.1 million net new owned and operated subscribers in 2002, compared to 1.2 million net new owned and operated subscribers in 2001. ARPU was $59.80 and $58.70 for the years ended December 31, 2002 and 2001, respectively. The increased ARPU was driven primarily from broader local channel offerings, higher revenues from seasonal and live sporting events and other subscriber revenues, such as revenues from an increased number of subscribers with multiple set-top boxes, partially offset by lower subscriber pay-per-view purchases.

EBITDA was $564 million in 2002 compared to $160 million in 2001. The operating profit in 2002 for the DIRECTV U.S. businesses was $158 million compared to an operating loss of $279 million in 2001. The change in EBITDA was primarily attributable to the additional profit resulting from the higher revenues discussed above, lower total subscriber acquisition costs and a $48 million charge primarily related to severance costs recorded in 2001. These improvements were partially offset by higher subscriber service expenses and the $56 million expense associated with the settlement with GECC. The change in operating loss was due to the increased EBITDA and lower amortization expense of $124 million that resulted from the adoption of SFAS No. 142, which was partially offset by a $91 million increase in depreciation expense related to the addition of property and satellites.

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Latin America. Revenues for the Latin America DIRECTV businesses decreased 6% to $680 million in 2002 from $727 million in 2001. The change in revenues resulted from the devaluation of several foreign currencies, the most significant of which was in Argentina, and lower 2002 subscribers, partially offset by $55 million of revenues generated from the 2002 World Cup. Subscribers declined slightly to about 1.58 million as of December 31, 2002 from about 1.61 million as of December 31, 2001. Due to the economic conditions in Latin America, DLA lost approximately 28,000 net subscribers in 2002, compared to 305,000 net new subscribers additions in 2001. During 2002 and 2001, ARPU for DLA was about $35 and $43 per month, respectively, of which approximately $27 and $34 was generated from monthly programming subscriptions, respectively, with the remainder derived from fees associated with leased equipment. The decrease in ARPU was primarily the result of the devaluation of the Argentinean, Brazilian and Venezuelan currencies against the U.S. dollar.

EBITDA was a negative $202 million in 2002 compared to negative EDITDA of $132 million in 2001. The change in EBITDA was due to the decreased revenues discussed above, the $80 million loss from the 2002 World Cup and the consolidation of GEA beginning in May of 2001, partially offset by lower operating expenses resulting from cost saving initiatives including a reduction in advertising and promotion costs, and renegotiated programming contracts. The Latin America DIRECTV businesses incurred an operating loss of $415 million in 2002 compared to an operating loss of $331 million in 2001. The increased operating loss resulted from the decline in EBITDA and higher depreciation expense of $44 million resulting from the addition of property, partially offset by a decrease in amortization expense of $30 million resulting from the discontinuation of goodwill amortization expense in accordance with SFAS No. 142.

DIRECTV Broadband. Revenues increased $45 million to $72 million for 2002 compared to $27 million for 2001. The increased revenues were primarily due to a

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document larger subscriber base in 2002 and a full year of revenues in 2002 compared with 2001, which only includes revenues from the date of DIRECTV Broadband's acquisition in April 2001. DIRECTV Broadband added about 60,600 net new subscribers for 2002 compared to 26,500 net new subscribers added from the date of its acquisition in 2001. As of December 31, 2002, DIRECTV Broadband had about 151,600 residential broadband subscribers in the United States compared with about 91,000 subscribers as of December 31, 2001.

EBITDA was a negative $201 million for 2002 compared to a negative $106 million for 2001. The operating loss was $248 million for 2002 and $143 million for 2001. The increase in negative EBITDA and operating loss was due to the $92.8 million charge recorded for the costs associated with the shutdown of operations. For further discussion of the DIRECTV Broadband shutdown, see "Liquidity and Capital Resources--Acquisitions and Divestitures" below.

Satellite Services Segment

Revenues for the Satellite Services segment in 2002 decreased $57.8 million to $812.3 million from $870.1 million in 2001. The decrease was primarily due to a decline in outright sales and sales-type lease revenue that amounted to $19.6 million for 2002 compared to $67.9 million for 2001. Revenues from operating leases of transponders, satellite services and other were 97.6% of total 2002 revenues and decreased to $792.7 million from $802.2 million in 2001. Generally, revenues from outright sales and sales-type lease agreements, equal to the net present value of the future minimum lease payments, are recognized at service commencement. Interest income from sales-type leases is recognized over the lease term. Revenues from operating leases are recognized monthly on a straight-line basis over the lease term.

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EBITDA for 2002 was $591.6 million compared to $580.0 million for 2001. EBITDA margin for 2002 was 72.8% compared to 66.7% for 2001. The higher EBITDA and EBITDA margin was principally due to increased operating efficiencies that resulted from cost saving initiatives, a $40.1 million net gain related to the settlement of the PAS-7 insurance claim and a $7.0 million severance charge in the third quarter of 2001. These gains were partially offset by the decline in revenues from outright sales and sales type lease transactions discussed above, an $18.7 million charge for the write-off of receivables due to the conversion of several sales-type leases to operating leases by a PanAmSat customer and a $13.7 million provision for idle facilities and severance costs in 2002. Operating profit was $255.9 million for 2002, compared to $165.3 million in 2001. The increase in operating profit resulted from the increase in EBITDA and lower amortization expense of $65 million for 2002 due to the discontinuation of goodwill amortization in accordance with SFAS No. 142.

Backlog for the Satellite Services segment, which consists primarily of operating leases on satellite transponders, was about $5.55 billion as of December 31, 2002 compared to about $5.84 billion as of December 31, 2001.

Network Systems Segment

Revenues for the Network Systems segment decreased by 11.8% to $1,169.9 million in 2002 from $1,325.8 million for 2001. The lower revenues resulted primarily from the substantial completion in late 2001 of two significant customer contracts for the sale of phones and systems for mobile satellite programs, partially offset by increased sales of DIRECTV receiving equipment, which totaled about 2.6 million units in 2002 compared to about 2.0 million units in 2001.

The Network Systems segment reported negative EBITDA of $87.0 million for 2002 compared to negative EBITDA of $111.8 million for 2001. The Network Systems segment had an operating loss of $160.7 million in 2002 compared to an operating loss of $171.8 million in 2001. The change in EBITDA and operating loss resulted from higher operating margins from increased sales of DIRECTV receiving equipment, a $24.5 million gain resulting from the recovery of receivables written-off in 1999 and lower general and administrative costs, partially offset by a provision for inventory and receivables and a $10.3 million charge related to severance benefits in 2002.

Eliminations and Other

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The elimination of revenues increased to $240.6 million in 2002 from $238.3 million in 2001.

Operating profit from "Eliminations and Other" improved to $10.9 million in 2002 from an operating loss of $1.4 million in 2001. The increase in operating profit resulted primarily from the $95 million net gain recorded from the NASA claim and a 2001 severance charge of $23 million, partially offset by the $23 million loss recorded in connection with the termination of the AOL alliance, higher corporate expenditures related to costs associated with the terminated EchoStar Merger and employee benefit costs.

2001 compared to 2000

Overall

Revenues. Revenues increased 13.4% to $8,264.0 million in 2001 compared with $7,287.6 million in 2000. The increase in revenues resulted primarily from $1,068.4 million of higher revenues at the Direct-To-Home Broadcast segment over 2000. This increase was due primarily to the addition of about 1.5 million net new DIRECTV subscribers in the United States and Latin America

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HUGHES ELECTRONICS CORPORATION since December 31, 2000 and the added revenues from the consolidation of GEA beginning in May 2001. The increased revenues from the Direct-To-Home Broadcast segment were partially offset by a decrease in revenues of $153.5 million at the Satellite Services segment and $84.0 million at the Network Systems segment. The decrease in revenues from the Satellite Services segment was principally due to a lower volume of new outright sales and sales-type lease transactions executed during 2001 compared to 2000. The decrease in revenues from the Network Systems segment was principally due to decreased shipments of DIRECTV(TM) receiving equipment that resulted from DIRECTV completing the conversion of the PRIMESTAR By DIRECTV customers to the DIRECTV service in the third quarter of 2000.

Operating Costs and Expenses. Operating costs and expenses increased to $9,021.8 million in 2001 from $7,641.7 million in 2000. Broadcast programming and other costs increased by $517.8 million during 2001 due to higher costs at the Direct-To-Home Broadcast segment, resulting from higher programming costs associated with the increase in subscribers and added costs from DIRECTV Broadband. This increase was partially offset by decreased costs at the Satellite Services segment associated with the lower new outright sales and sales-type lease transaction activity in 2001. Costs of products sold increased by $85.1 million in 2001 from 2000 mainly due to higher costs associated with a mobile telephony contract and increased costs associated with the DIRECWAY service at the Network Systems segment. Selling, general and administrative expenses increased by $577.6 million in 2001 from 2000 due primarily to higher subscriber acquisition and marketing costs at the Direct-To-Home Broadcast segment in both the United States and Latin America, added costs from DIRECTV Broadband, and the $87.5 million charge related to the 2001 company-wide employee reductions. Depreciation and amortization increased by $199.6 million in 2001 over 2000 due primarily to the addition of property and satellites since December 31, 2000, a reduction in the useful life of the Galaxy VIII-i satellite due to the failure of its primary propulsion system during the third quarter of 2000, and added goodwill amortization and depreciation that resulted from the DIRECTV Broadband and GEA transactions.

EBITDA. EBITDA for 2001 was $389.9 million and EBITDA margin was 4.7%, compared to EBITDA of $594.0 million and EBITDA margin of 8.2% for 2000. The change in EBITDA and EBITDA margin resulted from lower EBITDA at the Satellite Services segment principally due to decreased new outright sales and sales-type lease transactions executed during 2001 compared to 2000 and higher direct operating and selling, general and administrative expenses; lower EBITDA at the Network Systems segment primarily due to increased costs associated with the rollout of new DIRECWAY(R) services and decreased shipments of DIRECTV receiving equipment; and lower EBITDA at the Direct-To-Home Broadcast segment due to negative EBITDA from DIRECTV Broadband and the company-wide $87.5 million charge primarily related to severance.

Operating Loss. Hughes' operating loss was $757.8 million in 2001, compared to $354.1 million in 2000. The increased operating loss resulted from the decrease

Interest Income and Expense. Interest income increased to $56.7 million in 2001 compared to $49.3 million in 2000 due to an increase in cash and cash equivalents that resulted from the sale of the Satellite Businesses in October of 2000. Interest expense decreased to $195.9 million in 2001 from $218.2 million in 2000. The lower interest expense resulted primarily from lower average outstanding borrowings. Interest expense is net of capitalized interest of $76.3 million and $82.4 million in 2001 and 2000, respectively. Changes in cash and cash equivalents and debt are discussed in more detail below under "Liquidity and Capital Resources."

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HUGHES ELECTRONICS CORPORATION

Other, Net. Other, net decreased to a loss of $92.7 million in 2001 from a loss of $292.6 million in 2000. Other, net for 2001 resulted primarily from equity method investee losses of $61.3 million, a write-down of $212.0 million related to the Sky Perfect investment, partially offset by $130.6 million of net gains from the sale of certain marketable equity securities and the reversal of $32.0 million of accrued exit costs related to the DIRECTV Japan business. Including the write-down of the Sky Perfect investment, Hughes recognized $226.1 million of write-downs related to other-than-temporary declines in the fair value of marketable equity securities in 2001. The loss in 2000 included $164.2 million of equity method investee losses and $128.4 million of costs related to the exit of the DIRECTV Japan business. The change in equity method investee losses in 2001 compared to 2000 resulted from lower losses at DIRECTV Japan due to the shutdown of the business at September 30, 2000. See "Liquidity and Capital Resources--Acquisitions and Divestitures" and "Liquidity and Capital Resources--Investments in Marketable Securities" below for additional information regarding the transaction discussed above.

Income Taxes. Hughes recognized an income tax benefit of $325.6 million in 2001 compared to $406.1 million in 2000. The lower tax benefit in 2001 was primarily due to an additional tax benefit in 2000 associated with the write-off of Hughes' historical investment in DIRECTV Japan as well as the effect of favorable tax settlements recorded in 2000. The 2000 tax benefits were partially offset by higher pre-tax losses in 2001 compared to 2000 and a 2001 tax benefit resulting from the write-off of an investment in Motient Corporation ("Motient").

Loss from Continuing Operations. Hughes reported a loss from continuing operations before cumulative effect of accounting change of $614.2 million in 2001, compared to $355.4 million in 2000.

Cumulative Effect of Accounting Change. Hughes adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001. SFAS No. 133 requires Hughes to carry all derivative financial instruments on the balance sheet at fair value. In accordance with the transition provisions of SFAS No. 133, Hughes recorded a one-time after-tax charge of $7.4 million on January 1, 2001 as a cumulative effect of accounting change and an after-tax unrealized gain of $0.4 million in "Accumulated other comprehensive income (loss)."

Direct-To-Home Broadcast Segment

Direct-To-Home Broadcast segment revenues increased 20.4% to $6,306.4 million in 2001 from $5,238.0 million in 2000. The Direct-To-Home Broadcast segment had negative EBITDA of $74.8 million in 2001 compared with negative EBITDA of $24.5 million in 2000. The operating loss for the segment increased to $749.9 million in 2001 from $557.9 million in 2000.

United States. The DIRECTV U.S. businesses were the biggest contributors to the segment's revenue growth with revenues of $5,552 million in 2001, an 18% increase over 2000 revenues of $4,694 million. The large increase in revenues resulted primarily from an increased number of DIRECTV subscribers since December 31, 2000 and higher revenues from local channel offerings, pay-per-view movies, sporting events and other subscriber revenues, such as revenues from an increased number of subscribers with multiple set-top boxes. The DIRECTV U.S. businesses added 1.2 million net new subscribers in 2001, compared to 1.8 million net new subscribers in 2000. In addition, during the third quarter of 2001, DIRECTV made a one-time downward adjustment of approximately 143,000 subscribers. This adjustment primarily corrected errors that had accumulated

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document over the preceding 18 months related to subscribers who disconnected service prior to June 30, 2001 but were counted as active subscribers in DIRECTV's database. As of December 31, 2001, DIRECTV had about 10.3 million subscribers compared to about 9.1 million subscribers at December 31, 2000. ARPU for DIRECTV U.S. was $58.70 and $57.70 in 2001 and 2000, respectively.

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EBITDA was $160 million in 2001 compared to $151 million in 2000. The operating loss in 2001 for the DIRECTV U.S. businesses was $279 million compared to $244 million in 2000. The change in EBITDA resulted from increased profit on the higher revenues discussed above and the improvement in subscriber service expenses and broadcast operations expenses due mostly to the exit of the PRIMESTAR business in September 2000, which more than offset higher subscriber acquisition costs and operating costs and a $48 million charge related to 2001 employee reductions. The higher operating loss was principally due to increased depreciation primarily associated with customer leased DIRECTV receiving equipment.

Latin America. Revenues for the Latin America DIRECTV businesses increased 34% to $727 million in 2001 from $541 million in 2000. The increase in revenues was primarily due to continued subscriber growth as well as the consolidation of GEA. Subscribers grew to 1.6 million at December 31, 2001 compared to 1.3 million in 2000. Latin America DIRECTV added 305,000 net new subscribers in 2001, compared to 501,000 net new subscribers added in 2000. During 2001 and 2000, the average revenue per subscriber for the Latin American businesses was about $43 and $45 per month, respectively, of which approximately $34 and $36 was generated from monthly programming subscriptions, respectively, with the remainder derived from fees associated with leased equipment.

EBITDA was a negative $132 million in 2001 compared to negative EDITDA of $171 million in 2000. The change in EBITDA resulted primarily from the increased revenues discussed above, partially offset by a $29 million charge for the recent devaluation of the Argentinean peso, higher marketing costs and a $10 million charge related to 2001 employee reductions. The Latin America DIRECTV businesses incurred an operating loss of $331 million in 2001 compared to an operating loss of $309 million in 2000. The increased operating loss resulted from higher depreciation expense due to an increase in customer leased DIRECTV receiving equipment and amortization of goodwill that resulted primarily from the GEA transaction.

DIRECTV Broadband. Revenues and EBITDA for DIRECTV Broadband were $27 million and negative $106 million for 2001, respectively. DIRECTV Broadband incurred an operating loss of $143 million for 2001. Since its April 3, 2001 acquisition, DIRECTV Broadband has added about 26,500 net subscribers. Net subscriber additions were negatively impacted by customer churn that resulted from the bankruptcy of two wholesale providers of DSL services. At December 31, 2001, DIRECTV Broadband had more than 91,000 residential broadband subscribers in the United States.

Satellite Services Segment

Revenues for the Satellite Services segment in 2001 decreased $153.5 million to $870.1 million from $1,023.6 million in 2000. The decrease was primarily due to a decline in new outright sales and sales-type lease transactions. Revenues associated with outright sales and sales-type leases of transponders were $67.9 million in 2001 compared to $243.3 million for 2000. Revenues from operating leases of transponders, satellite services and other were 92.2% of total 2001 revenues and increased by 2.8% to $802.2 million from $780.3 million in 2000.

EBITDA for 2001 was $580.0 million compared to $694.0 million for 2000. The decrease in EBITDA was due to the decreased revenues discussed above, higher direct operating and selling, general and administrative expenses to support the continued satellite fleet expansion, costs associated with new service initiatives, and a $7.0 million severance charge in the third quarter of 2001. EBITDA margin for 2001 was 66.7% compared to 67.8% for 2000. The decrease in EBITDA margin was due to the lower sales and higher operating costs. Operating profit was $165.3 million for

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2001, compared to $356.6 million for 2000. The decrease in operating profit resulted from the decrease in EBITDA and higher depreciation expense related to additional satellites placed into service since December 31, 2000, and increased depreciation expense that resulted from a reduction in the useful life of the Galaxy VIII-i satellite due to the failure of its primary propulsion system during the third quarter of 2000.

Backlog for the Satellite Services segment, which consists primarily of operating leases on satellite transponders, was about $5.84 billion as of December 31, 2001 compared to about $6.0 billion as of December 31, 2000.

Network Systems Segment

Revenues for the Network Systems segment decreased by 6.0% to $1,325.8 million in 2001 from $1,409.8 million in 2000. The lower revenues resulted primarily from decreased shipments of DIRECTV receiver equipment, which totaled about 2.0 million units in 2001 compared to about 3.0 million units in 2000, due primarily to DIRECTV completing the conversion of PRIMESTAR By DIRECTV customers to the DIRECTV service in the third quarter of 2000.

The Network Systems segment reported negative EBITDA of $111.8 million for 2001 compared to EBITDA of $0.1 million for 2000. The Network Systems segment had an operating loss of $171.8 million for 2001 compared to an operating loss of $63.5 million for 2000. The change in EBITDA and operating loss resulted from increased costs associated with the rollout of new DIRECWAY services, including AOL Plus Powered by DIRECWAY and the decreased revenues discussed above.

Eliminations and Other

The elimination of revenues decreased to $238.3 million in 2001 from $383.8 million in 2000 due primarily to the decline in intercompany purchases of DIRECTV receiving equipment and lower manufacturing subsidies paid by DIRECTV to HNS. Intercompany transactions include sales of receiving equipment from HNS to DIRECTV, and PanAmSat transponder leases to HNS and DLA.

Operating losses from "Eliminations and Other" improved to a loss of $1.4 million in 2001 from a loss of $89.3 million in 2000 due primarily to decreased corporate expenditures for employee benefits and lower margins on intercompany sales.

Liquidity and Capital Resources

In 2002, Hughes had sources of cash of $2,141.7 million, resulting primarily from additional net borrowings of $470.5 million, proceeds from the sale of investments of $322.4 million, insurance proceeds of $215.0 million and cash provided by operations of $1,126.1 million. Cash provided by operations included cash receipts of $600.0 million from the settlement payment related to the terminated merger agreement with EchoStar and a cash payment by Hughes of $180.0 million related to the GECC settlement. These sources of cash were offset by cash used during 2002 of about $1,713.2 million, primarily for expenditures for satellites and property of $1,298.1 million, the final settlement payment to Raytheon of $134.2 million, the $99.8 million purchase of short-term investments, preferred stock dividends paid to GM of $68.7 million and debt issuance costs of $85.4 million.

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As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) at December 31, 2002 and 2001 was 1.14 and 0.76, respectively. Working capital increased by $1,518.7 million to working capital of $453.3 million at December 31, 2002 from a working capital deficit of $1,065.4 million at December 31, 2001. The change was principally due to the repayment of current debt obligations and an increase in cash balances, both of which were funded by the proceeds received from long-term borrowings that resulted from the refinancing transactions described in more detail below, the cash receipts of $600 million from the settlement payment related to the terminated merger agreement with EchoStar and proceeds from the sale of investments.

Hughes expects to have cash requirements for its continuing operations in 2003

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document of about $200 million to $300 million. This cash will be used primarily for capital expenditures for satellites and property, interest expense and investments in affiliated companies, including the Latin America DIRECTV businesses. The above cash requirements do not include non-operational cash requirements such as costs related to the shutdown of the DIRECTV Broadband business and a potential purchase price adjustment payment to Boeing. For further discussion of the Boeing purchase price adjustment, see "Commitments and Contingencies" below. Hughes' cash requirements are expected to be funded from a combination of existing cash balances, cash provided from operations, amounts available under credit facilities, and additional borrowings or refinancings, as needed. In the first quarter of 2003, Hughes completed a series of financing transactions designed to provide sufficient liquidity to fund Hughes' business plan through cash flow breakeven. See "Notes Payable and Credit Facilities" below for additional information.

Hughes' and its subsidiaries' ability to borrow under the credit facilities is contingent upon meeting financial and other covenants. The agreements also include certain operational restrictions. These covenants limit Hughes' and its subsidiaries' ability to, among other things: incur or guarantee additional indebtedness; make restricted payments, including dividends; create or permit to exist certain liens; enter into business combinations and asset sale transactions; make investments; enter into transactions with affiliates; and enter into new businesses. In addition, the terms of the PanAmSat debt and credit facilities restrict PanAmSat from transferring funds to Hughes in the form of cash dividends, loans or advances. At December 31, 2002, Hughes and its subsidiaries were in compliance with all such covenants.

Common Stock Dividend Policy. Dividends may be paid on the GM Class H common stock only when, as, and if declared by GM's Board in its sole discretion.

The GM Board has not paid, and does not currently intend to pay in the foreseeable future, cash dividends on its Class H common stock. Similarly, Hughes has not paid dividends on its common stock to GM. Future Hughes earnings, if any, are expected to be retained for the development of the businesses of Hughes.

Cash and Cash Equivalents. Cash and cash equivalents were $1,128.6 million at December 31, 2002 compared to $700.1 million at December 31, 2001. Included within cash and cash equivalents at December 31, 2002 was $784.0 million of cash and cash equivalents at PanAmSat, which are available to PanAmSat but are generally not available for use by Hughes in its other businesses.

Cash provided by operating activities was $1,126.1 million in 2002 compared to $190.3 million in 2001 and $1,090.7 million in 2000. The change in 2002 compared to 2001 resulted from the settlement

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HUGHES ELECTRONICS CORPORATION payment related to the terminated merger agreement with EchoStar and $452.6 million of lower cash requirements for the change in operating assets and liabilities. The change in 2001 compared to 2000 resulted from $506.9 million of higher cash requirements for the change in operating assets and liabilities and $393.5 million of lower income from continuing operations excluding non-cash adjustments, such as deferred income taxes and other, depreciation and amortization, net gain from sale of investments and net loss on write-down of investments.

Cash provided by (used in) investing activities was $(887.2) million in 2002 compared to $(1,741.2) million in 2001 and $2,210.8 million in 2000. The change from 2002 to 2001 was primarily from reduced expenditures for satellites and property, reduced investments in companies, increased proceeds from the sale of investments and insurance claims, partially offset by a $99.8 million purchase of short-term investments by PanAmSat in 2002. The change from 2001 to 2000 was primarily from decreased proceeds from the sale of investments, which in 2000 included the proceeds from the sale of the Satellite Businesses to Boeing, and an increase in satellites and investment in companies in 2001, offset by lower expenditures for property and higher proceeds from insurance claims in 2001.

Cash provided by (used in) financing activities was $189.6 million in 2002 compared to $742.9 million in 2001 and $(849.6) million in 2000. Financing activities in 2002 includes net borrowings of $470.5 million, partially offset

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document by the $134.2 million final payment of the Raytheon settlement, the payment of preferred stock dividends to GM and debt issuance costs of $85.4 million. Financing activities in 2001 includes an increase in borrowings of $1,314.8 million, partially offset by the $500 million partial payment of the Raytheon settlement and the payment of preferred stock dividends to GM. Financing activities in 2000 reflect the repayment of debt and payment of preferred stock dividends to GM.

Cash used in discontinued operations was $1.2 billion in 2000, which was primarily due to $1.1 billion of taxes associated with the sale of the Satellite Businesses.

Property and Satellites. Property, net of accumulated depreciation, decreased $180.4 million to $2,017.4 million in 2002 from $2,197.8 million in 2001. The decrease in property resulted primarily from depreciation partially offset by capital expenditures of $566.4 million. The decrease in capital expenditures for property of $233.0 million in 2002 compared to 2001 was primarily due to a decrease in the purchase of DIRECTV receiving equipment in Latin America due to the economic environment and reduction in subscribers as well as decreased capital expenditures for property at PanAmSat. Satellites, net of accumulated depreciation, increased $116.0 million to $4,922.6 million in 2002 from $4,806.6 million in 2001. The increase in satellites resulted primarily from capital expenditures of $731.7 million for the construction of satellites, offset by depreciation of $375.7 million and the write-off of PAS-7 during the first quarter of 2002. The decrease in capital expenditures for satellites of $212.4 million in 2002 compared to 2001 was primarily due to decreased spending on SPACEWAY as the platform nears completion and DIRECTV 4S, which was launched in the fourth quarter of 2001. Total capital expenditures decreased to $1,298.1 million in 2002 from $1,743.5 million in 2001.

Notes Payable and Credit Facilities. Notes Payable. In February 2002, PanAmSat completed an $800 million private placement notes offering. Such notes were exchanged for registered notes in November 2002. These unsecured notes bear interest at an annual rate of 8.5%, payable semi-annually and mature in 2012.

In January 2002, PanAmSat repaid in full the $46.5 million outstanding balance of variable rate notes assumed in 1999 in connection with the early buy-out of a satellite sale-leaseback.

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PanAmSat issued five, seven, ten and thirty-year fixed rate notes totaling $750.0 million in January 1998. The $200 million five-year notes were repaid in January 2003. The outstanding principal balances and interest rates for the seven, ten and thirty-year notes as of December 31, 2002 were $275 million at 6.125%, $150 million at 6.375% and $125 million at 6.875%, respectively. Principal on the notes is payable at maturity, while interest is payable semi-annually. In connection with a new secured bank facility entered into by PanAmSat in February 2002, described below, these notes were ratably secured by certain of the operating assets of PanAmSat that were pledged in connection with the secured bank facility.

Credit Facilities. In February 2002, Hughes amended and increased its existing $750.0 million multi-year credit facility (the "Amended Credit Agreement"). The Amended Credit Agreement provided availability of $1,235.2 million in revolving borrowings. The facility was secured by substantially all of Hughes' assets other than the assets of DLA and PanAmSat. In March 2002, Hughes borrowed an additional $764.8 million under a term loan tranche that was added to the Amended Credit Agreement. The Amended Credit Agreement was subsequently amended in November 2002. The November 2002 amendment reduced the size of the term loan from $764.8 million to $650.0 million and increased the size of the revolving component to $1,284.0 million, of which $500 million was committed by General Motors Acceptance Corporation ("GMAC"). In December 2002, EchoStar paid $600 million for the termination of the merger agreement, which resulted in a $143.7 million mandatory prepayment of the term loan under the Amended Credit Agreement. Accordingly, the term loan was reduced from $650.0 million to $506.3 million. As of December 31, 2002, the revolving component of the Amended Credit Agreement was undrawn and $506.3 million was outstanding under the term loan. The Amended Credit Agreement was terminated on February 28, 2003 and all amounts outstanding were repaid by Hughes from the proceeds of the DIRECTV Holdings LLC ("DIRECTV") notes offering described below.

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document In the first quarter of 2003, Hughes completed a series of financing transactions to replace the Amended Credit Agreement with a capital structure that is more long-term in nature. On February 28, 2003, DIRECTV issued $1.4 billion in senior notes due in 2013. The ten-year senior notes are unsecured indebtedness guaranteed by all of DIRECTV's domestic subsidiaries and bear interest at 8.375%. In addition, on March 6, 2003, DIRECTV entered into a new senior secured credit facility with total term loan and revolving loan commitments of $1.675 billion. The new senior secured credit facility is comprised of a $375.0 million Tranche A Term Loan, $200.0 million of which was undrawn at March 6, 2003, a $1,050.0 million Tranche B Term Loan and a $250.0 million revolving credit facility which was undrawn at March 6, 2003. The new senior secured credit facility has a term of five to seven years and is secured by substantially all of DIRECTV's assets and guaranteed by all of DIRECTV's domestic subsidiaries. The revolving credit facility and term loans bear interest at the London Interbank Offered Rate ("LIBOR") plus 3.50%. DIRECTV distributed to Hughes the net proceeds from the senior secured credit facility and the sale of the senior notes totaling $2.56 billion. The $200 million undrawn portion of the Tranche A Term Loan is expected to be drawn by December 31, 2003 with the proceeds distributed to Hughes. The revolving portion of the senior secured credit facility will be available to DIRECTV to fund working capital and other requirements. The above distribution enabled Hughes to repay all amounts outstanding under its existing Amended Credit Agreement and is expected to provide sufficient liquidity to fund Hughes' business plan through projected cash flow breakeven and for Hughes' other corporate purposes.

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LIBOR plus 3.5%. The revolving credit facility and Tranche A Term Loan interest rates may be increased or decreased based upon changes in PanAmSat's total leverage ratio, as defined by the credit agreement. The revolving credit facility and the Tranche A Term Loan terminate in 2007 and the Tranche B Term Loan matures in 2008. Principal payments under the Tranche A Term Loan are due in varying amounts from 2004 to 2007. Principal payments under the Tranche B Term Loan are due primarily at maturity. The facilities are secured ratably by substantially all of PanAmSat's operating assets, including its satellites. PanAmSat repaid a $1,725 million intercompany loan from Hughes in February 2002, using proceeds from the bank facility and notes payable described above, as well as existing cash balances.

On October 1, 2001, Hughes entered into a $2.0 billion revolving credit facility with GMAC. The facility was subsequently amended in February and November 2002. The most recent amendment reduced the size of the facility to $1,500 million and provided for a commitment through August 31, 2003. The facility is comprised of a $1,500 million tranche secured by a $1,500 million Hughes cash deposit. Borrowings under the facility bear interest at GMAC's cost of funds plus 0.125%. The $1,500 million cash deposit earns interest at a rate equivalent to GMAC's cost of funds. Hughes has the legal right of setoff with respect to the $1,500 million GMAC cash deposit, and accordingly offsets it against amounts borrowed from GMAC under the $1,500 million tranche in the consolidated statement of financial position. The facility was fully drawn as of December 31, 2002.

On January 5, 2001, DLA entered into a $450.0 million revolving credit facility. The obligations under the DLA facility were assigned to Hughes in February 2002. In addition, the obligations under SurFin's unsecured revolving credit facilities of $400.0 million and $212.5 million were assigned to Hughes in February 2002.

Other. $61.5 million in other short-term and long-term debt, related primarily to DLA and HNS' international subsidiaries, was outstanding at December 31, 2002, bearing fixed and floating rates of interest of 4.30% to 16.00%. Principal on these borrowings is due in varying amounts through 2007.

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Acquisitions and Divestitures. DIRECTV Broadband. On April 3, 2001, Hughes acquired Telocity, a company that provided land-based DSL services, through the completion of a tender offer and merger. Telocity was operated as DIRECTV Broadband and is included as part of the Direct-To-Home Broadcast segment. The purchase price was $197.8 million and was paid in cash.

The financial information included herein reflects the acquisition discussed above from its date of acquisition. The acquisition was accounted for by the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition.

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Hughes Tele.com (India) Limited. On December 6, 2002, HNS completed a series of transactions to exchange its equity interest in HTIL of $58.8 million, long-term receivables from HTIL of $75.0 million, and a net receivable of $25.4 million from HTIL's Indian sponsor, Ispat, in exchange for investments in Tata Teleservices Limited ("TTSL"). The transactions were accounted for as a sale of the assets surrendered at their fair values and the purchase of the instruments in TTSL on the date of the transactions. HNS allocated the fair value of the assets surrendered of $135.1 million to the assets received, which include redeemable preference shares ($110.1 million), a 15 year zero coupon note ($9.7 million) and 50 million common stock purchase warrants ($15.3 million), based on their relative fair values. The preference shares are redeemable at the end of 51 or 75 months at the option of HNS and are also convertible to common equity at the end of 75 months at the option of HNS. The redemption is guaranteed in the form of a put to TTSL's parent company, Tata Sons. The preference shares are carried at fair value as an available-for-sale debt security, with unrealized gains and losses reported, net of tax, as a component of OCI.

Based on the fair value of the assets surrendered on December 6, 2002, HNS recognized an after-tax loss of approximately $14.1 million, which is comprised of a pre-tax loss recognized in "Other, net" of $52.1 million, based on the difference between fair value and carrying value of the assets surrendered and the requirement to recognize cumulative translation adjustments of $28.0 million associated with the HTIL investment, which were offset by an approximate $38.0 million tax benefit which includes the tax benefit from equity method losses that were not previously recognized for tax purposes.

Also during 2002, HNS recorded the receivable from Ispat described above when it honored a $54.4 million loan guarantee. The receivable was immediately reduced to its estimated net realizable value of $25.4 million through a charge to "Other, net" of $29.0 million.

During September 2000, HTIL sold new common shares in a public offering in India. As a result of this transaction, Hughes' equity interest was reduced from 44.7% to 29.1% and Hughes recorded a $23.3 million increase to "Capital stock and additional paid-in capital."

Galaxy Entertainment Argentina. On May 1, 2001, DLA acquired from Grupo Clarin S.A. ("Clarin") a 51% ownership interest in GEA, a local operating company in Argentina that provides direct-to-home broadcast services, and other assets,

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document consisting primarily of programming and advertising rights. The purchase price, valued at $169 million, consisted of a 3.98% ownership interest in DLA and a put option that under certain circumstances will allow Clarin to sell its 3.98% interest back to DLA in November 2003 for $195 million (see "Commitments and Contingencies" below for further discussion). As a result of the transaction, Hughes' interest in DLA decreased from 77.8% to 74.7% and Hughes' ownership in GEA increased from 20% to 58.1%. Hughes' portion of the purchase price, which amounted to about $130 million, was recorded as an increase to "Capital stock and additional paid-in capital."

Satellite Systems Manufacturing Businesses. On October 6, 2000, Hughes completed the sale of its satellite systems manufacturing businesses for $3.75 billion in cash. The transaction resulted in the recognition of a pre-tax gain of $2,036.0 million, or $1,132.3 million after-tax. Included in this gain is a net after-tax curtailment loss of $42.0 million related to pension and other post retirement benefit plan assets and liabilities associated with the Satellite Businesses. The purchase price is subject to adjustment based upon the final closing date financial statements as discussed in "Commitments and Contingencies" below.

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In a separate, but related transaction, Hughes also sold to Boeing its 50% interest in HRL Laboratories LLC ("HRL") for $38.5 million, which represented the net book value of Hughes' interest in HRL at October 6, 2000.

DIRECTV Japan. On March 1, 2000, Hughes announced that the operations of DIRECTV Japan would be discontinued. Pursuant to an agreement with Japan Digital Broadcasting Services Inc. (now named Sky Perfect), qualified subscribers to the DIRECTV Japan service were offered the opportunity to migrate to the Sky Perfect service. DIRECTV Japan was paid a commission for each subscriber who actually migrated. Hughes also acquired a 6.6% interest in Sky Perfect. As a result, Hughes wrote-off its net investment in DIRECTV Japan of $164.6 million and accrued exit costs of $403.7 million and involuntary termination benefits of $14.5 million. Accrued exit costs consist of claims arising out of contracts with dealers, manufacturers, programmers and others, satellite transponder and facility and equipment leases, subscriber migration and termination costs, and professional service fees and other. The write-off and accrual were partially offset by the difference between the cost of the Sky Perfect shares acquired and the estimated fair value of the shares ($428.8 million), as determined by an independent appraisal, and by $40.2 million for anticipated contributions from other DIRECTV Japan shareholders. The net effect of the transaction was a charge to "Other, net" in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) of $170.6 million at March 31, 2000.

DIRECTV Japan employed approximately 290 personnel as of March 31, 2000, of which 244 were terminated during 2000. All remaining personnel were terminated in the first quarter of 2001.

During 2002, $41.1 million of accrued liabilities related to the exit costs were reversed upon the resolution of the remaining claims, resulting in a credit adjustment to "Other, net." In the third quarter of 2001, $32.0 million of accrued exit costs were reversed as a credit adjustment to "Other, net." In the fourth quarter of 2000, $106.6 million of accrued exit costs were reversed and $0.6 million of involuntary termination benefits were added, resulting in a net credit adjustment to "Other, net" of $106.0 million. The third quarter of 2001 and fourth quarter of 2000 adjustments made to the exit cost accrual were primarily attributable to earlier than anticipated cessation of the DIRECTV Japan broadcasting service, greater than anticipated commission payments for subscriber migration and favorable settlements of various contracts and claims.

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document "other-than-temporary," resulting in a write-down of the carrying value of the investment by $212 million and $86 million, respectively. At December 31, 2001, the investment's market value approximated its carrying value. In October 2002, Hughes sold all of its interest in Sky Perfect for approximately $105 million in cash, resulting in a pre-tax loss of about $24.5 million.

Investments in Marketable Securities. Investments in marketable equity securities stated at current fair value and classified as available-for-sale totaled $98.2 million and $725.4 million at December 31, 2002 and 2001, respectively, and were recorded in the Consolidated Balance Sheets in "Investment and Other Assets." Investments in debt securities, stated at current fair value and classified as available-for-sale, totaled $209.9 million at December 31, 2002. Investments in debt securities with maturities of less than one year totaling $99.8 million are carried in "Prepaid expenses and other." Investments in debt securities with remaining maturities of six years totaling $110.1 million are carried in "Investments and Other Assets."

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At December 31, 2002, $3.4 million in accumulated unrealized pre-tax losses were recorded as part of OCI. At December 31, 2001, $323.1 million of accumulated unrealized pre-tax gains were recorded as part of OCI. During 2002 and 2001, Hughes recorded a write-down for other-than-temporary declines in certain marketable equity investments of $148.9 million and $226.1 million, respectively.

On August 21, 2002, Hughes sold about 8.8 million shares of Thomson common stock for approximately $211.0 million in cash, resulting in a pre-tax gain of about $158.6 million.

On November 19, 2001, Hughes repaid $74.9 million of debt pursuant to the terms of a debt guarantee provided by Hughes for the benefit of Motient. In connection with the payment, Hughes received from Motient 7.1 million common shares of XM Satellite Radio Holdings Inc. stock, with a market value as of November 2001 of $67.9 million and $3.6 million in cash. The repayment of Motient's debt released Hughes of any further obligations related to Motient's indebtedness and therefore Hughes reversed a related reserve of $39.5 million. The net effect of these actions resulted in a credit of $36.1 million to "Other, net" in the Consolidated Statement of Operations and Available Separate Consolidated Net Income (Loss).

On July 31, 2001, Hughes sold about 4.1 million shares of Thomson common stock for approximately $132.7 million in cash, resulting in a pre-tax gain of approximately $108.3 million.

Pension Plans. Hughes recorded pension expense of $24.2 million in 2002, $10.2 million in 2001, and $10.9 million in 2000 related to its funded and unfunded defined benefit retirement plans. Hughes contributed $7.9 million in 2002, $6.4 million in 2001 and $8.0 million in 2000 to its unfunded plans for benefit payments. The pension benefit obligation of Hughes' defined benefit retirement plans exceeded the fair value of plan assets by about $135.5 million at December 31, 2002 and $39.9 million at December 31, 2001. The increase in the unfunded benefit obligation is largely the result of unfavorable equity market performance, a lower discount rate and benefit payments made during 2002.

Hughes uses December 1 as the measurement date to determine the Projected Benefit Obligation ("PBO") reported for year end and for the pension expense to be recorded in the subsequent year. The discount rate assumption is determined based on the yield of high quality fixed-income debt instruments. For purposes of determining Hughes' PBO as of December 31, 2002 and pension expense in 2003, Hughes used a discount rate of 7.00% as of December 1, 2002, a 1/4% reduction from the 7.25% discount rate used in the prior year. A further 1/4% decrease in the discount rate would increase the PBO by approximately $11.5 million and reduce equity, net of taxes, by approximately $6.0 million, while a 1/4% increase in the discount rate would decrease the PBO by approximately $11.2 million and increase equity, net of taxes, by approximately $5.5 million. These assumed changes in discount rates would also result in a change to pension expense of less than $1 million.

Hughes' expected return on plan assets assumption is derived from a review of Hughes' long-term actual return on plan assets, annual survey data, and periodic

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document detailed studies conducted by Hughes' actuary. While the review gives appropriate consideration to recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate. Based on the most recent review, Hughes is revising its expected long-term return on plan assets assumption for 2003 to 9.00%, a reduction from its previous level of 9.50%. Although in 2002 and 2001, asset returns have been below Hughes' long-term return on plan asset assumption, Hughes has achieved a compounded annual return on plan assets of about 12% over the 20 year period ended December 1, 2002. An additional 1/4% reduction in the expected return on plan assets would increase the 2003 expense by approximately $1 million. Hughes' funding requirements would not be impacted by changes in the discount rate or the expected return on plan asset assumption.

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Commitments and Contingencies

Litigation

In connection with the 2000 sale by Hughes of its satellite systems manufacturing businesses to Boeing, the stock purchase agreement provides for potential adjustment to the purchase price based upon the final closing date financial statements of the satellite systems manufacturing businesses. The stock purchase agreement also provides for a dispute resolution process to resolve any disputes that arise in determining the purchase price adjustment. Based upon the final closing date financial statements of the satellite systems manufacturing businesses that were prepared by Hughes, Boeing is owed a purchase price adjustment of $164 million plus interest at a rate of 9.5% from the date of sale, the total amount of which has been provided for in Hughes' consolidated financial statements. However, Boeing has submitted additional proposed adjustments, which are being resolved through the dispute resolution process. As of December 31, 2002, approximately $670 million of proposed adjustments remain unresolved. Hughes is contesting the matter in the arbitration process, which will result in a binding decision unless the matter is otherwise settled. Although Hughes believes it has adequately provided for the disposition of this matter, the impact of its disposition cannot be determined at this time. It is possible that the final resolution of this matter could result in Hughes making a cash payment to Boeing that would be material to Hughes' consolidated results of operations and financial position.

Litigation is subject to uncertainties and the outcome of individual litigated matters is not predictable with assurance. In addition to the above item, various legal actions, claims, and proceedings are pending against Hughes arising in the ordinary course of business. Hughes has established loss provisions for matters in which losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or treble damage claims, or sanctions, that if granted, could require Hughes to pay damages or make other expenditures in amounts that could not be estimated at December 31, 2002. After discussion with counsel representing Hughes in those actions, it is the opinion of management that such liability is not expected to have a material adverse effect on Hughes' consolidated results of operations and financial position. See Item 3. Legal Proceedings under Part I for further information.

Other

The in-orbit satellites of Hughes and its subsidiaries are subject to the risk of failing prematurely due to, among other things, mechanical failure, collision with objects in space or an inability to maintain proper orbit. Satellites are subject to the risk of launch delay and failure, destruction and damage while on the ground or during launch and failure to become fully operational once launched. Delays in the production or launch of a satellite or the complete or partial loss of a satellite, in-orbit or during launch, could have a material adverse impact on the operation of Hughes' businesses. Hughes has, in the past, experienced technical anomalies on some of its satellites. Service interruptions caused by anomalies, depending on their severity, could result in claims by affected customers for termination of their transponder agreements, cancellation of other service contracts or the loss of other customers.

Hughes uses in-orbit and launch insurance to mitigate the potential financial impact of satellite fleet in-orbit and launch failures unless the premium costs

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document are considered uneconomic relative to the risk of satellite failure. The insurance generally covers the unamortized book value of covered satellites and does not compensate for business interruption or loss of future revenues or customers. Hughes relies on in-orbit spare satellites and excess transponder capacity at key orbital slots to mitigate the effects of satellite failure on its ability to provide service. Where insurance costs related to known satellite anomalies are prohibitive, Hughes' insurance policies contain coverage exclusions and

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HUGHES ELECTRONICS CORPORATION

Hughes is not insured for certain other satellites. The book value of satellites that were insured with coverage exclusions amounted to $563.5 million and the book value of the satellites that were not insured was $1,049.7 million at December 31, 2002.

On February 19, 2003, PanAmSat filed proofs of loss under the insurance policies for Galaxy XI and PAS-1R for constructive total losses based on degradation of the solar panels. Service to existing customers has not been affected, and PanAmSat expects that both of these satellites will continue to serve these existing customers. The insurance policies for these satellites total approximately $289 million and $345 million, respectively, and both include a salvage provision for PanAmSat to share 10% of future revenues from these satellites with their respective insurers if the proof of loss is accepted. The availability and use of the proceeds from these insurance claims are restricted by the agreements governing PanAmSat's debt obligations. No assurances can be made that the proof of loss with respect to these two satellites will be accepted by the insurers. PanAmSat is working with the satellite manufacturer to determine the long-term implications to the satellites and will continue to assess the operational impact these losses may have. At this time, based upon all information currently available to PanAmSat, as well as planned modifications to the operation of the satellites in order to maximize revenue generation, PanAmSat currently expects to operate these satellites through their expected economic ends of life, although a portion of the transponder capacity on these satellites will not be useable during such time. Hughes currently believes that the net book values of these satellites are fully recoverable and does not expect a material impact on 2003 revenues as a result of the difficulties on these two satellites.

PanAmSat and the manufacturer of the Galaxy VIII-iR satellite have agreed in principle to terminate the Galaxy VIII-iR satellite construction contract. The agreement is subject to the execution of mutually acceptable documentation, but there can be no assurance that this will occur. In connection with the termination of the contract, as of December 31, 2002, PanAmSat had a receivable due from the satellite manufacturer of $72.0 million, which represents amounts previously paid to the manufacturer (of approximately $58.8 million), liquidated damages and interest owed under the construction agreement. PanAmSat expects that it will collect substantially all of this receivable and does not anticipate recording a charge to earnings related to this receivable. In addition, PanAmSat has agreed with the Galaxy VIII-iR launch vehicle provider to defer use of the launch to a future satellite. PanAmSat had intended to locate the Galaxy VIII-iR satellite at 95 degrees west longitude. However, with the successful launch and commencement of service on the Galaxy IIIC satellite at this same orbital location in September 2002, PanAmSat believes it has sufficient capacity to meet customer demand for services at this location.

Hughes is contingently liable under standby letters of credit and bonds in the aggregate amount of $65.1 million which were undrawn at December 31, 2002 and DLA has guaranteed $3.0 million of bank debt related to non-consolidated DLA local operating companies, which is due in varying amounts through 2005. Additionally, as described in "Liquidity and Capital Resources--Acquisitions and Divestitures" above, DLA may be required to repurchase Clarin's 3.98% interest in DLA for $195 million in November 2003. In the first quarter of 2003, Clarin notified DLA that it believes that DLA's decision to initiate discussions with Clarin and certain other programmers, suppliers and business associates to address DLA's financial and operational challenges has caused DLA to be responsible immediately to purchase Clarin's equity interest in DLA. DLA does not believe that the purchase obligation has been accelerated. See Note 22 of the Notes to the Consolidated Financial Statements in Item 8 for further discussion of this matter.

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document The Hughes Board of Directors has approved several benefit plans designed to provide benefits for the retention of about 205 key employees and also provide benefits in the event of employee lay-offs. Generally, these benefits are only available if a qualified change-in-control of Hughes occurs.

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Upon a change-in-control, the retention benefits will be accrued and expensed when earned and the severance benefits will be accrued and expensed if an employee is identified for termination. A total of up to about $105 million for retention benefits will be paid, with approximately 50% paid at the time of a change-in-control and 50% paid up to 12 months following the date of a change-in-control. The amount of severance benefits to be paid will be based upon decisions that will be made relating to employee layoffs, if any, following the date of a change-in-control. In addition, as of December 31, 2002, approximately 30.5 million employee stock options to purchase shares of GM Class H common stock will vest upon a qualifying change-in-control and up to an additional 8.4 million employee stock options could vest if employees are laid off within one year of a change-in-control.

At December 31, 2002, minimum future commitments under noncancelable operating leases having lease terms in excess of one year were primarily for real property and aggregated $769.4 million, payable as follows: $252.5 million in 2003, $210.6 million in 2004, $107.6 million in 2005, $52.3 million in 2006, $46.1 million in 2007, and $100.3 million thereafter. Certain of these leases contain escalation clauses and renewal or purchase options. Rental expenses under operating leases, net of sublease rental income, were $68.0 million in 2002, $59.7 million in 2001 and $55.9 million in 2000.

Hughes has minimum commitments under noncancelable satellite construction and launch contracts and programming agreements. Minimum payments over the terms of applicable contracts are anticipated to be approximately $3,461.5 million, payable as follows: $825.1 million in 2003, $596.8 million in 2004, $437.5 million in 2005, $693.0 million in 2006, $762.1 million in 2007, and $147.0 million thereafter.

During the first quarter of 2003, Hughes and AOL agreed to terminate their strategic alliance, which the companies had entered into in June 1999. In connection with the termination of the alliance, Hughes recorded a pre-tax charge of $23 million in the fourth quarter of 2002 to "Selling, general and administrative expenses" and was released from its commitment to spend up to approximately $1 billion in additional sales, marketing, development and promotion efforts in support of certain specified products and services. Under the terms of the agreement, HNS will continue to provide services to current bundled AOL broadband subscribers using the HNS high-speed Internet satellite service as the companies develop a transition plan to an unbundled service.

Certain Relationships and Related Party Transactions

Satellite Procurement Agreements. Currently, Hughes is a party to agreements with Boeing Satellite Systems, Inc., formerly Hughes Space and Communications Company ("HSC"), for the construction of four satellites with a total contract value of $1,434.6 million that were entered into prior to the sale of HSC to Boeing on October 6, 2000. Although Hughes believes the agreements are on commercially reasonable terms, there can be no assurance that Hughes will be able to procure satellites on similar terms in the future. At December 31, 2002, Hughes' remaining obligation under these contracts was $178.3 million.

Income Taxes. Hughes and its domestic subsidiaries join with GM in filing a consolidated U.S. federal income tax return. The terms of the current tax allocation agreement with GM generally require that Hughes provide for income taxes as if it filed on a separate return basis. At December 31, 2002, the Consolidated Balance Sheets reflect deferred tax assets attributable to the future benefits from the utilization of certain foreign tax credits, alternative minimum tax credits, general business credits and net operating losses of acquired subsidiaries available to be carried forward in the amounts of $61.5 million, $46.3 million, $14 million and $98.3 million, respectively.

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Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Equity Method Investments. Hughes holds 19.5% and 40.0% equity interests in LOC's that are the exclusive distributors of DIRECTV in Venezuela and Puerto Rico, respectively. During 2001, Hughes began recording approximately 75.0% of the net losses incurred from these entities due to the accumulation of net losses in excess of the other investors' investments, and Hughes' continued funding of those businesses. During the years ended December 31, 2002, 2001 and 2000, DLA recognized revenues of $189.9 million, $160.6 million, and $90.1 million, respectively, primarily for sales of programming to the LOC's. Broadcast programming and other costs associated with these revenues were $110.4 million, $90.7 million, and $51.6 million during the years ended December 31, 2002, 2001 and 2000, respectively. Also during the years ended December 31, 2002, 2001 and 2000, Hughes recognized equity method losses in "Other, net" of $54.1 million, $16.2 million, and $18.8 million, respectively. DLA had accounts receivable of $310.9 million and $217.5 million from the LOC's as of December 31, 2002 and 2001, respectively.

Accounting Changes

Hughes adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" on January 1, 2002. SFAS No. 144 refined existing impairment accounting guidance and extended the use of this accounting to discontinued operations. SFAS No. 144 allowed the use of discontinued operations accounting treatment for both reporting segments and distinguishable components thereof. SFAS No. 144 also eliminated the existing exception to consolidation of a subsidiary for which control is likely to be temporary. The adoption of SFAS No. 144 did not have any impact on Hughes' consolidated results of operations or financial position. However, operating results of discontinued businesses such as DIRECTV Broadband, which previously would not have been reported as a discontinued operation, will be reported as a discontinued operation under this new standard in future periods.

Hughes also adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. SFAS No. 142 required that existing and future goodwill and intangible assets with indefinite lives not be amortized, but written-down, as needed, based upon an impairment analysis that must occur at least annually, or sooner if an event occurs or circumstances change that would more likely than not result in an impairment loss. All other intangible assets are amortized over their estimated useful lives. SFAS No. 142 required that Hughes perform step one of a two-part transitional impairment test to compare the fair value of each reportable unit with its respective carrying amount, including goodwill. If the carrying value exceeds the fair value, step two of the transitional impairment test must be performed to measure the amount of the impairment loss, if any. SFAS No. 142 also required that intangible assets be reviewed as of the date of adoption to determine if they continue to qualify as intangible assets under the criteria established under SFAS No. 141, "Business Combinations," and to the extent previously recorded intangible assets do not meet the criteria that they be reclassified to goodwill.

As part of Hughes' acquisition of PRIMESTAR in 1999, dealer network and subscriber base intangible assets were identified and valued in accordance with Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations." The dealer network intangible asset originally valued as part of Hughes' acquisition of PRIMESTAR was based on established distribution, customer service and marketing capability that had been put in place by PRIMESTAR. The subscriber base intangible asset originally valued as part of Hughes' acquisition of PRIMESTAR was primarily based on the expected non-contractual future cash flows to be earned over the life of the PRIMESTAR subscribers converted to the DIRECTV service. In accordance with SFAS No. 142, Hughes completed a review of its intangible assets and determined that the previously recorded dealer network and subscriber base intangible assets established under APB Opinion No. 16 did not meet the contractual or other legal

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HUGHES ELECTRONICS CORPORATION rights criteria. The dealer network and subscriber base intangible assets also did not meet the separability criteria because the intangible assets could not be sold, transferred, licensed, rented or exchanged individually or in combination with other assets or liabilities, apart from selling the entire DIRECTV business. As a result, in the first quarter of 2002, Hughes reclassified $209.8 million, net of $146.0 million of accumulated amortization, of previously

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document reported intangible assets to goodwill. As a result of this reclassification, approximately $13.2 million of quarterly amortization expense ceased, beginning January 1, 2002. In October 2002, Emerging Issues Task Force ("EITF") Issue No. 02-17, "Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination" was issued, which gave clarifying guidance on the treatment of certain subscriber-related relationships. As a result, as of the beginning of the fourth quarter of 2002, the subscriber base and dealer network intangible assets were reinstated and are being amortized over their estimated remaining useful lives of 2 and 12 years, respectively. As a result of this change, Hughes recognized amortization expense of $18.5 million in the fourth quarter of 2002.

In the first quarter of 2002, Hughes also completed the required transitional impairment test for intangible assets with indefinite lives, which consist of FCC licenses for direct-to-home broadcasting frequencies ("Orbital Slots"), and determined that no impairment existed because the fair value of these assets exceeded the carrying value as of January 1, 2002.

In the second quarter of 2002, with the assistance of an independent valuation firm, Hughes completed step one of the transitional test to determine whether a potential impairment existed for goodwill recorded at January 1, 2002. Primarily based on the present value of expected future cash flows, it was determined that the fair values of DIRECTV U.S. and the Satellite Services segment exceeded their carrying values, therefore no further impairment test was required. It was also determined that the carrying values of DLA and DIRECTV Broadband exceeded their fair values, therefore requiring step two of the impairment test be performed. No goodwill or intangible assets existed at the Network Systems segment and therefore no impairment test was required.

Hughes completed step two of the impairment test for DLA and DIRECTV Broadband in the fourth quarter of 2002 as required by SFAS No. 142. Step two of the transitional test requires the comparison of the implied value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss will be recognized in an amount equal to that excess. In the initial year of adoption, the impairment loss, if any, is recorded as a cumulative effect of accounting change, net of taxes. As a result of completing step two, Hughes determined that $631.8 million and $107.9 million representing all of the goodwill recorded at DLA and DIRECTV Broadband, respectively, was impaired. In addition, Hughes also recorded a $16.0 million charge representing its share of the goodwill impairment of an equity method investee. Therefore, Hughes recorded a cumulative effect of accounting change, net of taxes, of $681.3 million ($755.7 million pre-tax) as of January 1, 2002 in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss).

In accordance with SFAS No. 142, Hughes will perform its annual impairment test for all reporting units during the fourth quarter of each year, commencing in the fourth quarter of 2002. If an impairment loss results from the annual impairment test, the loss will be recorded as a pre-tax charge to operating income. In the fourth quarter of 2002, with the assistance of an independent valuation firm, Hughes completed its first annual impairment test for DIRECTV U.S. and the Satellite Services segment. The independent valuation, which was primarily based on the present value of expected future cash flows, resulted in fair values for DIRECTV U.S. and for the Satellite Services segment that exceeded Hughes' carrying values. As a result, no impairment loss existed for DIRECTV U.S. and the Satellite Services segment for 2002.

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Hughes adopted SFAS No. 141, "Business Combinations" on July 1, 2001. SFAS No. 141 required that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and prohibited the amortization of goodwill and intangible assets with indefinite lives acquired thereafter. The adoption of SFAS No. 141 did not have a significant impact on Hughes' consolidated results of operations or financial position.

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document one-time after-tax charge of $7.4 million on January 1, 2001 as a cumulative effect of accounting change in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) and an after-tax unrealized gain of $0.4 million in "Accumulated other comprehensive income (loss)."

New Accounting Standards

In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities--an interpretation of ARB No. 51" ("FIN 46"). FIN 46 requires the consolidation of affiliated companies where a controlling financial interest is achieved through arrangements other than voting interests. Affiliated companies are considered variable interest entities in instances where affiliate capital is insufficient to permit the affiliate to finance its activities without additional subordinated financial support, and in certain other circumstances. The determination as to whether an affiliate is a variable interest entity must be based on the circumstances on the date that an entity becomes involved with an affiliate or when certain events occur that would indicate a potential change in a previous determination. Consolidation of an affiliate is required when it is determined that the affiliate is a variable interest entity and that the investor will absorb a majority of the expected losses or residual returns if they occur. As required, Hughes will apply the provisions of FIN 46 for all investments in affiliates after January 31, 2003. For investments in variable interest entities made before February 1, 2003, Hughes will follow the provisions of FIN 46, as required, no later than July 1, 2003. The adoption of this standard could result in the consolidation of certain affiliates which were previously accounted for under the equity method of accounting. Such adoption would be reflected as a cumulative effect of accounting change in the consolidated statements of operations.

Hughes has identified the partially-owned local operating companies providing DLA programming services in Venezuela and Puerto Rico, of which Hughes owns 19.5% and 40.0%, respectively, as potential variable interest entities. Hughes currently accounts for these investments under the equity method of accounting and reflects approximately 75.0% of their net income or loss in Hughes' consolidated statements of operations due to the accumulation of net losses in excess of the other investors' investments.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS No. 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide two alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Hughes currently follows the intrinsic value based method of accounting for stock- based compensation of APB No. 25. Hughes will adopt the fair value based method of accounting for

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HUGHES ELECTRONICS CORPORATION stock-based compensation for all stock-based compensation granted after December 31, 2002 in accordance with the original transition provisions of SFAS No. 123. Adoption of this standard will result in an increase in compensation cost recognized in operating results. Had Hughes followed the fair value based method of accounting for stock-based compensation under SFAS No. 123 for the years ended December 31, 2002, 2001 and 2000, pro forma earnings (loss) used for computation of available separate consolidated net income (loss) would have been $(1,112.4) million, $(946.5) million and $585.3 million, respectively.

In November 2002, the EITF reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the related revenues should be measured and allocated to the separate units of accounting. EITF Issue No. 00-21 will apply to revenue arrangements entered into after June 30, 2003; however, upon adoption, the EITF allows the guidance to be applied on a retroactive basis, with the change, if any, reported as a cumulative effect of accounting change in the consolidated statements of operations. Hughes has not yet determined the impact this issue will have on its consolidated results of

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 generally requires the recognition of costs associated with exit or disposal activities when incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces previous accounting guidance provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Hughes is required to implement SFAS No. 146 on January 1, 2003. Hughes' adoption of this standard on January 1, 2003 is not expected to have a significant impact on Hughes' consolidated results of operations or financial position.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." SFAS No. 145 eliminates the requirement to present gains and losses on the early extinguishment of debt as an extraordinary item, and resolves accounting inconsistencies for certain lease modifications. Hughes' adoption of this standard on January 1, 2003 is not expected to have an impact on Hughes' consolidated results of operations or financial position.

Security Ratings

Debt ratings by the various rating agencies reflect each agency's opinion of the ability of issuers to repay debt obligations as they come due. Ratings below Baa3 and BBB- denote sub-investment grade status for Moody's and S&P, respectively. Ratings in the Ba/BB range generally indicate moderate protection of interest and principal payments, potentially outweighed by exposure to uncertainties or adverse conditions. Ratings in the B range generally indicate that the obligor currently has financial capacity to meet its financial commitments but there is limited assurance over any long period of time that interest and principal payments will be made or that other terms will be maintained. In general, lower ratings result in higher borrowing costs. A security rating is not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization.

Hughes

On December 11, 2002, Moody's Investor Services ("Moody's") confirmed Hughes' Ba3 senior secured and senior implied rating. The rating outlook, which previously remained on review for possible

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HUGHES ELECTRONICS CORPORATION downgrade pending the outcome of the EchoStar Merger, was revised to stable, and Moody's stated that the credit focus had turned to liquidity and Hughes obtaining permanent financing for its long-term needs. The rating action resulted from the December 10, 2002 announcement that Hughes received a $600 million cash settlement payment related to the terminated merger agreement with EchoStar.

On December 11, 2002, Standard & Poor's Ratings Services ("S&P") affirmed its long-term corporate credit rating on Hughes of B+ and its rating of BB- on Hughes' senior secured credit facility. At the same time, S&P revised its Credit Watch implications on Hughes from negative to developing. The rating action stated that the termination of the EchoStar merger agreement on December 10, 2002 provided meaningful cash to Hughes and enabled Hughes to freely pursue strategic alternatives. S&P further noted that considerable uncertainty surrounds the eventual ownership of Hughes and that a new assessment would be needed if Hughes enters into merger discussions with another party.

DIRECTV

On February 19, 2003, Moody's assigned to DIRECTV a Ba2 senior secured rating with respect to its senior secured credit facilities and a B1 senior unsecured rating on the $1.4 billion of senior unsecured notes. Moody's has also assigned a Ba3 senior implied and a B2 issuer rating to DIRECTV. The outlook is stable. The rating outlook presumed diminishing capital and investment requirements, combined with operating profit improvement to generate eventual free cashflow,

On February 12, 2003, S&P assigned a BB- rating on the senior secured credit facilities and a B rating on the $1.4 billion of senior unsecured notes. The ratings were placed on Credit Watch with positive implications, based on S&P's assessment of the likelihood that Hughes or DIRECTV could be acquired by an entity with higher credit quality than Hughes' B+ corporate credit rating.

PanAmSat

On December 11, 2002 Moody's confirmed PanAmSat's Ba2 senior secured debt rating and Ba3 senior unsecured debt rating. The rating actions resulted from the termination of the EchoStar merger agreement and the announcement that Hughes would retain its 81% interest in PanAmSat. The outlook for the PanAmSat rating is stable.

On December 11, 2002 S&P revised its Credit Watch implications for the corporate credit rating on PanAmSat to developing from negative, following the termination of the EchoStar merger agreement. On November 18, 2002 S&P lowered PanAmSat's corporate credit rating to B+ from BB-. A BB- rating was assigned to PanAmSat's senior secured credit facilities and notes, and a B- rating was assigned to the $800 million of senior notes which are unsecured. S&P stated that the PanAmSat downgrade reflected Hughes' majority ownership and not PanAmSat's stand-alone operating performance or financial conditions, which was considered stable.

Market Risk Disclosure

The following discussion and the estimated amounts generated from the sensitivity analyses referred to below include forward-looking statements of market risk which assume for analytical purposes that certain adverse market conditions may occur. Actual future market conditions may differ materially from such assumptions because the amounts noted below are the result of analyses used for the purpose of assessing possible risks and the mitigation thereof. Accordingly, the forward-looking statements should not be considered projections by Hughes of future events or losses.

General

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Hughes enters into derivative instruments only to the extent considered necessary to meet its risk management objectives, and does not enter into derivative contracts for speculative purposes.

Foreign Currency Risk

Hughes generally conducts its business in U.S. dollars with some business conducted in a variety of foreign currencies and therefore is exposed to fluctuations in foreign currency exchange rates. Hughes' objective in managing its exposure to foreign currency changes is to reduce earnings and cash flow volatility associated with foreign exchange rate fluctuations. Accordingly, Hughes enters into foreign exchange contracts to mitigate risks associated with foreign currency denominated assets, liabilities, commitments and anticipated foreign currency transactions. By policy, Hughes maintains coverage between minimum and maximum percentages of its anticipated foreign exchange exposures. The gains and losses on derivative foreign exchange contracts offset changes in value of the related exposures. The impact of a hypothetical 10% adverse change in exchange rates on the fair values of foreign exchange contracts and foreign currency denominated assets and liabilities would be a charge of $12.5 million and $11.6 million, net of taxes, at December 31, 2002 and December 31, 2001, respectively.

Investments

Hughes maintains investments in publicly-traded common stock of unaffiliated

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document companies and is therefore subject to equity price risk. These investments are classified as available-for-sale and, consequently, are reflected in Hughes' Consolidated Balance Sheets at fair value with unrealized gains or losses, net of taxes, recorded as part of OCI, a separate component of stockholder's equity. Declines in market value that are judged to be "other-than-temporary" are charged to "Other, net" in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss). The fair values of the investments in such common stock were $98.2 million and $725.4 million at December 31, 2002 and December 31, 2001, respectively, based on closing market prices. A 10% decline in the market price of these investments would cause the fair value of the investments in common stock to decrease by $9.8 million and $72.5 million at December 31, 2002 and December 31, 2001, respectively. No actions have been taken by Hughes to hedge this market risk exposure.

Interest Rate Risk

Hughes is subject to interest rate risk related to its outstanding debt of $3.1 billion at December 31, 2002 and $2.6 billion at December 31, 2001. As of December 31, 2002, debt consisted of PanAmSat's fixed rate borrowings of $1,550.0 million and variable rate borrowings of $1,000 million, Hughes' variable rate borrowings of $506.3 million, and various other floating and fixed rate borrowings. Hughes is subject to fluctuating interest rates, which may adversely impact its consolidated results of operations and cash flows for its variable rate bank borrowings. At December 31, 2002, outstanding borrowings bore interest rates ranging from 4.3% to 16.0%. As of December 31, 2002, the hypothetical impact of a one percentage point increase in interest rates related to Hughes' outstanding variable rate debt would be to increase annual interest expense by approximately $15 million.

Credit Risk

Hughes is exposed to credit risk in the event of non-performance by the counterparties to its derivative financial instrument contracts. While Hughes believes this risk is remote, credit risk is managed through the periodic monitoring and approval of financially sound counterparties.

* * *

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INDEPENDENT AUDITORS' REPORT

To the Board of Directors of Hughes Electronics Corporation:

We have audited the accompanying Consolidated Balance Sheets of Hughes Electronics Corporation as of December 31, 2002 and 2001, and the related Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss), Consolidated Statements of Changes in Stockholder's Equity and Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedules listed in Item 15. These financial statements and the financial statement schedules are the responsibility of Hughes Electronics Corporation's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedules based on our audits.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Hughes Electronics Corporation at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 3 of the Notes to the Consolidated Financial Statements, effective January 1, 2002, Hughes Electronics Corporation changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."

/s/ DELOITTE & TOUCHE LLP ------Deloitte & Touche LLP

Los Angeles, California January 15, 2003 (March 6, 2003 as to Note 22)

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CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF OPERATIONS AND AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS)

------Reference should be made to the Notes to the Consolidated Financial Statements.

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CONSOLIDATED BALANCE SHEETS

Reference should be made to the Notes to the Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY

Reference should be made to the Notes to the Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Reference should be made to the Notes to the Consolidated Financial Statements.

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Note 1: Basis of Presentation and Description of Business

Hughes Electronics Corporation ("Hughes") is a wholly-owned subsidiary of General Motors Corporation ("GM"). The GM Class H common stock tracks the financial performance of Hughes.

Hughes is a leading provider of digital entertainment, information and communication services and satellite-based private business networks. Hughes is the world's leading digital multi-channel entertainment service provider, based on the number of subscribers, with its programming distribution service known as DIRECTV(R), which was introduced in the United States ("U.S.") in 1994 and was the first high-powered, all digital, direct-to-home television distribution service in North America. DIRECTV Broadband, Inc. ("DIRECTV Broadband"), formerly known as Telocity Delaware, Inc. ("Telocity"), which was acquired by Hughes in April 2001, provided digital subscriber line ("DSL") services purchased from wholesale providers. DIRECTV Latin America, LLC, ("DLA"), which is 74.7% owned by Hughes, is the leading direct-to-home satellite television service in Latin America and the Caribbean that began service in 1996. Hughes is the owner and operator of one of the largest commercial satellite fleets in the world through its approximately 81% owned subsidiary, PanAmSat Corporation ("PanAmSat"). Hughes is also a leading provider of broadband services and products, including satellite wireless communications ground equipment and business communications services. Hughes' equipment and services are applied in, among other things, data, video and audio transmission, cable and network television distribution, private business networks, digital cellular communications and direct-to-home satellite broadcast distribution of television programming.

Hughes announced, in December of 2002, that DIRECTV Broadband would close its high-speed Internet service business in the first quarter of 2003 and transition existing customers to alternative service providers. See further discussion of this item in Note 18.

Revenues, operating costs and expenses, and other non-operating results for the discontinued operations of the satellite systems manufacturing businesses ("Satellite Businesses"), which were sold to The Boeing Company ("Boeing") on October 6, 2000, are excluded from Hughes' results from continuing operations for 2000. Alternatively, the financial results are presented in Hughes' Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) in a single line item entitled "Income from discontinued operations, net of taxes" and the net cash flows are presented in the Consolidated Statements of Cash Flows as "Net cash used in discontinued operations." See further discussion in Note 18.

The accompanying consolidated financial statements include the applicable portion of intangible assets, including goodwill, and related amortization resulting from purchase accounting adjustments associated with GM's purchase of Hughes in 1985, with certain amounts allocated to the Satellite Businesses. With Hughes' adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," Hughes ceased amortization of goodwill and intangible assets with indefinite lives on January 1, 2002. See further discussion in Note 3.

On October 28, 2001, Hughes and GM, together with EchoStar Communications Corporation ("EchoStar"), announced the signing of definitive agreements that provided for the split-off of Hughes from GM and the subsequent merger of the Hughes business with EchoStar (the "Merger"). Hughes, GM and EchoStar entered into a termination agreement on December 9, 2002, pursuant to which GM,

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

Hughes and EchoStar agreed to terminate the merger agreement and certain related agreements. Under the terms of the termination agreement, EchoStar paid Hughes $600 million in cash and Hughes retained its 81% ownership position in PanAmSat.

GM has announced that it is currently evaluating a variety of strategic options for Hughes, including a reduction or elimination of its retained economic

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document interest in Hughes, transactions that would involve strategic investors and public offerings of GM Class H common stock or related securities for cash or in exchange for outstanding GM debt obligations. Any such transaction might involve the separation of Hughes from GM. GM and Hughes have engaged in preliminary discussions with some parties. No other decisions have been made regarding which options or combinations of options, if any, GM will pursue. Due to the numerous uncertainties involved in these matters, there can be no assurance that any transaction or offering will be announced or completed or as to the time at which such a transaction or offering might be completed.

Note 2: Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying financial statements are presented on a consolidated basis and include the accounts of Hughes and its domestic and foreign subsidiaries that are more than 50% owned or controlled by Hughes after elimination of intercompany accounts and transactions. Hughes allocates earnings and losses to minority interests only to the extent of a minority investor's investment in a subsidiary.

Use of Estimates in the Preparation of the Consolidated Financial Statements

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported therein. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be affected by changes in those estimates.

Reclassifications

During 2002, Hughes changed the classification of certain subscriber acquisition costs. As a result, the costs of free programming and the costs of installation and hardware subsidies for subscribers added through DIRECTV's direct sales program are now included as part of "Broadcast programming and other costs" in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) rather than in "Selling, general and administrative expenses" where they had previously been reported. Prior period amounts have been reclassified to conform to the 2002 presentation.

Revenue Recognition

Revenues are generated from sales of direct-to-home broadcast subscriptions, the sale of transponder capacity and related services through outright sales, sales-type leases and operating

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) lease contracts, and sales of DIRECTV(R) receiving equipment, communications equipment and communications services.

Sales are generally recognized as products are shipped or services are rendered. Direct-To-Home subscription and pay-per-view revenues are recognized when programming is broadcast to subscribers. Equipment rental revenue is recognized monthly as earned. Advertising revenue is recognized when the related services are performed. Programming payments received from subscribers in advance of the broadcast are recorded as deferred revenues until earned.

Pursuant to an outright sale contract, all rights and title to a transponder are purchased. In connection with an outright sale, Hughes recognizes the sale amount as revenue and the cost basis of the transponder is charged to "Broadcast programming and other costs."

Satellite transponder lease contracts qualifying for capital lease treatment (typically based, among other factors, on the term of the lease) are accounted for as sales-type leases, with revenues recognized at inception of the lease

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document equal to the net present value of the future minimum lease payments. Upon inception of a sales-type lease, the cost basis of the transponder is charged to "Broadcast programming and other costs." The portion of each periodic lease payment deemed to be attributable to interest income is recognized in each respective period.

Transponder and other lease contracts that do not qualify as sales-type leases are accounted for as operating leases. Operating lease revenues are generally recognized on a straight-line basis over the respective lease term. Differences between operating lease payments received and revenues recognized are deferred and included in "Accounts and notes receivable" and "Investments and Other Assets."

Sales-type lease agreements and contracts for the sale of transponders typically include a telemetry, tracking and control ("TT&C") service agreement with the customer, which require the customer to pay monthly service fees which are recognized and billable as the services are performed. For a significant portion of the customer lease agreements, TT&C services are performed for the customer and the fees for such services are included in the customer's monthly lease payment.

A small percentage of revenues are derived from long-term contracts for the sale of wireless communications systems. Sales under long-term contracts are recognized primarily using the percentage-of-completion (cost-to-cost) method of accounting. Under this method, sales are recorded equivalent to costs incurred plus a portion of the profit expected to be realized, determined based on the ratio of costs incurred to estimated total costs at completion. Profits expected to be realized on long-term contracts are based on estimates of total sales value and costs at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are recorded in the accounting period in which the revisions are made. Estimated losses on contracts are recorded in the period in which they are identified.

Subscriber Acquisition Costs

Subscriber acquisition costs in the consolidated statements of operations consist of costs incurred to acquire new subscribers through third parties and the direct customer acquisition program. The deferred portion of the costs are included in "Prepaid expenses and other" in the Consolidated Balance Sheets.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

Subscriber acquisition costs primarily consist of amounts paid for third-party customer acquisitions, which consist of the cost of commissions paid to authorized retailers and dealers for subscribers added through their respective distribution channels which are included in the consolidated statements of operations in "Selling, general and administrative expenses," and the cost of installation and hardware subsidies for subscribers added through the direct customer acquisition program which are included in the consolidated statements of operations in "Broadcast programming and other costs." Additional components of subscriber acquisition costs include subsidies paid to manufacturers of receiving equipment, if any, and the cost of print and television advertising. The cost of advertising and manufacturer subsidies is expensed as incurred. Manufacturer subsidies for hardware activated on the DIRECTV service prior to August 2000 are payable over five years, the present value of which was accrued in the period of activation with interest expense recorded over the term of the obligation. The current portion of these manufacturer subsidies are recorded in the Consolidated Balance Sheets in "Accrued liabilities and other," with the long-term portion recorded in "Other Liabilities and Deferred Credits."

Substantially all commissions paid to retailers and dealers for third-party customer acquisitions, although paid in advance, are earned by the retailers or dealers over 12 months from the date of subscriber activation and may be recouped by Hughes on a pro-rata basis should the subscriber cancel the service during the 12-month service period. Accordingly, prepaid commissions are deferred and amortized to expense over the 12-month service period. The amount deferred is limited to the estimated average gross margin (equal to an average subscriber's revenue to be earned over 12 months, less the related cost of

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document programming) to be derived from the subscriber over the 12-month period. The excess commission over the estimated gross margin and non-refundable commissions are expensed immediately.

The cost of installation and hardware under the direct customer acquisition program is deferred when a customer commits to 12 months of the service. The amount deferred is amortized to expense over the commitment period and limited to the estimated gross margin (equal to the contractual revenues to be earned from the subscriber over 12 months, less the related cost of programming) expected to be earned over the contract term, less a reserve for estimated unrecoverable amounts. The cost of installation and hardware in excess of the estimated gross margin and where no customer commitment is obtained is expensed immediately.

Hughes actively monitors the recoverability of prepaid commissions and deferred installation and hardware costs. To the extent Hughes needs to charge back prepaid commissions, Hughes offsets the amount due against amounts payable to the retailers/dealers, and therefore, recoverability of prepaid commissions, net of existing reserves, is reasonably assured. Generally, new subscribers secure their accounts by providing a credit card or other identifying information and agree that a pro-rated early termination fee of $150 will be assessed if the subscriber cancels service prior to the end of the commitment period. As a result, with the ability to charge the subscriber an early termination fee, together with existing reserves, the recoverability of deferred installation and hardware costs is reasonably assured.

Cash Flows

Cash equivalents consist of highly liquid investments purchased with original maturities of three months or less.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

Net cash provided by operating activities includes cash payments made for interest of $398.0 million, $268.4 million and $312.9 million in 2002, 2001 and 2000, respectively and net cash refunds received for prior year income taxes of $354.5 million, $310.7 million and $290.5 million in 2002, 2001 and 2000, respectively.

Contracts in Process

Contracts in process are stated at costs incurred plus estimated profit, less amounts billed to customers and advances and progress payments applied. Engineering, tooling, manufacturing, and applicable overhead costs, including administrative, research and development and selling expenses, are charged to costs and expenses when incurred. Advances offset against contract related receivables amounted to $38.2 million and $37.6 million at December 31, 2002 and 2001, respectively.

Inventories

Inventories are stated at the lower of cost or market principally using the average cost method.

Major Classes of Inventories 2002 2001 ------(Dollars in Millions) Productive material and supplies...... $34.7 $58.3 Work in process...... 111.2 145.7 Finished goods...... 118.9 183.2 Provision for excess or obsolete inventory (34.5) (27.1) ------Total...... $230.3 $360.1 ======

Property, Satellites and Depreciation

Property and satellites are carried at cost. Satellite costs include

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document construction costs, launch costs, launch insurance, incentive obligations, direct development costs and capitalized interest. Capitalized satellite costs represent satellites under construction and the costs of successful satellite launches. The proportionate cost of a satellite, net of accumulated depreciation and insurance proceeds, is written-off in the period a full or partial loss of the satellite occurs. Capitalized customer leased set-top box costs include the cost of hardware and installation. Depreciation is computed generally using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the life of the asset or term of the lease.

Intangible Assets

As discussed below in Note 3, with the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002, Hughes ceased amortization of goodwill and intangible assets with indefinite lives. Goodwill and intangible assets with indefinite lives are subject to write-down, as needed, based upon an impairment analysis that must occur at least annually, or sooner if an event occurs or circumstances change that would more likely than not result in an impairment loss. Prior to January 1, 2002, goodwill, which represents the excess of the cost over the net tangible and

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) identifiable intangible assets of acquired businesses, and intangible assets with indefinite lives were amortized using the straight-line method over periods not exceeding 40 years. Other intangible assets are amortized using the straight-line method over their expected useful lives, which range from 5 to 15 years.

Broadcast Programming Rights

The cost of television programming broadcast rights is recognized when the related programming is distributed. The cost of television programming rights to distribute live sporting events is charged to expense using the straight-line method as the events occur over the course of the season or tournament. These costs are included in "Broadcast programming and other costs" in the consolidated statements of operations.

Advance payments in the form of cash and equity instruments from programming content providers for carriage of their signal are deferred and recognized as a reduction of programming costs on a straight-line basis over the related contract term. Equity instruments are recorded at fair value based on quoted market prices or appraised values, based on an independent third-party valuation. Also recorded as a reduction of programming costs is the amortization of a provision for above-market programming contracts that was recorded in connection with the United States Satellite Broadcasting Company, Inc. ("USSB") transaction in May 1999. The provision was based upon an independent third-party appraisal and recorded at its net present value, with interest expense recognized over the remaining term of the contract. The current and long-term portions of these deferred credits are recorded in the Consolidated Balance Sheets in "Accrued liabilities and other" and "Other Liabilities and Deferred Credits" and are being amortized using the interest method over the related contract terms of 92 months.

Software Development Costs

Other assets include certain software development costs capitalized in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalized software development costs at December 31, 2002 and 2001, net of accumulated amortization of $170.2 million and $147.8 million, respectively, totaled $88.0 million and $85.1 million, respectively. The software is amortized using the greater of the units of revenue method or the straight-line method over its estimated useful life, not in excess of five years. Software program reviews are conducted to ensure that capitalized software development costs are properly treated and costs associated with programs that are not generating revenues are expensed.

Valuation of Long-Lived Assets

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 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

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal. Changes in estimates of future cash flows could result in a write-down of the asset in a future period.

Foreign Currency

Some of Hughes' foreign operations have determined the local currency to be their functional currency. Accordingly, these foreign entities translate assets and liabilities from their local currencies to U.S. dollars using year-end exchange rates while income and expense accounts are translated at the average rates in effect during the year. The resulting translation adjustment is recorded as part of accumulated other comprehensive income (loss) ("OCI"), a separate component of stockholder's equity. Translation adjustments for foreign currency denominated equity investments are also recorded as part of OCI.

Hughes also has foreign operations where the U.S. dollar has been determined as the functional currency. Gains and losses resulting from remeasurement of the foreign currency denominated assets, liabilities and transactions into the U.S. dollar are recognized currently in the consolidated statements of operations.

Financial Instruments and Investments

Hughes maintains investments in equity securities of unaffiliated companies. Non-marketable equity securities are carried at cost. Marketable equity securities are considered available-for-sale and carried at current fair value based on quoted market prices with unrealized gains or losses (excluding other-than-temporary losses), net of taxes, reported as part of OCI. Hughes continually reviews its investments to determine whether a decline in fair value below the cost basis is "other-than-temporary." Hughes considers, among other factors: the magnitude and duration of the decline; the financial health and business outlook of the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors; and Hughes' intent and ability to hold the investment. If the decline in fair value is judged to be other-than-temporary, the cost basis of the security is written-down to fair value and the amount is recognized in the consolidated statements of operations as part of "Other, net" and recorded as a reclassification adjustment from OCI.

Investments in which Hughes owns at least 20% of the voting securities or has significant influence are accounted for under the equity method of accounting. Equity method investments are recorded at cost and adjusted for the appropriate share of the net earnings or losses of the investee. Investee losses are recorded up to the amount of the investment plus advances and loans made to the investee, and financial guarantees made on behalf of the investee. In certain instances, this can result in Hughes recognizing investee earnings or losses in excess of its ownership percentage.

The carrying value of cash and cash equivalents, accounts and notes receivable, investments and other assets, accounts payable, and amounts included in "Accrued liabilities and other" meeting the definition of a financial instrument and debt approximated fair value at December 31, 2002 and December 31, 2001.

Hughes carries all derivative financial instruments on the Consolidated Balance Sheets at fair value based on quoted market prices. Hughes uses derivative contracts to minimize the financial

HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) impact of changes in the fair value of recognized assets, liabilities, and unrecognized firm commitments, or the variability of cash flows associated with forecasted transactions in accordance with internal risk management policies. Changes in fair value of designated, qualified and effective fair value hedges are recognized in earnings as offsets to the changes in fair value of the related hedged items. Changes in fair value of designated, qualified and effective cash flow hedges are deferred and recorded as a component of OCI until the hedged transactions occur and are recognized in earnings. The ineffective portion and changes related to amounts excluded from the effectiveness assessment of a hedging derivative's change in fair value are immediately recognized in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) in "Other, net." Hughes assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives are highly effective. Hedge accounting is prospectively discontinued when hedge instruments are no longer highly effective.

The net deferred loss from effective cash flow hedges net of taxes in OCI of $1.2 million at December 31, 2002 is expected to be recognized in earnings over the next three years.

Stock Compensation

Hughes issues GM Class H common stock options to employees with grant prices equal to the fair value of the underlying security at the date of grant. No compensation cost has been recognized for options in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" in the consolidated statements of operations.

Had Hughes followed the fair value based method of accounting for stock-based compensation under SFAS No. 123, "Accounting for Stock-Based Compensation," for the years ended December 31, 2002, 2001 and 2000, pro forma earnings (loss) used for computation of available separate consolidated net income (loss) would have been $(1,112.4) million, $(946.5) million and $585.3 million, respectively. See Note 13 for additional information regarding the pro forma effect on earnings of recognizing compensation cost based on the estimated fair value of the stock options granted, as required by SFAS No. 123.

As discussed more completely below in Note 3, Hughes will adopt the fair value based method of accounting for stock-based compensation of SFAS No. 123 for all stock-based compensation granted after December 31, 2002. As a result, Hughes will expense the fair market value of stock-based compensation newly granted to employees pursuant to SFAS No. 123.

Advertising and Research and Development Costs

Advertising and research and development costs are expensed as incurred. Advertising expenses were $170.5 million in 2002, $163.0 million in 2001 and $129.6 million in 2000. Expenditures for research and development were $71.7 million in 2002, $85.8 million in 2001 and $104.5 million in 2000.

Market Concentrations and Credit Risk

Hughes provides services and extends credit to a number of wireless communications equipment customers and to a large number of consumers, both in the United States and Latin America. DIRECTV has significant accounts receivable from the National Rural Telecommunications Cooperative ("NRTC") and one of the NRTC's largest affiliates, Pegasus Satellite Television, Inc.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

("Pegasus"), arising from arrangements granting the NRTC and Pegasus the exclusive right to distribute certain programming in certain areas. In addition, DLA provides services and extends credit to unconsolidated local operating

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document companies ("LOC's) providing the DIRECTV service, particularly in Venezuela and Puerto Rico. Management monitors its exposure to credit losses and maintains allowances for anticipated losses.

Note 3: Accounting Changes and New Accounting Standards

Accounting Changes

As part of Hughes' acquisition of PRIMESTAR in 1999, dealer network and subscriber base intangible assets were identified and valued in accordance with APB Opinion No. 16, "Business Combinations." The dealer network intangible asset originally valued as part of Hughes' acquisition of PRIMESTAR was based on established distribution, customer service and marketing capability that had been put in place by PRIMESTAR. The subscriber base intangible asset originally valued as part of Hughes' acquisition of PRIMESTAR was primarily based on the expected non-contractual future cash flows to be earned over the life of the PRIMESTAR subscribers converted to the DIRECTV service. In accordance with SFAS No. 142, Hughes completed a review of its intangible assets and determined that the previously recorded dealer network and subscriber base intangible assets established under APB Opinion No. 16 did not meet the contractual or other legal rights criteria. The dealer network and subscriber base intangible assets also did not meet the separability criteria because the intangible assets could not be sold, transferred, licensed, rented or exchanged individually

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) or in combination with other assets or liabilities, apart from selling the entire DIRECTV business. As a result, in the first quarter of 2002, Hughes reclassified $209.8 million, net of $146.0 million of accumulated amortization, of previously reported intangible assets to goodwill. As a result of this reclassification, approximately $13.2 million of quarterly amortization expense ceased, beginning January 1, 2002. In October 2002, Emerging Issues Task Force ("EITF") Issue No. 02-17, "Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination" was issued, which gave clarifying guidance on the treatment of certain subscriber-related relationships. As a result, as of the beginning of the fourth quarter of 2002, the subscriber base and dealer network intangible assets were reinstated and are being amortized over their estimated remaining useful lives of 2 and 12 years, respectively. As a result of this change, Hughes recognized amortization expense of $18.5 million

In the first quarter of 2002, Hughes also completed the required transitional impairment test for intangible assets with indefinite lives, which consist of Federal Communications Commission licenses for direct-to-home broadcasting frequencies ("Orbital Slots"), and determined that no impairment existed because the fair value of these assets exceeded the carrying value as of January 1, 2002.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

The following represents Hughes' reported net income (loss) and reported income (loss) before cumulative effect of accounting changes on a comparable basis excluding the after-tax effect of amortization expense associated with goodwill and intangible assets with indefinite lives:

2002 2001 2000 ------(Dollars in Millions) Reported net income (loss)...... $(893.8) $(621.6) $813.0 Add: Goodwill amortization...... -- 219.9 215.1 Intangible assets with indefinite lives amortization...... -- 7.2 7.2 ------

Adjusted net income (loss)...... $(893.8) $(394.5) $1,035.3 ======

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Reported income (loss) before cumulative effect of accounting changes...... $(212.5) $(614.2) $813.0 Add: Goodwill amortization...... -- 219.9 215.1 Intangible assets with indefinite lives amortization...... -- 7.2 7.2 ------Adjusted income (loss) before cumulative effect of accounting changes...... $(212.5) $(387.1) $1,035.3 ======

Hughes adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001. SFAS No. 133 required Hughes to carry all derivative financial instruments on the balance sheet at fair value. In accordance with the transition provisions of SFAS No. 133, Hughes recorded a one-time after-tax charge of $7.4 million on January 1, 2001 as a cumulative effect of accounting change in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) and an after-tax unrealized gain of $0.4 million in "Accumulated other comprehensive income (loss)."

New Accounting Standards

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

FIN 46 for all investments in affiliates after January 31, 2003. For investments in variable interest entities made before February 1, 2003, Hughes will follow the provisions of FIN 46, as required, no later than July 1, 2003. The adoption of this standard could result in the consolidation of certain affiliates which were previously accounted for under the equity method of accounting. Such adoption would be reflected as a cumulative effect of accounting change in the consolidated statements of operations.

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Hughes currently follows the intrinsic value based method of accounting for stock-based compensation of APB No. 25. Hughes will adopt the fair value based method of accounting for stock-based compensation for all stock-based compensation granted after December 31, 2002 in accordance with the original transition provisions of SFAS No. 123. Adoption of this standard will result in an increase in compensation cost recognized in operating results. See Note 13 for pro forma information regarding the compensation costs that would have been recognized had Hughes followed the fair value based method of accounting for stock-based compensation under SFAS No. 123 for the years ended December 31, 2002, 2001 and 2000.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

Note 4: Property and Satellites, Net

Estimated Useful Lives (years) 2002 2001 ------(Dollars in Millions) Land and improvements...... 10-30 $55.1 $54.4 Buildings and leasehold improvements... 2-40 338.5 323.9 Machinery and equipment...... 2-23 1,968.1 1,627.2 Customer leased set-top boxes...... 4-7 867.5 969.5 Furniture, fixtures and office machines 2-15 154.9 128.6 Construction in progress...... -- 399.3 450.8 ------

Total...... 3,783.4 3,554.4 Less accumulated depreciation...... 1,766.0 1,356.6 ------

Property, net...... $2,017.4 $2,197.8

Satellites...... 12-16 $6,419.8 $6,215.4 Less accumulated depreciation...... 1,497.2 1,408.8 ------

Satellites, net...... $4,922.6 $4,806.6 ======

Hughes capitalized interest costs of $116.8 million, $76.3 million and $82.4 million during 2002, 2001 and 2000, respectively, as part of the cost of its property and satellites under construction.

Note 5: Leasing Activities

Future minimum payments due from customers under sales-type leases and related service agreements, and noncancelable satellite transponder operating leases as of December 31, 2002 are as follows:

Sales-Type Leases ------Minimum Service Lease Agreement Operating Payments Payments Leases ------(Dollars in Millions) 2003...... $39.3 $3.1 $568.1 2004...... 39.2 3.0 526.3 2005...... 39.2 3.0 502.3 2006...... 24.5 0.8 502.6 2007...... 21.2 0.4 408.9 Thereafter 114.2 1.9 1,915.5 ------Total.. $277.6 $12.2 $4,423.7 ======

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

Future minimum lease payments due from customers, included in the above table, related to satellites to be launched totaled approximately $0.8 billion. Included in the amounts above are $151.6 million of future lease payments, which may be terminated by the customers pursuant to certain contractual termination rights.

The components of the net investment in sales-type leases are as follows:

2002 2001 ------(Dollars in Millions) Total minimum lease payments...... $277.6 $380.7 Less unearned interest income and allowance for doubtful accounts 92.8 128.8 ------

Total net investment in sales-type leases...... 184.8 251.9 Less current portion...... 22.9 24.9 ------

Total long-term net investment in sales-type leases.. $161.9 $227.0 ======

Note 6: Intangible Assets

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Hughes had $5,775.2 million and $6,496.6 million of goodwill at December 31, 2002 and December 31, 2001, respectively, net of accumulated amortization of $606.9 million and $700.0 million at December 31, 2002 and December 31, 2001, respectively. Net goodwill of $140.6 million and $505.0 million related to the Direct-To-Home Broadcast and Satellite Services segments, respectively, which was carried at Corporate as of December 31, 2002 and 2001, has been allocated to the respective reporting unit in the presentation below. The changes in the carrying amounts of goodwill by reporting unit for the year ended December 31, 2002 were as follows:

Direct-To- Home Satellite Network Broadcast Services Systems Total ------(Dollars in Millions) Balance as of December 31, 2001 $3,734.0 $2,743.7 $18.9 $6,496.6 Impairment loss...... (739.7) -- (16.0) (755.7) Other...... 34.8 -- (0.5) 34.3 ------

Balance as of December 31, 2002 $3,029.1 $2,743.7 $2.4 $5,775.2 ======

Hughes had $644.7 million and $660.2 million of intangible assets, net at December 31, 2002 and December 31, 2001, respectively. Accumulated amortization for intangible assets was $195.1 million and $182.2 million at December 31, 2002 and December 31, 2001, respectively. Intangible assets at December 31, 2002 primarily consisted of $432.3 million, net of $30.6 million of accumulated amortization, of Orbital Slots which have indefinite useful lives, and $191.3 million, net of $164.5 million of accumulated amortization, of dealer network and subscriber base intangible assets which are being amortized over their estimated remaining useful lives of 2 and 12 years, respectively. See Note 3 for further discussion.

Amortization expense for intangible assets was $25.4 million, $70.8 million and $68.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. Estimated amortization expense in each of the next five years is as follows: $74.0 million in 2003; $31.1 million in 2004; $9.2 million in

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

2005; $9.2 million in 2006; $9.2 million in 2007; and $58.6 million thereafter. The increase in amortization expense from 2002 to estimated amortization expense in 2003 is due to the reinstatement of subscriber base and dealer network intangible assets as a result of the issuance of EITF Issue No. 02-17, "Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination." See Note 3 for further discussion.

As discussed in Note 3, Hughes ceased amortization of goodwill and intangible assets with indefinite lives with the adoption of SFAS No. 142 on January 1, 2002.

Note 7: Investments in Marketable Securities

Investments in marketable equity securities stated at current fair value and classified as available-for-sale totaled $98.2 million and $725.4 million at December 31, 2002 and 2001, respectively, and were recorded in the Consolidated Balance Sheets in "Investments and Other Assets." Investments in debt securities, stated at current fair value and classified as available-for-sale, totaled $209.9 million at December 31, 2002. Investments in debt securities with maturities of less than one year totaling $99.8 million are carried in "Prepaid expenses and other." Investments in debt securities with remaining maturities of six years totaling $110.1 million are carried in "Investments and Other Assets."

At December 31, 2002, $3.4 million of accumulated unrealized pre-tax losses were recorded as part of OCI. At December 31, 2001, $323.1 million of accumulated unrealized pre-tax gains were recorded as part of OCI. During 2002 and 2001, Hughes recorded a write-down for other-than-temporary declines in certain

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document marketable equity investments of $148.9 million and $226.1 million, respectively.

On August 21, 2002, Hughes sold about 8.8 million shares of Thomson multimedia S.A. ("Thomson") common stock for approximately $211.0 million in cash, resulting in a pre-tax gain of about $158.6 million.

On November 19, 2001, Hughes repaid $74.9 million of debt pursuant to the terms of a debt guarantee provided by Hughes for the benefit of Motient Corporation ("Motient"). In connection with the payment, Hughes received from Motient 7.1 million common shares of XM Satellite Radio Holdings Inc. stock, with a market value as of November 2001 of $67.9 million and $3.6 million in cash. The repayment of Motient's debt released Hughes from any further obligations related to Motient's indebtedness and therefore Hughes reversed a related reserve of $39.5 million. The net effect of these actions resulted in a credit of $36.1 million to "Other, net" in the Consolidated Statements of Operations and Available Separate Consolidated Net Income."

On July 31, 2001, Hughes sold about 4.1 million shares of Thomson common stock for approximately $132.7 million in cash, resulting in a pre-tax gain of approximately $108.3 million.

Aggregate investments in affiliated companies accounted for under the equity method at December 31, 2002 and 2001 amounted to $6.8 million and $76.6 million, respectively.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

Note 8: Accrued Liabilities and Other

2002 2001 ------(Dollars in Millions) Exit costs and other liabilities related to discontinued businesses $255.1 $386.3 Payroll and other compensation...... 212.9 216.8 Programming contract liabilities...... 120.6 106.3 Subscriber services expenses...... 75.3 59.0 Interest payable...... 63.6 27.2 Other...... 542.4 546.4 ------

Total...... $1,269.9 $1,342.0 ======

Included in "Other Liabilities and Deferred Credits" is a provision for long-term programming contracts with above-market rates, established as part of the USSB and PRIMESTAR acquisitions in 1999, which totaled $296.0 million and $430.1 million at December 31, 2002 and December 31, 2001, respectively.

See Note 18 for additional information on the exit costs and other liabilities related to discontinued businesses, including the shutdown of the DIRECTV Broadband business.

Note 9: Short-Term Borrowings and Long-Term Debt

Interest Rates at December 31, 2002 2002 2001 ------(Dollars in Millions) Revolving credit facilities...... $450.0 Other short-term borrowings...... 4.31%-16.00% $21.5 16.4 Current portion of long-term debt...... 5.93%-6.00% 706.3 1,192.1 ------

Total short-term borrowings and current portion of long-term debt.... $727.8 $1,658.5 ======

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

Long-Term Debt

Interest Rates at December 31, 2002 2002 2001 ------

(Dollars in Millions) Notes payable...... 6.00%-8.50% $1,550.0 $796.5 Credit facilities...... 4.42%-5.93% 1,506.3 1,322.6 Other debt...... 4.30%-12.37% 40.0 61.8 ------

Total debt...... 3,096.3 2,180.9 Less current portion..... 706.3 1,192.1 ------

Total long-term debt. $2,390.0 $988.8 ======

Notes Payables and Credit Facilities. Notes Payable. In February 2002, PanAmSat completed an $800 million private placement notes offering. Such notes were exchanged for registered notes in November 2002. These unsecured notes bear interest at an annual rate of 8.5%, payable semi-annually and mature in 2012.

In January 2002, PanAmSat repaid in full the $46.5 million outstanding balance of variable rate notes assumed in 1999 in connection with the early buy-out of a satellite sale-leaseback.

PanAmSat issued five, seven, ten and thirty-year fixed rate notes totaling $750.0 million in January 1998. The $200 million five-year notes were repaid in January 2003. The outstanding principal balances and interest rates for the seven, ten, and thirty-year notes as of December 31, 2002 were $275 million at 6.125%, $150 million at 6.375% and $125 million at 6.875%, respectively. Principal on the notes is payable at maturity, while interest is payable semi-annually. In connection with a new secured bank facility entered into by PanAmSat in February 2002, described below, these notes were ratably secured by certain of the operating assets of PanAmSat that were pledged in connection with the secured bank facility.

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document million for the termination of the merger agreement, which resulted in a $143.7 million mandatory prepayment of the term loan under the Amended Credit Agreement. Accordingly, the term loan was reduced from $650.0 million to $506.3 million. As of December 31, 2002, the revolving component of the Amended Credit Agreement was undrawn and $506.3 million was outstanding under the term loan. As discussed in Note 22, the Amended Credit Agreement was terminated subsequent to December 31, 2002 and all amounts outstanding were repaid by Hughes.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

In February 2002, PanAmSat obtained a bank facility in the amount of $1,250 million. The bank facility is comprised of a $250 million revolving credit facility, which was undrawn as of December 31, 2002, a $300 million Tranche A Term Loan and a $700 million Tranche B Term Loan, both of which were fully drawn as of December 31, 2002. This bank facility replaced a previously existing $500 million unsecured multi-year revolving credit facility. The new revolving credit facility and the Tranche A Term Loan bear interest at the London Interbank Offered Rate ("LIBOR") plus 3.0%. The Tranche B Term Loan bears interest at LIBOR plus 3.5%. The revolving credit facility and Tranche A Term Loan interest rates may be increased or decreased based upon changes in PanAmSat's total leverage ratio, as defined by the credit agreement. The revolving credit facility and the Tranche A Term Loan terminate in 2007 and the Tranche B Term Loan matures in 2008. Principal payments under the Tranche A Term Loan are due in varying amounts from 2004 to 2007. Principal payments under the Tranche B Term Loan are due primarily at maturity. The facilities are secured ratably by substantially all of PanAmSat's operating assets, including its satellites. PanAmSat repaid a $1,725 million intercompany loan from Hughes in February 2002, using proceeds from the bank facility and notes payable described above, as well as existing cash balances.

On January 5, 2001, DLA entered into a $450.0 million revolving credit facility. The obligations under the DLA facility were assigned to Hughes in February 2002. In addition, the obligations under SurFin Ltd.'s unsecured revolving credit facilities of $400.0 million and $212.5 million were assigned to Hughes in February 2002.

Other. $61.5 million in other short-term and long-term debt, related primarily to DLA and Hughes Network Systems, Inc.'s ("HNS") international subsidiaries, was outstanding at December 31, 2002, bearing fixed and floating rates of interest of 4.30% to 16.00%. Principal on these borrowings is due in varying amounts through 2007.

Covenants and Restrictions. Hughes' and its subsidiaries' ability to borrow under the credit facilities is contingent upon meeting financial and other covenants. The agreements also include certain operational restrictions. These covenants limit Hughes' and its subsidiaries' ability to, among other things: incur or guarantee additional indebtedness; make restricted payments, including dividends; create or permit to exist certain liens; enter into business combinations and asset sale transactions; make investments; enter into transactions with affiliates; and enter into new business. The terms of the PanAmSat debt and credit facilities restrict PanAmSat from transferring funds to Hughes in the form of cash dividends, loans or advances. At December 31, 2002, Hughes and its subsidiaries were in compliance with all such covenants.

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Note 10: Income Taxes

The income tax benefit is based on the reported loss from continuing operations before income taxes, minority interests and cumulative effect of accounting changes. Deferred income tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as measured by applying currently enacted tax laws.

Hughes and its domestic subsidiaries join with GM in filing a consolidated U.S. federal income tax return. The portion of the consolidated income tax liability or receivable recorded by Hughes is generally equivalent to the amount that would have been recorded on a separate return basis.

The income tax benefit consisted of the following:

2002 2001 2000 ------Dollars in Millions) Taxes currently payable (refundable): U.S. federal...... $(234.1) $(422.2) $(757.9) Foreign...... 77.4 54.8 31.6 State and local...... (15.0) (54.1) (52.0) ------

Total...... (171.7) (421.5) (778.3) ------

Deferred tax liabilities: U.S. federal...... 72.3 89.9 361.0 State and local...... 5.0 6.0 11.2 ------

Total...... 77.3 95.9 372.2 ------

Total income tax benefit...... (94.4) $(325.6) $(406.1) ======

Loss from continuing operations before income taxes, minority interests and cumulative effect of accounting changes included the following components:

2002 2001 2000 ------(Dollars in Millions) U.S. loss...... $(82.7) $(914.7) $(752.2) Foreign loss...... (202.6) (75.0) (63.4) ------

Total..... $(285.3) $(989.7) $(815.6) ======

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HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

The combined income tax benefit was different than the amount computed using the U.S. federal statutory income tax rate for the reasons set forth in the following table:

Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities at December 31 were as follows:

No income tax provision has been made for the portion of undistributed earnings of foreign subsidiaries deemed permanently reinvested that amounted to approximately $76.9 million and $62.5 million at December 31, 2002 and 2001, respectively. Repatriation of all accumulated earnings would have resulted in tax liabilities of $26.9 million in 2002 and $21.9 million in 2001.

At December 31, 2002, Hughes has $126.7 million of deferred tax assets relating to foreign operating loss carryforwards expiring in varying amounts between 2003 and 2007. A valuation allowance was provided for all foreign operating loss carryforwards. At December 31, 2002, Hughes has $24.2 million of foreign tax

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HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document credits which will expire in 2006, $37.2 million of foreign tax credits which will expire in 2007 and $58.6 million of foreign tax credits which will expire in 2008. A valuation allowance was provided for $58.5 million of foreign tax credits. At December 31, 2002, Hughes has $46.3 million of alternative minimum tax credits, which can be carried forward indefinitely and $14.0 million of general business credits which will expire between 2021 and 2022. At December 31, 2002, Hughes' subsidiaries have $98.3 million of deferred tax assets relating to federal net operating loss carryforwards, which will expire in varying amounts between 2009 and 2021.

Hughes has an agreement with Raytheon Company ("Raytheon") which governs Hughes' rights and obligations with respect to U.S. federal and state income taxes for all periods prior to the spin-off and merger of Hughes' defense electronics business with Raytheon in 1997. Hughes is responsible for any income taxes pertaining to those periods prior to the merger, including any additional income taxes resulting from U.S. federal and state tax audits, and is entitled to any U.S. federal and state income tax refunds relating to those years.

Hughes also has an agreement with Boeing, which governs Hughes' rights and obligations with respect to U.S. federal and state income taxes for all periods prior to the sale of Hughes' Satellite Businesses. Hughes is responsible for any income taxes pertaining to those periods prior to the sale, including any additional income taxes resulting from U.S. federal and state tax audits, and is entitled to any U.S. federal and state income tax refunds relating to those years.

The U.S. federal income tax returns of Hughes have been examined and Hughes has concluded its administrative appeals process with the Internal Revenue Service ("IRS") for all tax years through 1994. The IRS is currently examining Hughes' U.S. federal tax returns for years 1995 through 2000. Management believes that adequate provision has been made for any adjustment which might be assessed for open years.

Total taxes receivable from GM at December 31, 2002 and 2001 were approximately $205 million and $300 million, respectively, of which $75 million and $180 million, respectively, were included in "Prepaid expenses and other" and $130 million and $120 million, respectively, were included in "Investments and Other Assets" in the Consolidated Balance Sheets.

Note 11: Retirement Programs and Other Postretirement Benefits

Substantially all of Hughes' employees participate in Hughes' contributory and non-contributory defined benefit retirement plans. Benefits are based on years of service and compensation earned during a specified period of time before retirement. Additionally, an unfunded, nonqualified pension plan covers certain employees. Hughes also maintains a program for eligible retirees to participate in health care and life insurance benefits generally until they reach age 65. Qualified employees who elected to participate in the Hughes contributory defined benefit pension plans may become eligible for these health care and life insurance benefits if they retire from Hughes between the ages of 55 and 65.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

The components of the pension benefit obligation and the other postretirement benefit obligation, as well as the net benefit obligation recognized in the Consolidated Balance Sheets, are shown below:

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HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

There were no GM Class H common stock shares included in the pension plan assets at December 31, 2002 and December 31, 2001.

Other Postretirement Pension Benefits Benefits ------2002 2001 2002 2001 ------Weighted-average assumptions as of December 31 Discount rate...... 7.00% 7.25% 6.75% 7.00% Expected return on plan assets...... 9.50% 9.50% N/A N/A Rate of compensation increase...... 5.00% 5.00% 5.00% 5.00%

For measurement purposes, an 8.0% annual rate of increase in per capita cost of covered health care benefits was assumed for 2003. The rate was assumed to decrease gradually 0.5% per year to 6.0% in 2007.

Hughes determines the discount rate assumption annually for each of its retirement-related benefit plans on December 1, Hughes' SFAS No. 87 measurement date, utilizing the yield of high quality fixed-income debt instruments.

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Hughes' expected return on plan assets assumption is derived from a review of Hughes' long-term actual return on plan assets and periodic detailed studies conducted by Hughes' actuary. While the review gives appropriate consideration to recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate. Based on the most recent review, Hughes is revising its expected return on plan assets assumption for 2003 to 9.0%. Hughes has achieved a compounded annual return on plan assets of about 12% over the 20 year period ended December 1, 2002.

The projected benefit obligation and accumulated benefit obligation for the pension plans with accumulated benefit obligations in excess of plan assets were $493.5 million and $440.1 million, respectively, as of December 31, 2002 and $62.3 million and $52.8 million, respectively, as of December 31, 2001. The fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets was $357.1 as of December 31, 2002.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

A one-percentage point change in assumed health care cost trend rates would have the following effects on other postretirement benefits:

1-Percentage 1-Percentage Point Increase Point Decrease ------(Dollars in Millions) Effect on total of service and interest cost components...... $0.2 $(0.2) Effect on postretirement benefit obligation.... 2.5 (2.3)

Hughes maintains 401(k) plans for qualified employees. A portion of employee contributions are matched by Hughes and amounted to $15.7 million, $17.7 million and $15.1 million in 2002, 2001 and 2000, respectively.

Hughes has disclosed certain amounts associated with estimated future postretirement benefits other than pensions and characterized such amounts as "other postretirement benefit obligation." Notwithstanding the recording of such amounts and the use of these terms, Hughes does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of Hughes (other than pensions) represent legally enforceable liabilities of Hughes.

GM holds all of the outstanding common stock of Hughes, which consists of 200 shares of $0.01 par value common stock.

The following represents changes in the components of OCI, net of taxes, as of December 31:

Note 13: Incentive Plans

Under the Hughes Electronics Corporation Incentive Plan (the "Plan"), as approved by the GM Board of Directors in 1999, shares, rights or options to acquire up to 159 million shares of GM Class H

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) common stock on a cumulative basis were authorized for grant, of which 4.6 million shares were available at December 31, 2002 subject to GM Executive Compensation Committee approval.

The GM Executive Compensation Committee may grant options and other rights to acquire shares of GM Class H common stock under the provisions of the Plan. The option price is equal to 100% of the fair market value of GM Class H common stock on the date the options are granted. These nonqualified options generally vest over two to five years, vest immediately in the event of certain transactions, expire ten years from date of grant and are subject to earlier termination under certain conditions.

Changes in the status of outstanding options were as follows:

Shares Under Weighted-Average Option Exercise Price

GM Class H Common Stock Outstanding at December 31, 1999 47,506,068 $13.28 Granted...... 35,538,026 37.06 Exercised...... (5,718,726) 11.88 Terminated...... ( 10,976,113) 31.47 ------

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Outstanding at December 31, 2000 66,349,255 23.04 Granted...... 37,971,644 23.34 Exercised...... (1,946,460) 11.44 Terminated...... (6,565,541) 27.66 ------

Outstanding at December 31, 2001 95,808,898 23.08 Granted...... 290,000 15.71 Exercised...... (570,855) 13.44 Terminated...... (1,903,967) 21.03 ------

Outstanding at December 31, 2002 93,624,076 23.16 ======

The following table summarizes information about the Plan stock options outstanding at December 31, 2002:

Options Outstanding Options Exercisable ------Weighted- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (years) Price Exercisable Price ------

$3.00 to $8.99 1,246,998 1.8 $7.20 1,246,998 $7.20 9.00 to 16.99 28,412,802 5.1 12.61 27,430,578 12.55 17.00 to 24.99 22,859,726 7.6 19.56 11,393,598 19.09 25.00 to 32.99 17,519,754 8.0 27.80 7,000,140 28.34 33.00 to 41.99 23,584,796 7.3 37.10 7,652,282 40.38 ------

93,624,076 6.8 23.16 54,723,596 19.60 ======

On May 5, 1997, PanAmSat adopted a stock option incentive plan with terms similar to the Plan. As of December 31, 2002, PanAmSat had 6,765,242 options outstanding to purchase its common

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) stock with exercise prices ranging from $14.64 per share to $63.25 per share. The options vest ratably over three to four years and have a remaining life ranging from four to ten years. At December 31, 2002, 2,749,027 options were exercisable at a weighted average exercise price of $36.37 per share. The PanAmSat options have been considered in the following pro forma analysis.

The following table presents pro forma information as if Hughes recorded compensation cost using the fair value of issued options on their grant date, as required by SFAS No. 123, "Accounting for Stock Based Compensation":

2002 2001 2000 ------(Dollars in Millions) Earnings (loss) used for computation of available separate consolidated net income (loss), as reported...... $(940.7) $(714.7) $732.9 Assumed stock compensation costs.. (171.7) (231.8) (147.6) ------

Pro forma earnings (loss) used for computation of available separate

The pro forma amounts for compensation cost are not indicative of the effects on operating results for future periods.

The following table presents the estimated weighted-average fair value for options granted under the Plan using the Black-Scholes valuation model and the assumptions used in the calculations:

2002 2001 2000 ------Estimated fair value per option granted.. $9.19 $13.66 $20.39 Average exercise price per option granted 15.71 23.34 37.06 Expected stock volatility...... 51.6% 51.3% 42.1% Risk-free interest rate...... 4.7% 5.1% 6.5% Expected option life (in years)...... 7.0 7.0 6.9

Note 14: Other Income and Expenses

2002 2001 2000 ------(Dollars in Millions) Equity losses from unconsolidated affiliates...... $(70.1) $(61.3) $(164.2) EchoStar Merger termination payment...... 600.0 -- -- Net gain (loss) on discontinuation of businesses... 41.1 32.0 (128.4) Net loss on write-down of investments to fair value (180.6) (239.0) -- Net gain from sale of investments...... 84.1 130.6 -- Other...... (49.0) 45.0 ------

Total Other, net...... $425.5 $(92.7) $(292.6) ======

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HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

2002 equity losses from unconsolidated affiliates are primarily comprised of losses at the DLA local operating companies. 2001 equity losses from unconsolidated affiliates are primarily comprised of losses at the DLA LOC's and Hughes Tele.com (India) Limited ("HTIL"), and in 2000, DIRECTV Japan.

Note 15: Related-Party Transactions

In the ordinary course of its operations, Hughes sells products and services to related parties, which include GM and equity method investees. During the years ended December 31, 2002, 2001 and 2000, Hughes sold telecommunications services and equipment to GM and HTIL, and sold broadcast programming and other services to DLA LOC's located in Puerto Rico, Venezuela and Argentina. As a result of the HTIL and Galaxy Entertainment Argentina S.A. ("GEA") transactions described in Note 18, HTIL and GEA are not considered related parties subsequent to the completion of those transactions on December 6, 2002 and May 1, 2001, respectively.

The following table summarizes significant related-party transactions for the years ended December 31:

2002 2001 2000 ------(Dollars in Millions) Revenues...... $211.1 $238.8 $243.3 Costs and expenses 117.9 126.2 149.9

The following table sets forth the amounts of accounts receivable from related

2002 2001 ------(Dollars in Millions) Accounts receivable from related parties...... $317.4 $237.7 Long-term accounts receivable from related parties -- 75.8

The December 31, 2002 accounts receivable balance is primarily from DLA LOC's.

Note 16: Available Separate Consolidated Net Income (Loss)

GM Class H common stock is a "tracking stock" of GM designed to provide holders with financial returns based on the financial performance of Hughes. Holders of GM Class H common stock have no direct rights in the equity or assets of Hughes, but rather have rights in the equity and assets of GM (which includes 100% of the stock of Hughes).

Amounts available for the payment of dividends on GM Class H common stock are based on the Available Separate Consolidated Net Income (Loss) ("ASCNI") of Hughes. The ASCNI of Hughes is determined quarterly and is equal to the net income (loss) of Hughes, excluding the effects of the GM purchase accounting adjustment arising from GM's acquisition of Hughes and reduced by the effects of preferred stock dividends paid and/or payable to GM (earnings (loss) used for computation of ASCNI), multiplied by a fraction, the numerator of which is equal to the weighted-average number of shares of GM Class H common stock outstanding during the period and the denominator of which is a number

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) equal to the weighted-average number of shares of GM Class H common stock which, if issued and outstanding, would represent 100% of the tracking stock interest in the earnings of Hughes (Average Class H dividend base).

In addition, the denominator used in determining the ASCNI of Hughes may be adjusted from time to time as deemed appropriate by the GM Board under the GM restated certificate of incorporation to reflect the following: (i) subdivisions and combinations of the GM Class H common stock and stock dividends payable in shares of GM Class H common stock to holders of GM Class H common stock; (ii) the fair market value of contributions of cash or property by GM to Hughes, or of cash or property of GM to or for the benefit of employees of Hughes for employee benefit plans or arrangements of GM, Hughes or other GM subsidiaries; (iii) the contribution of shares of capital stock of GM to or for the benefit of employees of Hughes or its subsidiaries for benefit plans or arrangements of GM, Hughes or other GM subsidiaries; (iv) payments made by Hughes to GM of amounts applied to the repurchase by GM of shares of GM Class H common stock, so long as the GM Board has approved the repurchase and GM applied the payment to the repurchase; and (v) the repurchase by Hughes of shares of GM Class H common stock that are no longer outstanding, so long as the GM Board approved the repurchase.

During the second quarter of 2000, GM completed an exchange offer in which GM repurchased 86 million shares of GM $1 2/3 par value common stock and issued 92 million shares (prior to giving effect to the stock split during 2000) of GM Class H common stock. In addition, on June 12, 2000, GM contributed approximately 54 million shares (prior to giving effect to the stock split during 2000) and approximately 7 million shares (prior to the stock split during 2000) of GM Class H common stock to its U.S. Hourly-Rate Employees Pension Plan and VEBA trust, respectively.

On June 6, 2000, the GM Board declared a three-for-one stock split of the GM Class H common stock. The stock split was in the form of a 200% stock dividend, paid on June 30, 2000 to GM Class H common stockholders of record on June 13, 2000. As a result, the numbers of shares of GM Class H common stock presented for all periods prior to the stock split have been adjusted to reflect the stock split, unless otherwise noted.

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Shares of Class H common stock delivered by GM in connection with the award of such shares to and the exercise of stock options by employees of Hughes increases the numerator and denominator of the fraction referred to above. From time to time, in anticipation of exercises of stock options, Hughes may purchase Class H common stock on the open market. Upon purchase, these shares are retired and therefore decrease the numerator and denominator of the fraction referred to above.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

The following table sets forth comparative information regarding GM Class H common stock and the GM Class H dividend base for the years ended December 31, 2002, 2001 and 2000:

2002 2001 2000 ------(Shares in Millions) GM Class H Common Stock Outstanding Shares at January 1...... 877.5 875.3 411.3 Shares issued for mandatory redemption of GM Series H preference stock...... 80.1 -- -- Shares issued related to GM exchange offer...... -- -- 276.0 Shares issued related to employee benefit plans.. -- -- 181.5 Shares issued for stock options exercised and other...... 0.7 2.2 6.5 ------

Shares at December 31...... 958.3 877.5 875.3 ======

Weighted average number of shares of GM Class H common stock outstanding (Numerator)...... 919.5 876.3 681.2 ======

GM Class H Dividend Base GM Class H dividend base at January 1...... 1,301.1 1,298.9 1,292.4 Increase for mandatory redemption of GM Series H preference stock...... 80.1 -- -- Increase for stock options exercised and other... 0.7 2.2 6.5 ------

GM Class H dividend base at December 31...... 1,381.9 1,301.1 1,298.9 ======

Weighted average GM Class H dividend base (Denominator)...... 1,343.1 1,300.0 1,297.0 ======

Note 17: Hughes Series A Preferred Stock and Hughes Series B Convertible Preferred Stock

On June 24, 1999, as part of a strategic alliance with Hughes, America Online, Inc. ("AOL") invested $1.5 billion in shares of GM Series H preference stock. The preferred stock accrued quarterly dividends at a rate of 6.25% per year. GM immediately invested the $1.5 billion received from AOL in shares of Hughes Series A Preferred Stock designed to correspond to the financial terms of the GM Series H preference stock. Dividends on the Hughes Series A Preferred Stock were payable to GM quarterly at an annual rate of 6.25%. The underwriting discount on the Hughes Series A Preferred Stock was amortized over three years.

On June 24, 2002, the GM Series H preference stock, pursuant to its terms, was mandatorily converted to about 80.1 million shares of GM Class H common stock. As a result, the number of shares in the Class H dividend base and the number of

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document shares of GM Class H common stock outstanding were each increased by the number of shares issued. Also on June 24, 2002, in connection with the automatic conversion of the GM Series H preference stock held by AOL, GM contributed the $1.5 billion of Hughes Series A Preferred Stock back to Hughes, which Hughes cancelled and recorded as a contribution to "Capital stock and additional paid-in capital." In exchange for the Hughes Series A Preferred Stock, Hughes issued $914.1 million of Hughes Series B Convertible Preferred Stock to GM, which was recorded as a reduction to "Capital stock and additional paid-in capital." The Hughes Series B Convertible Preferred Stock, which does not accrue dividends, may be converted to Hughes Class B common stock at the option of GM anytime after June 24, 2003 ("Optional Conversion").

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HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

As more fully described in the Amended and Restated Certificate of Incorporation of Hughes, the number of shares of Hughes Class B common stock that will be issued upon Optional Conversion will be equal to the number of shares of Hughes Series B Convertible Preferred Stock converted, multiplied by a fraction, the numerator of which is the stated value of the Hughes Series B Convertible Preferred Stock ($1,000.00 per share) and the denominator of which is the Fair Market Value of a share of Hughes Class B common stock (as determined in accordance with the Amended and Restated Certificate of Incorporation of Hughes). Issuance of Hughes Class B common stock will have no impact on the number of GM Class H common stock outstanding and no impact on the GM Class H dividend base.

Note 18: Acquisitions and Divestitures

DIRECTV Broadband

On April 3, 2001, Hughes acquired Telocity, a company that provides land-based DSL services, through the completion of a tender offer and merger. Telocity was operated as DIRECTV Broadband and is included as part of the Direct-To-Home Broadcast segment. The purchase price was $197.8 million and was paid in cash. The following selected unaudited pro forma information is being provided to present a summary of the combined results of Hughes and Telocity for 2001 and 2000 as if the acquisition had occurred as of the beginning of the periods, giving effect to purchase accounting adjustments. The pro forma data is presented for informational purposes only and may not necessarily reflect the consolidated results of operations of Hughes had Telocity operated as part of Hughes for the periods presented, nor are they necessarily indicative of the results of future operations. The pro forma information excludes the effect of non-recurring charges.

2001 2000 ------(Dollars in Millions) Total revenues...... $8,272.1 $7,297.0 Income (loss) before cumulative effect of accounting change...... (657.8) 670.0 Net income (loss)...... (665.2) 670.0 Pro forma earnings (loss) used for computation of available separate consolidated net income (loss)...... (758.3) 589.9

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document Available Separate Consolidated Net Income (Loss). Included in the $92.8 million charge were accruals for employee severance benefits of $21.3 million and contract termination payments of $18.6 million. No amounts were paid as of December 31, 2002.

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HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) the purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition.

Hughes Tele.com (India) Limited

On December 6, 2002, HNS completed a series of transactions to exchange its equity interest in HTIL of $58.8 million, long-term receivables from HTIL of $75.0 million, and a net receivable of $25.4 million from HTIL's Indian sponsor, Ispat, in exchange for investments in Tata Teleservices Limited ("TTSL"). The transactions were accounted for as a sale of the assets surrendered at their fair values and the purchase of the instruments in TTSL on the date of the transactions. HNS allocated the fair value of the assets surrendered of $135.1 million to the assets received, which include redeemable preference shares ($110.1 million), a 15 year zero coupon note ($9.7 million) and 50 million common stock purchase warrants ($15.3 million), based on their relative fair values. The preference shares are redeemable at the end of 51 or 75 months at the option of HNS and convertible to common equity at the end of 75 months at the option of HNS. The redemption is guaranteed in the form of a put to TTSL's parent company, Tata Sons. The preference shares are carried at fair value as an available-for-sale security, with unrealized gains and losses reported net of tax, as a component of OCI.

Galaxy Entertainment Argentina

On May 1, 2001, DLA, which operates the Latin America DIRECTV business, acquired from Grupo Clarin S.A. ("Clarin") a 51% ownership interest in GEA, a local operating company in Argentina that provides direct-to-home broadcast services, and other assets, consisting primarily of programming and advertising rights. The purchase price, valued at $169 million, consisted of a 3.98% ownership interest in DLA and a put option that under certain circumstances will allow Clarin to sell its 3.98% interest back to DLA in November 2003 for $195 million (see further discussion of this item in Note 21). As a result of the transaction, Hughes' interest in DLA decreased from 77.8% to 74.7% and Hughes' ownership in GEA increased from 20% to 58.1%. Hughes' portion of the purchase price, which amounted to about $130 million, was recorded as an increase to "Capital stock and additional paid-in capital."

The financial information included herein reflects the acquisition discussed above from its date of acquisition. The acquisition was accounted for by the

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition.

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HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

Satellite Systems Manufacturing Businesses

On October 6, 2000, Hughes completed the sale of its satellite systems manufacturing businesses for $3.75 billion in cash. The transaction resulted in the recognition of a pre-tax gain of $2,036.0 million, or $1,132.3 million after-tax. Included in this gain is a net after-tax curtailment loss of $42.0 million related to pension and other postretirement benefit plan assets and liabilities associated with the Satellite Businesses. The purchase price is subject to adjustment based upon the final closing date financial statements as discussed in Note 21.

Summarized financial information for the discontinued operations follows:

2000 ------(Dollars in Millions) Revenues (excluding intercompany transactions) $1,260.1 Income tax provision...... 23.2 Net income...... 36.1

DIRECTV Japan

On March 1, 2000, Hughes announced that the operations of DIRECTV Japan would be discontinued. Pursuant to an agreement with Japan Digital Broadcasting Services Inc. (now named Sky Perfect), qualified subscribers to the DIRECTV Japan service were offered the opportunity to migrate to the Sky Perfect service. DIRECTV Japan was paid a commission for each subscriber who actually migrated. Hughes also acquired a 6.6% interest in Sky Perfect. As a result, Hughes wrote-off its net investment in DIRECTV Japan of $164.6 million and accrued exit costs of $403.7 million and involuntary termination benefits of $14.5 million. Accrued exit costs consist of claims arising out of contracts with dealers, manufacturers, programmers and others, satellite transponder and facility and equipment leases, subscriber migration and termination costs, and professional service fees and other. The write-off and accrual were partially offset by the difference between the cost of the Sky Perfect shares acquired and the estimated fair value of the shares ($428.8 million), as determined by an independent appraisal, and by $40.2 million for anticipated contributions from other DIRECTV Japan shareholders. The net effect of the transaction was a charge to "Other, net" in the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss) of $170.6 million at March 31, 2000.

DIRECTV Japan employed approximately 290 personnel as of March 31, 2000, of which 244 were terminated during 2000. All remaining personnel were terminated in the first quarter of 2001.

IV-90

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

Japan broadcasting service, greater than anticipated commission payments for subscriber migration and favorable settlements of various contracts and claims.

In the fourth quarter of 2000, Sky Perfect completed an initial public offering, at which date the fair value of Hughes' interest (diluted by the public offering to approximately 5.3%) in Sky Perfect was approximately $343 million. In the third quarter of 2001 and fourth quarter of 2000, a portion of the decline in the value of the Sky Perfect investment was determined to be "other-than-temporary," resulting in a write-down of the carrying value of the investment by $212 million and $86 million, respectively. At December 31, 2001, the investment's market value approximated its carrying value. In October 2002, Hughes sold all of its interest in Sky Perfect for approximately $105 million in cash, resulting in a pre-tax loss of about $24.5 million.

Note 19: Derivative Financial Instruments and Risk Management

Hughes' cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates, interest rates and changes in the market value of its equity investments. Hughes manages its exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Hughes enters into derivative instruments only to the extent considered necessary to meet its risk management objectives, and does not enter into derivative contracts for speculative purposes.

Hughes is exposed to interest rate changes from its outstanding fixed rate and floating rate borrowings. Hughes manages its fixed to floating rate debt mix to mitigate the impact of adverse changes in interest rates on earnings and cash flows and on the market value of its borrowings. In accordance with policy, from time to time Hughes may enter into interest rate hedging contracts which effectively convert floating rate borrowings to fixed, or fixed rate borrowings to floating.

Note 20: Segment Reporting

Hughes' segments, which are differentiated by their products and services, include Direct-To-Home Broadcast, Satellite Services, and Network Systems. Direct-To-Home Broadcast is engaged in acquiring, promoting, selling and/or distributing digital entertainment programming via satellite to residential and commercial customers and provided land-based DSL services. Satellite Services is

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HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) engaged in the selling, leasing and operating of satellite transponders and providing services for cable television systems, news companies, Internet service providers and private business networks. The Network Systems segment is a provider of satellite-based private business networks and broadband Internet access, and a supplier of DIRECTV receiving equipment (set-top boxes and

IV-92

HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

Selected information for Hughes' operating segments are reported as follows:

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document (1) EBITDA is defined as operating profit (loss), plus depreciation and amortization. EBITDA is not presented as an alternative measure of operating results or cash flow from operations, as determined in accordance with accounting principles generally accepted in the United States of America. Hughes management uses EBITDA to evaluate the operating performance of Hughes and its business segments, to allocate resources and capital to its

IV-93

HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

business segments and as a measure of performance for incentive compensation purposes. Hughes believes EBITDA is a measure of performance used by some investors, equity analysts and others to make informed investment decisions. EBITDA is used as an analytical indicator of income generated to service debt and fund capital expenditures. In addition, multiples of current or projected EBITDA are used to estimate current or prospective enterprise value. Hughes management believes that EBITDA is a common measure used to compare Hughes' operating performance and enterprise value to other communications, entertainment and media service providers. EBITDA does not give effect to cash used for debt service requirements consisting of interest payments of $398.0 million, $268.4 million and $312.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. As a result, EBITDA does not reflect funds available for investment in the business of Hughes, dividends or other discretionary uses. EBITDA as presented herein may not be comparable to similarly titled measures reported by other companies.

The following represents a reconciliation of EBITDA to reported net income (loss) on the Consolidated Statements of Operations and Available Separate Consolidated Net Income (Loss):

Years Ended December 31, ------2002 2001 2000 ------(Dollars in Millions) EBITDA...... $668.0 $389.9 $594.0 Depreciation and amortization...... (1,067.1) (1,147.7) (948.1) ------

Operating loss...... (399.1) (757.8) (354.1) Interest income...... 24.5 56.7 49.3 Interest expense...... (336.2) (195.9) (218.2) Other, net...... 425.5 (92.7) (292.6) ------

Loss from continuing operations before income taxes, minority interest and cumulative effect of accounting changes.... (285.3) (989.7) (815.6) Income tax benefit...... 94.4 325.6 406.1 Minority interests in net (earnings) losses of subsidiaries...... (21.6) 49.9 54.1 ------

Loss from continuing operations before cumulative effect of accounting changes...... (212.5) (614.2) (355.4) Income from discontinued operations, net of taxes...... -- -- 36.1 Gain on sale of discontinued operations, net of taxes...... -- -- 1,132.3 Cumulative effect of accounting changes, net of taxes...... (681.3) (7.4) ------

Net income (loss)...... $(893.8) $(621.6) $813.0 ======

IV-94

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

The following table presents revenues earned from customers located in different geographic areas. Property is grouped by its physical location. All satellites are reported as United States assets.

Note 21: Commitments and Contingencies

Litigation

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 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

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HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued) the dispute resolution process. As of December 31, 2002, approximately $670 million of proposed adjustments remain unresolved. Hughes is contesting the matter in the arbitration process, which will result in a binding decision unless the matter is otherwise settled. Although Hughes believes it has adequately provided for the disposition of this matter, the impact of its disposition cannot be determined at this time. It is possible that the final resolution of this matter could result in Hughes making a cash payment to Boeing that would be material to Hughes' consolidated results of operations and financial position.

With respect to the previously reported dispute between General Electric Capital Corporation ("GECC") and DIRECTV arising out of a contract entered into between the parties on July 31, 1995, the parties executed an agreement on June 4, 2002 to settle the matter for $180 million. The settlement resulted in DIRECTV recording a second quarter 2002 pre-tax charge of $47 million to "Interest expense." In the first quarter of 2002, DIRECTV increased its provision for loss related to this matter by $83 million, of which $56 million was recorded as a charge to "Selling, general and administrative expenses" and $27 million was recorded as a charge to "Interest expense." Previously, DIRECTV had accrued $50 million as of December 31, 1999 associated with the expected settlement of this claim. The $180 million settlement was paid to GECC in June 2002.

Litigation is subject to uncertainties and the outcome of individual litigated matters is not predictable with assurance. In addition to the above items, various legal actions, claims, and proceedings are pending against Hughes arising in the ordinary course of business. Hughes has established loss provisions for matters in which losses are probable and can be reasonably estimated. Some of the matters may involve compensatory, punitive, or treble damage claims, or sanctions, that if granted, could require Hughes to pay damages or make other expenditures in amounts that could not be estimated at December 31, 2002. After discussion with counsel representing Hughes in those actions, it is the opinion of management that such liability is not expected to have a material adverse effect on Hughes' consolidated results of operations and financial position.

Other

HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

Hughes uses in-orbit and launch insurance to mitigate the potential financial impact of satellite fleet in-orbit and launch failures unless the premium costs are considered uneconomic relative to the risk of satellite failure. The insurance generally covers the unamortized book value of covered satellites and does not compensate for business interruption or loss of future revenues or customers. Hughes relies on in-orbit spare satellites and excess transponder capacity at key orbital slots to mitigate the effects of satellite failure on its ability to provide service. Where insurance costs related to known satellite anomalies are prohibitive, Hughes' insurance policies contain coverage exclusions and Hughes is not insured for certain other satellites. The book value of satellites that were insured with coverage exclusions amounted to $563.5 million and the book value of the satellites that were not insured was $1,049.7 million at December 31, 2002.

Hughes is contingently liable under standby letters of credit and bonds in the aggregate amount of $65.1 million which were undrawn at December 31, 2002 and DLA has guaranteed $3.0 million of bank debt related to non-consolidated DLA local operating companies, which is due in varying amounts through 2005. Additionally, as described in Note 18, DLA may be required to repurchase Clarin's 3.98% interest in DLA for $195 million in November 2003. In the first quarter of 2003, Clarin notified DLA that it believes that DLA's decision to initiate discussions with Clarin and certain other programmers, suppliers and business associates to address DLA's financial and operational challenges has caused DLA to be responsible immediately to purchase Clarin's equity interest in DLA. See Note 22 for further discussion of this matter.

The Hughes Board of Directors has approved several benefit plans designed to provide benefits for the retention of about 205 key employees and also provide benefits in the event of employee lay-offs. Generally, these benefits are only available if a qualified change-in-control of Hughes occurs. Upon a change-in-control, the retention benefits will be accrued and expensed when earned and the severance benefits will be accrued and expensed if an employee is identified for termination. A total of up to about $105 million for retention benefits will be paid, with approximately 50% paid at the time of a change-in-control and 50% paid up to 12 months following the date of a change-in-control. The amount of severance benefits to be paid will be based upon decisions that will be made relating to employee layoffs, if any, following the date of a change-in-control. In addition, as of December 31, 2002, approximately 30.5 million employee stock options to purchase shares of GM Class H common stock will vest upon a qualifying change-in-control and up to an additional 8.4 million employee stock options could vest if employees are laid off within one year of a change-in-control.

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HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document At December 31, 2002, minimum future commitments under noncancelable operating leases having lease terms in excess of one year were primarily for real property and aggregated $769.4 million, payable as follows: $252.5 million in 2003, $210.6 million in 2004, $107.6 million in 2005, $52.3 million in 2006, $46.1 million in 2007, and $100.3 million thereafter. Certain of these leases contain escalation clauses and renewal or purchase options. Rental expenses under operating leases, net of sublease rental income, were $68.0 million in 2002, $59.7 million in 2001 and $55.9 million in 2000.

Note 22: Subsequent Events

In the first quarter of 2003, Hughes completed a series of financing transactions to replace the Amended Credit Agreement with a capital structure that is more long-term in nature. On February 28, 2003, DIRECTV issued $1.4 billion in senior notes due in 2013. The ten-year senior notes are unsecured indebtedness guaranteed by all of DIRECTV's domestic subsidiaries and bear interest at 8.375%. In addition, on March 6, 2003, DIRECTV entered into a new senior secured credit facility with total term loan and revolving loan commitments of $1.675 billion. The new senior secured credit facility is comprised of a $375.0 million Tranche A Term Loan, $200.0 million of which was undrawn at March 6, 2003, a $1,050.0 million Tranche B Term Loan and a $250.0 million revolving credit facility which was undrawn at March 6, 2003. The new senior secured credit facility has a term of five to seven years and is secured by substantially all of DIRECTV's assets and guaranteed by all of DIRECTV's domestic subsidiaries. The revolving credit facility and term loans bear interest at LIBOR plus 3.50%. DIRECTV distributed to Hughes the net proceeds from the senior secured credit facility and the sale of the senior notes totaling $2.56 billion. The $200 million undrawn portion of the Tranche A Term Loan is expected to be drawn by December 31, 2003 with the net proceeds distributed to Hughes. The revolving portion of the senior secured credit facility will be available to DIRECTV to fund working capital and other requirements. The above distribution enabled Hughes to repay all amounts outstanding under its existing Amended Credit Agreement, which was terminated on February 28, 2003, and is expected to provide sufficient liquidity to fund Hughes' business plan through projected cash flow breakeven and for Hughes' other corporate purposes.

DLA has endured subscriber losses and revenue declines as a result of economic and political instability affecting various countries in which DLA provides service. As a result, in January 2003, DLA announced the commencement of discussions with certain programmers, suppliers and business associates to address DLA's current financial and operational challenges. The agreements which

IV-98

HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (continued)

DLA is seeking to restructure include certain long-term or exclusive programming agreements which have resulted in payment obligations substantially in excess of the current economic value of the programming to DLA. DLA has ceased making payments under certain of these agreements and has received notices of default relating to approximately $32 million claimed to be owed to programmers and a

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document claim that DLA's restructuring had resulted in an acceleration of an obligation to repurchase a 4% equity interest in DLA for $195 million. DLA does not believe that the purchase obligation has been accelerated. All such amounts correspond to agreements that are currently under renegotiation. If DLA does not comply with its obligations under its programming contracts and is unsuccessful in reaching a settlement with the relevant programmers, such programmers could seek to terminate the programming contracts, which would result in a loss of such programming to DLA. If the discussions do not result in a reasonable agreement in the near future, DLA has indicated that it would consider other options, including restructuring the company under Chapter 11 of the U.S. bankruptcy law. If DLA initiates proceedings under Chapter 11 of the U.S. bankruptcy law, it could reject some or all of its long-term programming agreements (as well as other non-essential executory contracts), in which event the programming related to such rejected agreements would no longer be available to DLA. This could result in increased churn or reduced demand for the DLA service, which would be a consideration for DLA in determining which programming contracts to reject in the event of Chapter 11 bankruptcy proceedings. A filing under Chapter 11 of the U.S. bankruptcy law could result in a charge in a future period that could be material to Hughes' consolidated results of operations and financial position.

On February 28, 2003, GM announced plans to contribute approximately 150 million shares of GM Class H common stock to certain of its U.S. employee benefit plans. GM expects to make the contribution during the month of March 2003. The contribution would increase the amount of GM Class H common stock held by GM's employee benefit plans to approximately 330 million shares and reduce GM's retained economic interest in Hughes to approximately 20.0% from 30.7%.

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HUGHES ELECTRONICS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (concluded) manufacturing businesses to Boeing, Hughes retained liability for certain possible fines and penalties and certain financial consequences of debarment or suspension that could be imposed by the State Department in connection with this matter. Hughes and BSS have now settled this matter through execution of a Consent Agreement with the State Department and a separate agreement among Hughes, BSS and Boeing. The Consent Agreement requires the payment of a fine in the aggregate amount of $20 million ($5 million of which is to be reimbursed to Hughes by BSS) to be paid in 8 equal installments over 7 years, which has been provided for in Hughes' consolidated financial statements as of December 31, 2002, a commitment by Hughes to spend $2 million over 5 years on internal export

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document compliance, and various improvements in Hughes' export program. The State Department has agreed that there will be no suspension or debarment for either company as part of the settlement. This resolves all outstanding government action related to the China matters and all claims among Boeing, BSS and Hughes related to these matters.

* * *

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HUGHES ELECTRONICS CORPORATION

SUPPLEMENTAL INFORMATION

------

(1) Included as part of Income (loss) before income taxes, minority interests and cumulative effect of accounting change for the fourth quarter of 2002 is a $600 million gain for the settlement on the terminated merger agreement with EchoStar, partially offset by a $146.3 million write down for other-than-temporary declines in the fair value of certain equity securities and a $92.8 million charge related to the shutdown of the DIRECTV Broadband business.

IV-101

HUGHES ELECTRONICS CORPORATION

CERTIFICATIONS

I, Jack A. Shaw, Director, President and Chief Executive Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Hughes Electronics Corporation;

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(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

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 10, 2003

By. /s/ JACK A. SHAW ------Jack A. Shaw Director, President and Chief Executive Officer

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HUGHES ELECTRONICS CORPORATION

CERTIFICATIONS

I, Michael J. Gaines, Vice President and Chief Financial Officer, certify that:

1. I have reviewed this annual report on Form 10-K of Hughes Electronics Corporation;

(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(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

Copyright © 2012 www.secdatabase.com. All Rights Reserved. Please Consider the Environment Before Printing This Document 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 10, 2003

By. /s/ MICHAEL J. GAINES ------Michael J. Gaines Vice President and Chief Financial Officer

IV-103

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of General Motors Corporation (the "Corporation") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, G. Richard Wagoner, Jr., President and Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ G. RICHARD WAGONER, JR. ------G. Richard Wagoner, Jr. President and Chief Executive Officer March 13, 2003

IV-104

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of General Motors Corporation (the "Corporation") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John M. Devine, Vice Chairman and Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ JOHN M. DEVINE ------John M. Devine Vice Chairman and Chief Financial Officer March 13, 2003

IV-105