DIRECTV 2002 Annual Report Download - page 62

HUGHES ELECTRONICS CORPORATION
In a separate, but related transaction, Hughes also sold to Boeing its 50% interest in HRL
Laboratories LLC (“HRL”) for $38.5 million, which represented the net book value of Hughes’ interest in
HRL at October 6, 2000.
DIRECTV Japan. On March 1, 2000, Hughes announced that the operations of DIRECTV Japan
would be discontinued. Pursuant to an agreement with Japan Digital Broadcasting Services Inc. (now
named Sky Perfect), qualified subscribers to the DIRECTV Japan service were offered the opportunity
to migrate to the Sky Perfect service. DIRECTV Japan was paid a commission for each subscriber who
actually migrated. Hughes also acquired a 6.6% interest in Sky Perfect. As a result, Hughes wrote-off
its net investment in DIRECTV Japan of $164.6 million and accrued exit costs of $403.7 million and
involuntary termination benefits of $14.5 million. Accrued exit costs consist of claims arising out of
contracts with dealers, manufacturers, programmers and others, satellite transponder and facility and
equipment leases, subscriber migration and termination costs, and professional service fees and other.
The write-off and accrual were partially offset by the difference between the cost of the Sky Perfect
shares acquired and the estimated fair value of the shares ($428.8 million), as determined by an
independent appraisal, and by $40.2 million for anticipated contributions from other DIRECTV Japan
shareholders. The net effect of the transaction was a charge to “Other, net” in the Consolidated
Statements of Operations and Available Separate Consolidated Net Income (Loss) of $170.6 million at
March 31, 2000.
DIRECTV Japan employed approximately 290 personnel as of March 31, 2000, of which 244 were
terminated during 2000. All remaining personnel were terminated in the first quarter of 2001.
During 2002, $41.1 million of accrued liabilities related to the exit costs were reversed upon the
resolution of the remaining claims, resulting in a credit adjustment to “Other, net.” In the third quarter of
2001, $32.0 million of accrued exit costs were reversed as a credit adjustment to “Other, net.” In the
fourth quarter of 2000, $106.6 million of accrued exit costs were reversed and $0.6 million of
involuntary termination benefits were added, resulting in a net credit adjustment to “Other, net” of
$106.0 million. The third quarter of 2001 and fourth quarter of 2000 adjustments made to the exit cost
accrual were primarily attributable to earlier than anticipated cessation of the DIRECTV Japan
broadcasting service, greater than anticipated commission payments for subscriber migration and
favorable settlements of various contracts and claims.
In the fourth quarter of 2000, Sky Perfect completed an initial public offering, at which date the fair
value of Hughes’ interest (diluted by the public offering to approximately 5.3%) in Sky Perfect was
approximately $343 million. In the third quarter of 2001 and fourth quarter of 2000, a portion of the
decline in the value of the Sky Perfect investment was determined to be “other-than-temporary,”
resulting in a write-down of the carrying value of the investment by $212 million and $86 million,
respectively. At December 31, 2001, the investment’s market value approximated its carrying value. In
October 2002, Hughes sold all of its interest in Sky Perfect for approximately $105 million in cash,
resulting in a pre-tax loss of about $24.5 million.
Investments in Marketable Securities. Investments in marketable equity securities stated at
current fair value and classified as available-for-sale totaled $98.2 million and $725.4 million at
December 31, 2002 and 2001, respectively, and were recorded in the Consolidated Balance Sheets in
“Investment and Other Assets.” Investments in debt securities, stated at current fair value and
classified as available-for-sale, totaled $209.9 million at December 31, 2002. Investments in debt
securities with maturities of less than one year totaling $99.8 million are carried in “Prepaid expenses
and other.” Investments in debt securities with remaining maturities of six years totaling $110.1 million
are carried in “Investments and Other Assets.”
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