-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JCK6YLp+y0NdBKGVrMHbpiOyzViiCehEWDGtkC/Cs1Rzafn9O1Qzcu/BXWvLE/tV lxrXUheieGz0QZP5JqpQXQ== 0000040730-00-000042.txt : 20000314 0000040730-00-000042.hdr.sgml : 20000314 ACCESSION NUMBER: 0000040730-00-000042 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL MOTORS CORP CENTRAL INDEX KEY: 0000040730 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 380572515 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-00143 FILM NUMBER: 567073 BUSINESS ADDRESS: STREET 1: 300 RENAISSANCE CTR CITY: DETROIT STATE: MI ZIP: 48265-1000 BUSINESS PHONE: 3135565000 MAIL ADDRESS: STREET 1: 3044 W GRAND BOULEVARD CITY: DETROIT STATE: MI ZIP: 48202-3091 10-K 1 1999 10-K DOCUMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF - --- 1934 For the fiscal year ended December 31, 1999 ----------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 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 (619,783,944 shares outstanding as of February 29, 2000) New York Stock Exchange, Inc. Class H Common, $0.10 par value (137,879,463 shares outstanding as of February 29, 2000) New York Stock Exchange, Inc. Preference, $0.10 par value, Series D 7.92% Depositary Shares, stated value $25 per share, dividends cumulative (3,014,654 depositary shares outstanding as of February 29, 2000) New York Stock Exchange, Inc. Preference, $0.10 par value, Series G 9.12% Depositary Shares, stated value $25 per share, dividends cumulative (5,015,410 depositary shares outstanding as of February 29, 2000) New York Stock Exchange, Inc. General Motors Capital Trust D 8.67% Trust Originated Preferred Securitiessm (TOPrSsm), Series D (3,149,748 shares outstanding as of February 29, 2000) New York Stock Exchange, Inc. General Motors Capital Trust G 9.87% Trust Originated Preferred Securitiessm (TOPrSsm), Series G (5,221,123 shares outstanding as of February 29, 2000) 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 Montreal Stock Exchange Montreal, Quebec, Canada Toronto Stock Exchange Toronto, Ontario, Canada Borse Frankfurt am Main Frankfort 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 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. ( ) The aggregate market value (based upon the average of the highest and lowest sales prices on the Composite Tape on February 29, 2000) of General Motors Corporation $1-2/3 par value and GM Class H common stocks held by nonaffiliates on February 29, 2000 was approximately $47.7 billion and $16.6 billion, respectively. GM's Class H common stock is a "tracking stock" designed to provide holders with financial returns based on the financial performance of 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 Document 10-K into Which Incorporated ----------------------------- General Motors Notice of Annual Meeting of Stockholders and Proxy Statement for the Annual Meeting of Stockholders to be held June 6, 2000 Part III, Items 10 through 13 - -------------------- sm "Trust Originated Preferred Securities" and "TOPrS" are service trademarks of Merrill Lynch & Co. 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" or the "Corporation" and, together with its subsidiaries, is hereinafter sometimes referred to as "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-20 Note 26 of Notes to the GM Consolidated Financial Statements (Segment Reporting) II-72 through II-75 GM presents separate consolidating financial information for the following businesses: Automotive, Communications Services, and Other Operations and 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 Asia/Pacific (GMAP), and GM Latin America/Africa/Mid-East (GMLAAM). GMNA designs, manufactures, and markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, and Saturn. GME, GMAP, and GMLAAM meet the demands of customers outside North America with vehicles designed, manufactured, and marketed under the following nameplates: Opel, Vauxhall, Holden, Isuzu, Saab, Buick, Chevrolet, GMC, and Cadillac. GM's communications services relate to its Hughes Electronics Corporation subsidiary (Hughes) which includes digital entertainment, information and communications services, and satellite-based private business networks. GM's other operations includes the design, manufacturing and marketing of locomotives and heavy-duty transmissions, the elimination of intersegment transactions, and certain non-segment specific revenues and expenditures. 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, full-service leasing and fleet leasing, dealer financing, car and truck extended service contracts, residential and commercial mortgage services, commercial, vehicle, and homeowners' insurance, and asset-based lending. Substantially all automotive-related products are marketed through retail dealers and through distributors and jobbers in the United States, Canada, and Mexico, and through distributors and dealers overseas. At December 31, 1999, there were approximately 8,100 GM vehicle dealers in the United States, 840 in Canada, and 155 in Mexico. Additionally, there were a total of approximately 11,340 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 $9.2 billion and $10.1 billion backlog of commercial contracts relating to its telecommunications and space businesses at the end of 1999 and 1998, respectively. I-1 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, Nissan Motor Corporation, Ltd., Honda Motor Company, Ltd., Mazda Motor Corporation, Mitsubishi Motors Corporation, Volkswagen A.G. (Volkswagen), Hyundai Motor Company, Ltd. (Hyundai), Bayerische Motoren Werke AG (BMW), Volvo AB, and Kia Motors Corporation (Kia). All but Volkswagen, Hyundai and Kia 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. Wholesale unit sales of GM passenger cars and trucks during the three years ended December 31, 1999 are summarized in Management's Discussion and Analysis in Part II. Total industry new motor vehicle (passenger cars, trucks, and buses) registrations of domestic and foreign makes and GM's competitive position during the years ended December 31, 1999, 1998, and 1997, respectively, were as follows: 1999(1) 1998 1997 ---- ---- ---- (Units in Thousands) Total industry registrations In the United States 17,419 15,966 15,501 In Canada and Mexico 2,221 2,092 1,919 In other countries 35,307 34,623 36,125 ------ ------ ------ Total industry registrations - all countries 54,947 52,681 53,545 ====== ====== ====== 1999(1) 1998 1997 ---- ---- ---- (Percent of Total Industry) GM's registrations In the United States 29% 29% 31% In Canada and Mexico 29 29 31 In other countries 9 9 9 Total GM's registrations - all countries 16 16 16 - --------------- (1) Preliminary The above information on registrations of new cars, trucks, and buses was obtained from outside sources and that pertaining to GM's registrations includes units which are manufactured overseas by other companies and which are imported and sold by GM and affiliates. Research and Development In 1999, GM spent $6.8 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, $295 million was spent for customer-sponsored activities. Comparably, $6.3 billion and $6.5 billion were spent on company-sponsored activities in 1998 and 1997, respectively and $717 million and $1.5 billion were spent on customer-sponsored activities in 1998 and 1997, respectively. Environmental Matters Automotive Emissions Control Both the 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 hardware 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. I-2 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 "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. The requirement that, for model years 2003 and later, 10% of cars and small light-duty trucks (up to 3,750 lb Loaded Vehicle Weight) sold in California must be zero emission vehicles (ZEVs), was modified by the LEV II rules to allow up to 6% of the 10% to be met using partial ZEV credits. Also, GM and six other major vehicle manufacturers signed Memorandum of Agreements (MOAs) with CARB to provide for a more market driven-introduction of ZEVs. The MOAs include provisions for an advanced battery ZEV demonstration program of 3,750 vehicles in the 1998-2000 time frame, a National LEV program or an alternative that provides equivalent emission benefits in California, the capability to produce specified numbers of ZEVs as warranted by demand, and continued research and development of advanced batteries. General Motors has fulfilled its MOA commitment for 1998 and 1999. 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 have done so. Under the voluntary National LEV (NLEV) program, the auto industry began the phase in of California vehicles in the northeast in 1999, and vehicles in all states outside California standard states meeting LEV standards on average starting in 2001. The EPA issued a final rule which would implement the NLEV program as a voluntary alternative available to automakers, and on March 2, 1998, the EPA declared that the NLEV program was "in effect" for 1999 and later model years after all manufacturers and all the Northeast states except New York, Massachusetts, Maine, and Vermont opted to participate in the 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. 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 will need to be further modified to accommodate Federal onboard refueling vapor recovery (ORVR) control standards. ORVR phases in on passenger cars in the 1998 through 2000 model years and on light-duty trucks in the 2001 through 2006 model years. Beginning with the 2004 model year, even more stringent evaporative emission standards will be required in California, as well as Federally. Starting in the 2001 model year, today's test procedure for exhaust emissions will 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. Both of these requirements have the potential of adding hardware (and thus costs) to many vehicles. 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 has recorded a liability of $404 million at December 31, 1999 and $500 million at December 31, 1998 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 is verified. The total liability for sites involving GM is estimated to be $114 million at December 31, 1999. This compares to $147 million at December 31, 1998. . For closed or closing 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, is estimated at $92 million at December 31, 1999. This compares to $102 million at December 31, 1998. . GM is involved in investigations and remediation activities at additional locations worldwide with an estimated liability of approximately $198 million at December 31, 1999. This compares to $251 million at December 31, 1998. 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 2003. I-3 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Industrial Environmental Control (concluded) Expenditures by General Motors in the United States for industrial environmental control facilities during the years ended December 31, 1999, 1998, and 1997, respectively, were as follows (in millions): 1999-$71; 1998-$78; and 1997-$84. The Corporation currently estimates that future expenditures for industrial environmental control facilities through 2003 will be (in millions): 2000-$99; 2001-$74; 2002 and 2003-$104. Specific environmental expenses are difficult to isolate since expenditures may be made for more than one purpose, making precise classification difficult. Vehicular Noise Control Federal Truck Regulations preempt all state/local noise regulations for trucks over 10,000 lb Gross Vehicle Weight Rating (GVWR). All jurisdictions regulating noise levels of school buses which are built on medium-duty truck chassis have adopted standards compatible with Federal regulations for medium-duty trucks. Federal Truck Regulations contain label and owner's manual requirements. Passenger cars and light-duty trucks are subject to state and local motor vehicle noise regulations. The current standard for vehicles in these classes is 80 dB as measured at 50 feet. Future implementation of more stringent exhaust emission regulations and more stringent fuel economy regulations will require an assessment of increased costs of noise control. Safety Affairs and Regulations Expenditures to maintain and improve the operational safety, occupant protection, and vehicle theft deterrence capability of new GM models continue. These expenditures include amounts for the study of alternative approaches for meeting the needs of all three areas. GM continues to meet the government requirement for passive restraints by installing driver and passenger supplemental inflatable restraints (air bags) on all passenger cars and many light trucks and vans. Once permitted by federal regulatory changes to do so, GM introduced in 1998 and later models, less aggressive air bags in order to address concerns about inflation injuries, particularly to children and smaller adult passengers who are not properly positioned. GM continues to make available air bag on-off switches for those customers eligible to request them under the requirements of the National Highway Traffic Safety Administration (NHTSA) regulation allowing these devices. In 1998 and 1999, the NHTSA proposed extensive modifications to Federal Motor Vehicle Safety Standard (FMVSS) 208, an occupant protection regulation. The proposal entails a substantial increase in the number of crash test configurations and test dummy occupant sizes for which certification compliance performance would be required. It also would add a large number of static air bag suppression or low risk deployment test requirements. A significant amount of engineering design and development is already underway, with more anticipated, in preparation for the final version of the proposal which will be adopted by the NHTSA during the 2000 calendar year. Dynamic side impact protection requirements similar to those for cars apply to certain light trucks and vans as of September 1, 1998. Side structure and interior trim designs of future models will continue to be affected. Additional market pressure and future model design effects are likely regarding side impact performance at higher crash speeds. This will result as the federal government continues its consumer information side impact crash test program at elevated impact speeds. A new government requirement for vehicle interior impact protection continues to significantly affect upper body structure and interior trim designs of future model passenger cars and light trucks and vans. The phase-in for this rulemaking began on September 1, 1998, and will apply to all these vehicles in the 2003 model year. NHTSA currently is considering changing the existing fuel system crash integrity requirements of Federal Motor Vehicle Safety Standard 301. If any significant changes are adopted, some undetermined redesign, cost, and weight increases can be expected for most of GM's vehicles. See Item 3, Legal Proceedings, Other Matters. With the passage of the Anti-Car Theft Act of 1992, implementation costs affected approximately 22 passenger car assembly plants and 4 light-duty truck plants. For the affected truck plants, the major expenditures were for new label printer installations and additional stamping equipment. 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 1999 model year domestic passenger car fleet is projected to attain a Corporate Average Fuel Economy (CAFE) of 27.6 miles per gallon (mpg) versus the standard of 27.5 mpg. The CAFE estimate for 2000 model year domestic passenger cars is projected at 28.1 mpg versus the standard of 27.5 mpg. For GM's imported passenger cars, 1999 model year CAFE is projected to be 27.9 mpg versus a standard of 27.5 mpg. The CAFE estimate for 2000 model year import passenger cars is 24.8 mpg versus the standard of 27.5 mpg. Projected shortfalls to the standard will be offset by credits from previous model years. I-4 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive Fuel Economy (concluded) Fuel economy standards for light-duty trucks became effective in 1979. General Motors' light truck CAFE fleet average for the 1999 model year is projected to be 20.0 mpg versus a standard of 20.7 mpg. GM's 2000 model year truck CAFE is projected at 21.0 mpg versus a standard of 20.7 mpg. Projected shortfalls to the standard are expected to be offset by credits from future model years. 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. It is expected that the Kyoto Protocol on climate change will lead to continued pressure to increase fuel economy levels. End of Life Vehicles The proposed European Directive on End-of-Life Vehicles aims at the prevention of waste from vehicles at the end of their life and encourages the re-use, recycling, and recovery of vehicles and their components. At the end of July 1999, it was determined by the Environment Ministers (Council) that manufacturers are financially responsible for the take-back of vehicles put on the market as of January 2001 and all vehicles as of 2006 (vehicles built prior to 2001 and retired from use after 2006). However, on February 3, 2000, the European Parliament amended the Council's text. While it is clear that the last owner not incur any costs for turning in an end-of-life vehicle it is currently undecided who has the responsibility for paying for the costs of taking back vehicles after 2006. These differences are expected to be reconciled during the first quarter of 2000. If left undefined, member states will be allowed to choose the most appropriate solution for their country. The original January 2001 implementation date has been pushed back; the Directive is currently projected to be effective in early 2002. 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 1999, 1998, and 1997 are summarized in Note 26 of Notes 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 182 locations operating in 33 states and 106 cities in the United States. Of these, 20 are engaged in the final assembly of GM cars and trucks; 42 are service parts operations responsible for distribution or warehousing; 11 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 manufacture of automotive components and power products. In addition, the Corporation has 21 locations in Canada and assembly, manufacturing, distribution, or warehousing operations in 51 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, 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 under Management's Discussion and Analysis in Part II. I-5 GENERAL MOTORS CORPORATION AND SUBSIDIARIES 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, 1999, or subsequent thereto, but before the filing of this report are summarized below. Environmental Matters In August, 1996, the California Air Resources Board (CARB) ordered General Motors to recall about 11,500 1992 MY "S" Trucks. The CARB claims that the engines in these trucks, known by their emissions engine family designator as N3G4.3TBXEB2, exceeded the applicable new motor vehicle emissions standard for oxides of nitrogen (Nox). In addition to the ordered recall, the CARB threatened civil penalties of up to $57 million. General Motors believes that it has valid defenses to all CARB's claims and has requested and been granted an administrative review of the penalties and recall order. General Motors' defenses include the failure of CARB's outside contractor test laboratory to comply with the Federal Test Procedure used to identify non-compliant engine families. The administrative case is in the discovery stage. * * * In December 1998, the Louisiana Department of Environmental Quality (LDEQ) issued a Penalty Assessment in the amount of $100,000 involving the plant in Monroe, Louisiana operated by Delphi Automotive Systems. Although Delphi sold the plant to a third party in October, 1998, GM retains responsibility for certain pre-sale environmental issues, including the alleged permit violations covered by the Penalty Assessment. GM filed a request for hearing and is pursuing settlement discussions with LDEQ. * * * Other Matters On April 26 and 27, 1996, two purported class actions, Keith McGill v. General Motors Corporation and Richard Dolowich v. General Motors Corporation, were filed against General Motors in the Supreme Court of the State of New York, Counties of Bronx and Suffolk, alleging defective rear disc brake caliper pins in the "GM W-Body car". These actions have been consolidated in the Supreme Court of the State of New York, County of Bronx. The Dolowich suit is brought on behalf of all persons and entities in the United States who currently own or lease or previously owned or leased a 1988-1993 Buick Regal, Oldsmobile Cutlass Supreme, Pontiac Grand Prix or Chevrolet Lumina. The McGill suit includes the same model year vehicles, but is brought on behalf of persons and entities residing in the State of New York who purchased or leased such vehicles and still own them. Three additional purported nationwide class actions, brought on behalf of current and previous owners of the same vehicles, have been filed in federal courts in New Jersey, Garcia v. General Motors, and Pennsylvania, Neff v. General Motors and Marcel v. General Motors. Two additional purported class actions involving the same vehicles were filed, one in the Superior Court of New Jersey for Burlington County, Bishop v. General Motors Corporation and another in the United States District Court for the Eastern District of Pennsylvania, Cohen v. General Motors Corporation. Together, the complaints allege violation of state consumer protection laws, fraud, negligent misrepresentation, and breach of express and implied warranty, and seek unspecified amounts of economic damages, punitive damages not less than $20 million, attorneys' fees and costs, and injunctive relief. The Neff, Marcel and Cohen actions have been consolidated in Pennsylvania State Court. The Garcia and Bishop actions have been consolidated in New Jersey State Court. On November 11, 1996, the New Jersey state court rendered a decision certifying a class of all past and present owners of 1988 through 1993 model year Buick Regals, Chevrolet Luminas, Oldsmobile Cutlass Supremes and Pontiac Grand Prix. The New Jersey Appellate Division denied GM's motion for leave to appeal, but noted that the trial court is required to monitor compliance with the requirements to maintain a class. GM intends to vigorously defend this matter. * * * Thirty-nine class actions have been filed in state, federal, and Canadian courts against the Corporation, claiming that 1973-1987 model Chevrolet and GMC full-size pickup trucks are defective because their fuel tanks are mounted below the cab and outside the frame rails. Twenty-four federal court class actions were transferred to the federal court in Philadelphia, Pennsylvania by the Judicial Panel on Multidistrict Litigation. In these actions, plaintiffs claimed that the fuel tank locations make the vehicles unreasonably susceptible to fuel-fed fires following side-impact collisions. Plaintiffs alleged breach of contract and warranty, negligence, fraud and negligent misrepresentation, as well as violation of various state consumer protection laws. The lawsuits seek compensatory and punitive damages and injunctions requiring notice to owners, repairs, retrofitting and "disgorgement" of revenues. I-6 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (continued) An agreement for a nationwide settlement of the class actions pending in federal and state courts received final court approval on December 19, 1996, by a state court in Louisiana. The settlement, which is not expected to have a material effect on the consolidated financial statements of General Motors, provides for owners of 1973 to 1991 full-size pickup trucks and cab chassis with outside-the-frame fuel tanks, as of July 3, 1996, to receive certificates for $1,000 toward the purchase of any new General Motors passenger car or light truck, except Saturns. The certificates can be used for the first 15 months at $1,000 or transferred one time, whereupon the transferee would be able to use the certificate for $500 ($250 if used with a General Motors rebate) toward the purchase of an eligible vehicle until expiration of the 15-month period. After the first 15 months, original recipients of the certificates may use them for an additional 18 months at $500 or transfer them, whereupon the transferee would be able to use the certificates for $250 towards the purchase of an eligible vehicle. For fleets and governmental entities, after the first 15 months, the certificates are reduced to $250 for an additional 35 months, but are not transferable, except to other departments or agencies of the same governmental entity. The settlement also provides for approximately $4 million to fund motor vehicle fire safety research. Research funds will be used to benefit motor vehicle safety generally, and research will not be done on the pickup trucks. The court ordered General Motors to pay plaintiffs' attorneys' fees and costs totaling approximately $28 million. The Louisiana Court of Appeal reversed the trial court's certification of the class (and, indirectly, its approval of the settlement) on the ground that the findings required to certify a class had not been made and remanded the case to the trial court for the required findings. The Louisiana Supreme Court denied review of that reversal. On January 20, 1999, the trial court made supplemental findings, recertified the settlement class, and reaffirmed its approval of the settlement. After the appeal time had run, over GM's objections, plaintiffs obtained an order from the trial court modifying certain express provisions of the approved settlement. Those changes are directly contrary to the order approving the settlement and two prior consent orders. GM appealed to the Louisiana Court of Appeal which granted a stay of the order modifying the settlement and ordered that the appeal be permitted. Certificates will not be issued until the appeal is concluded. There are also pending individual product liability claims and lawsuits involving allegations of defects in the design of such vehicles resulting in fuel-fed fires following side-impact collisions. GM intends to defend these cases vigorously. * * * On December 2, 1996, a purported class action, Alma Rose Rangel, et al. v. General Motors Corporation, was filed in District Court, Webb County, Texas, claiming that the Type III door latches used in approximately 40 million 1978 to 1986 model GM passenger cars and light trucks are defective. Plaintiffs allege breaches of express and implied warranties, negligence and gross negligence, and seek compensatory and punitive damages and attorneys' fees. No determination has been made that the case can proceed as a class action. GM has removed the case to the United States District Court, Southern District of Texas, Laredo Division, and intends to oppose certification of a class and defend the case vigorously. On February 27, 1998, Johnny McLain v. General Motors Corporation was filed in circuit Court, Walker County, Alabama. GM removed the case to the United States District Court, Northern District of Alabama, and moved to dismiss that case. On August 19, 1998, Thomas Haenish v. General Motors Corporation was filed in state court, Cook County, Illinois. GM removed the case to the United States District Court, Northern District of Illinois, and moved to dismiss the complaint. GM's motion was granted. The Judicial Panel on Multidistrict Litigation has granted GM's motion to consolidate such actions for coordinated pretrial proceedings and transferred the cases to a federal court in Chicago. GM intends to vigorously defend these cases. Separately, a petition to open a defect investigation of the Type III door latches was denied by the National Highway Safety Traffic Administration. * * * Nine separate putative class actions have been filed alleging defects in vehicle paint. Three of those cases have been dismissed. No determination has been made as to whether any of the six pending cases described below may proceed as a class action. I-7 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (continued) On March 24, 1995, a purported nationwide class action (Christian Amedee and Louis Fuxan v. General Motors Corporation, et al), was filed in the Civil District Court for the Parish of New Orleans, State of Louisiana, alleging that the paint or paint application process used by GM at several unspecified North American assembly plants was defective due to the omission of a surface layer primer, allegedly causing the paint to prematurely delaminate, deteriorate and peel. Plaintiffs seek unspecified compensatory damages, equitable relief, interest, costs and attorneys' fees. On April 8, 1998, the Corporation was served with a putative nationwide class action filed in the Circuit Court of Cook County, Illinois, Chancery Division (Craig Friedman, Robert Bengston and Debra Bengston v. General Motors Corporation). GM removed the case to Federal Court, where it is currently pending as Cherise Miller, Davie Carie and Donald Teringo v. General Motors Corporation. The named plaintiffs purport to represent a class of all persons who now or formerly owned or leased a 1990 through 1997 model year GM vehicle which was painted without a primer surface layer and which subsequently experienced peeling paint. Plaintiffs assert claims for violation of the Illinois Consumer Protection Act and misrepresentation by omission and seek unquantified compensatory damages, punitive damages, pre-judgment interest, costs and attorneys' fees. On or about July 6, 1998, the Corporation was served with a putative class action complaint filed in the Superior Court for the City and County of San Francisco, California (Eddie Glorioso v. General Motors Corporation). On or about July 23, 1998, the Corporation was served with a virtually identical complaint filed in the Superior Court for the County of Almeida, California (Scott Arnold v. General Motors Corporation). The two cases have been consolidated in San Francisco County where they have been stayed. The named plaintiffs purport to represent a class of all persons or entities resident in California which then or formerly owned or leased a 1985 through 1997 model year GM vehicle which was painted without a primer surface layer and which subsequently exhibited peeling or chipping of the paint. Each complaint asserts claims for breach of express warranty, violation of California's Song Beverly Consumer Warranty Act, and unfair competition and/or fraudulent business practices. Plaintiffs seek restitution of all amounts paid by class members for GM vehicles and/or disgorgement of related profits or revenues, equitable relief, actual damages, prejudgment interest, costs and attorneys' fees. On May 16, 1999, the Corporation was served with a putative class action filed in the Court of Common Pleas of Philadelphia County, Pennsylvania (Scott Haverdink v. General Motors Corporation). The named plaintiff purports to represent a class of Pennsylvania residents who purchased or leased model year 1985 through 1997 GM vehicles which have exhibited peeling paint and alleges that vehicles painted using an application process which omits a primer surface layer are inherently defective. The Complaint includes claims of breach of express warranty breach of contract and alleged violation of the Pennsylvania Unfair Trace Practices Consumer Protection Law. On June 2, 1999, a statement of claim against General Motors Corporation and General Motors of Canada Limited was filed in support of a putative class action in the Supreme Court of British Columbia (Darryl Oshanek v. General Motors Corporation). The named plaintiff purports to represent a class of consumers resident in British Columbia who purchased 1986 through 1997 model year GM vehicles which have experienced peeling paint and asserts a single count under British Columbia's Deceptive Trade Practices Act. * * * On July 9, 1999, a jury in a Los Angeles Superior Court in the matter of Anderson et. al, v. General Motors Corporation, returned a verdict of $4.9 billion against General Motors in a product liability lawsuit involving a post-collision, fuel fed fire in a 1979 Chevrolet Malibu. The initial jury award consisted of $102 million in compensatory damages and $4.8 billion in punitive damages. After trial, the trial court reduced the punitive damages to $1.1 billion. This case arose out of an accident on December 24,1993. While the plaintiffs were stopped at a red light, they were struck in the rear by a 1977 Buick Regal going approximately 70 mph. The driver of the Regal was intoxicated, having a blood alcohol level of .20, almost three times the California limit. The ensuing post-crash fire burned all of the occupants of the Malibu with the children receiving the most severe burns. Plaintiffs claimed that the Malibu's fuel tank, which was located behind the rear axle, should have been located over the axle. Alternatively they claimed the tank should have been shielded or incorporated a bladder. I-8 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (continued) GM believes that, by any measure, the 1979 Malibu was a safe passenger car. The Malibu's fuel tank location was similar to that in most other vehicles of the same size and vintage and its design met or exceeded the applicable FMVSS 301 standard, having passed a 50 mph rear-impact test that few other cars on the market in 1979 would have passed. Even the alternative designs suggested by the plaintiffs would have been compromised in such a severe crash. GM was not allowed to introduce other compelling evidence that the Malibu's fuel system was well-designed. Lastly, although the jury was asked to apportion the non-economic compensatory damages between GM and the driver of the Regal, they were not informed about his intoxication. GM believes that the design of the subject Chevrolet Malibu was not responsible for plaintiff's injuries, that numerous evidentiary and procedural reversible errors occurred at the trial and that as a matter of law, GM's conduct does not support any punitive damages. The trial court has entered an order which stays execution of the judgment pending resolution of all appeals by GM and has released the bond GM had posted for the punitive and compensatory damages, the cost of which was not material to the Corporation. GM will continue to vigorously pursue its appellate rights, including efforts to secure a new trial and the complete elimination of responsibility to pay any damages in this matter consistent with GM's view that the design of the Chevrolet Malibu was not responsible for plaintiffs' injuries. * * * Eleven purported class actions alleging that certain antilock braking systems on 1989 to 1996 light duty GM trucks are defective were consolidated by the Judicial Panel on Multidistrict Litigation for coordinated pretrial proceedings as In Re General Motors Anti-Lock Brake Products Liability Litigation, USDC, Eastern District of Missouri, Eastern Division. On June 11, 1997, GM's motion to dismiss the consolidated complaint was granted. The dismissal was affirmed by the court of appeals for the Eighth Circuit. Subsequently, Michael Siegel v. General Motors Corporation was filed in the Circuit Court of Cook County, Illinois. GM has removed the case to the federal court and a conditioned transfer order transferring it to the Multidistrict Court has been entered. * * * In October, 1994, a California jury awarded a total of approximately $90 million in damages against Hughes, which include approximately $10 million of actual damages and punitive damages of $40 million to each of two former Hughes employees, Lane (race discrimination/retaliation) and Villalpando (retaliation), based on claims of mistreatment and denials of promotions. The trial court granted Hughes' motion to set aside the verdicts because of insufficient evidence and ordered a new trial of the matter. On January 6, 1997, the Court of Appeal reversed the trial court's decision that had set aside the verdicts and ordered a new trial. The Court of Appeal also reinstated the jury verdicts, while reducing the two $40 million punitive damage awards to $5 million and approximately $3 million, resulting in an aggregate judgment of approximately $17 million. Hughes' petition for review by the California Supreme Court was granted in November, 1997. On March 6, 2000, the California Supreme Court reversed the judgment of the Court of Appeal, remanding the case with instructions to set aside the verdicts as to actual and punitive damages and affirming the order of the trial court to proceed with a new trial. * * * General Electric Capital Corporation (GECC) and DIRECTV, Inc. (DIRECTV) entered into a contract on July 31, 1995, in which GECC agreed to establish and manage a private label consumer credit program for consumer purchases of hardware and related DIRECTV programming. Under the contract, GECC also agreed to provide certain related services to DIRECTV, including credit risk scoring, billing, and collections services. DIRECTV agreed to act as a surety for loans complying with the terms of the contract. Hughes guaranteed DIRECTV's performance under the contract. A complaint and counterclaim have been filed by the parties in the U.S. District Court for the District of Connecticut concerning GECC's performance and DIRECTV's obligation to act as a surety. GECC claims damages from DIRECTV in excess of $140 million. DIRECTV is seeking damages from GECC in excess of $45 million. Hughes intends to vigorously contest GECC's allegations and pursue Hughes' own contractual rights and remedies. Hughes does not believe that the litigation will have a material adverse impact on its results of operations or financial position. Pretrial discovery is completed. No specific trial date has been set, but a trial may be held in 2000. * * * I-9 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (continued) In November 1996, Personalized Media Communications, Inc. (PMC) brought an International Trade Commission proceeding against DIRECTV, U.S. Satellite Broadcasting Company (USSB), Hughes Network Systems, and other manufacturers of receivers for the DIRECTV system to prevent importation of certain receivers manufactured in Mexico, alleging infringement of one of its patents. During 1997, the International Trade Commission held for DIRECTV and other respondents on all claims at issue, finding each to be invalid. PMC appealed these adverse rulings to the Court of Appeals for the Federal Circuit. During 1998, the Court of Appeals affirmed the lower court's holdings as to three of the claims, and remanded to the International Trade Commission for further deliberation on a remaining claim. PMC then moved for dismissal of the proceeding, which was granted, terminating the action. Also in 1996, PMC filed a related action in the U.S. District Court for the Northern District of California. This case has been stayed pending outcome of the International Trade Commission proceeding. The complaint alleges infringement and willful infringement of three PMC patents, and seeks unspecified damages, trebling of damages, an injunction, and attorneys' fees. Hughes denies that it engaged in acts of infringement of the asserted patents and intends to vigorously contest these claims. * * * There is a pending grand jury investigation into whether Hughes should be accused of criminal violations of the export control laws arising out of the participation of two of its employees on a committee formed to review the findings of Chinese engineers regarding the failure of a Long March rocket in China in 1996. Hughes is also subject to the authority of the State Department to impose sanctions for non-criminal violations of the Arms Export Control Act. The possible criminal and/or civil sanctions could include fines as well as debarment from various export privileges and participating in government contracts. If Hughes were to enter into a settlement of this matter prior to the closing of The Boeing Company (Boeing) transaction (see Note 27 to the GM consolidated financial statements) that involves a debarment from sales to the U.S. government or a material suspension of Hughes' export licenses or other material limitation on projected business activities of the satellite systems manufacturing businesses, Boeing would not be obligated to complete the purchase of Hughes' satellite systems manufacturing businesses. Hughes does not expect the grand jury investigation or State Department review to result in a material adverse effect upon its business. However, there can be no assurance as to such a favorable outcome. * * * In connection with the 1997 spin-off of the defense electronics business of Hughes' predecessor and the subsequent merger of that business with Raytheon Company (Raytheon), the terms of the merger agreement provided processes for resolving disputes that might arise in connection with post-closing financial adjustments that were also called for by the terms of the merger agreement. These financial adjustments might require a cash payment from Raytheon to Hughes or vice versa. Disputes currently exist regarding the post-closing adjustments which Hughes and Raytheon have proposed to one another and related issues regarding the adequacy of disclosures made by Hughes to Raytheon in the period prior to consummation of the merger. Hughes and Raytheon are proceeding with the dispute resolution process. It is possible that the ultimate resolution of the post-closing financial adjustment and of related disclosure issues may result in Hughes making a payment to Raytheon that would be material to Hughes. However, the amount of any payment that either party might be required to make to the other cannot be determined at this time. Hughes intends to vigorously pursue resolution of the disputes through the arbitration processes, opposing the adjustments proposed by Raytheon, and seeking the payment from Raytheon that Hughes has proposed. * * * On June 3, 1999, the National Rural Telecommunications Cooperative (NRTC) filed a lawsuit against DIRECTV, Inc. and Hughes Communications Galaxy, Inc. (together "DIRECTV") in the United States District Court for the Central District of California, alleging that DIRECTV has breached the DBS Distribution Agreement (the "DBS Agreement") with the NRTC. The DBS Agreement provides the NRTC with certain rights, in certain specified portions of the United States, with respect to DIRECTV 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 USSB over the other five frequencies at 101 degrees. 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. The NRTC's complaint seeks, in the alternative, the right to distribute former USSB programming on a non-exclusive basis and the recovery of related revenues from the date USSB was acquired by Hughes. DIRECTV maintains that the NRTC's right under the DBS Agreement is to market and sell the former USSB programming as its agent and is not entitled to the claimed revenues. DIRECTV intends to vigorously defend against the NRTC claims. DIRECTV has also filed a counterclaim against the NRTC seeking a declaration of the parties' rights under the DBS Agreement. I-10 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Other Matters (concluded) On August 26, 1999, the NRTC filed a second lawsuit against DIRECTV in which it alleges that DIRECTV has breached the agreement it has with NRTC. 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. Pegasus Satellite Television, Inc. and Golden Sky Systems, Inc., the two largest NRTC affiliates, filed an action on January 11, 2000 against DIRECTV in United States District Court in Los Angeles. The plaintiffs allege, among other things, that DIRECTV has interfered with their contractual relationship with the NRTC. The plaintiffs plead that their rights and damages are derivative of the rights and claims asserted by the NRTC in its two cases against DIRECTV. The plaintiffs also allege that DIRECTV has interfered with their contractual relationships with manufacturers and distributors by preventing those parties from selling receiving equipment to the plaintiffs' dealers. DIRECTV denies that it has wrongly interfered with any of the plaintiffs' business relationships and will vigorously defend the lawsuit. Although an amount of loss, if any, cannot be estimated at this time, an unfavorable outcome could be reached in the NRTC and Pegasus litigation that could be material to Hughes' results of operations or financial position. * * * EchoStar Communications Corporation and others commenced an action in the United States District Court in Colorado on February 1, 2000 against DIRECTV, Hughes Network Systems, and Thomson Consumer Electronics, Inc. seeking, among other things, injunctive relief and unspecified damages, including treble damages, in connection with allegations that the defendants have entered into agreements with retailers and program providers and engaged in other conduct that violates the antitrust laws and constitutes unfair competition. DIRECTV believes that the complaint is without merit and intends to vigorously defend against the allegations raised. Although an amount of loss, if any, cannot be estimated at this time, an unfavorable outcome could be reached that could be material to Hughes' results of operations or financial position. * * * (b) Previously reported legal proceedings which have been terminated, either during the year ended December 31, 1999, or subsequent thereto, but before the filing of this report are summarized below: With respect to the previously reported action commenced by Comsat Corporation (Comsat) on or about October 25, 1996 against PanAmSat Corporation (PanAmSat), such action has been dismissed without prejudice. * * * With respect to the previously reported suits challenging GM's split-off of Electronic Data Systems Corporation (EDS), i.e., Stephen A. Solomon v. General Motors Corporation, et al and TRV Holding Company v. General Motors Corporation et al, filed in Delaware Chancery Court on May 13 and 18, 1994, respectively, and Ward et al, as Trustees for the Eisenberg Children's Irrevocable Trust II v. General Motors Corporation, et al, filed in Delaware Chancery Court on November 15, 1995, the Supreme Court of the State of Delaware has affirmed the final judgment of the Court of Chancery dismissing all of the consolidated Class E stockholder class actions and stockholder derivative actions. All Class E stockholder litigation is now concluded. * * * * * * ITEM 4. Submission of Matters to a Vote of Security Holders NONE I-11 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 4A. Executive Officers of the Registrant The names and ages of all executive officers of the Registrant at February 29, 2000 and their positions and offices with the Registrant on that date are as follows: Name and (Age) Positions and Offices - -------------- ------------------------------------------- John F. Smith, Jr. (61) Chairman of the Board; Chief Executive Officer; Member, Investment Funds Committee Harry J. Pearce (57) Vice Chairman of the Board G. Richard Wagoner, Jr. (47) President and Chief Operating Officer J. Michael Losh (53) Executive Vice President; Chief Financial Officer Louis R. Hughes (51) Executive Vice President; New Business Strategies Ronald L. Zarrella (50) Executive Vice President; President, GM North America John D. Finnegan (51) Executive Vice President; President, GMAC 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. I-12 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. On January 1, 1996, Mr. Smith became Chairman of the Board of Directors. Mr. Harry J. Pearce has been associated with General Motors since 1985. In May 1987, he was elected Vice President and General Counsel of General Motors. Effective November 1992, he was elected Executive Vice President of General Motors with responsibility for the Legal Staff, Industry-Government Relations, Environmental and Energy, Worldwide Economics, Electronic Data Systems Corporation and GM Hughes Electronics Corporation (now Hughes Electronics Corporation). In July 1994, he assumed responsibility for GM's Strategic Decision Center, Corporate Communications, Allison Transmission Division, Electro-Motive Division (now GM Locomotive Group), Corporate Relations, Worldwide Executive Compensation and Corporate Governance, and the Business Support Group. He remained General Counsel through August 1, 1994. Effective January 1996, Mr. Pearce was elected a director and became Vice Chairman of the Board of Directors and assumed responsibility for Information System Services. In 1997 he assumed responsibility for the Enterprise Activities Group and Global Human Resources and GM University. 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. Mr. J. Michael Losh has been associated with General Motors since 1964. In July 1984, he was elected Vice President of General Motors and General Manager of Pontiac Division. He was named General Manager of Oldsmobile Division in June 1989. Effective May 1992, he was elected Group Executive in charge of North American Vehicle Sales, Service, and Marketing. In July 1994, he was elected Executive Vice President and Chief Financial Officer of General Motors. Mr. Louis R. Hughes has been associated with General Motors since 1966. In April 1989, he was elected Chairman and Managing Director of Adam Opel AG. He was elected President of General Motors Europe and Vice President and Group Executive of General Motors in April 1992. Effective November 1992, he was elected Executive Vice President, in charge of International Operations of General Motors. In September 1994, he was named Executive Vice President and President of International Operations. In October, 1998 he was elected Executive Vice President, New Business Strategies. Mr. Ronald L. Zarrella has been associated with General Motors since 1994. In December 1994, he was elected Vice President of General Motors and Group Executive in charge of GM's North American Vehicle Sales, Service and Marketing Group. In October 1998, he was elected Executive Vice President of General Motors and President of General Motors North America. Mr. John D. Finnegan has been associated with General Motors since 1976. In 1992, he was elected as Executive Vice President and Chief Financial Officer of General Motors Acceptance Corporation. During 1994, he added the responsibilities of Chairman and President of GMAC Mortgage Corporation. Effective December 1995, he was named Vice President and Treasurer of General Motors. In November 1997, he was elected Vice President and Group Executive of General Motors and President of General Motors Acceptance Corporation. Effective May 1999, he was elected Chairman of General Motors Acceptance Corporation and Executive Vice President of General Motors. I-13 PART II GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters General Motor's (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 Note 20 to the GM Consolidated Financial Statements in Part II. As of December 31, 1999, there were 499,809 holders of record of $1-2/3 par value common stock and 192,866 holders of record of GM Class H common stock. As of December 31, 1998, there were 525,583 holders of record of $1-2/3 par value common stock and 205,904 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, not adjusted to account for the spin-off of Delphi which occurred during the second quarter of 1999. 1999 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 $93.88 $94.88 $72.44 $79.06 Low $69.19 $61.06 $59.75 $60.69 Class H (1): High $53.00 $63.88 $62.44 $97.63 Low $38.50 $48.94 $48.75 $55.94 1998 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 $74.25 $76.69 $74.75 $74.94 Low $55.06 $66.13 $54.44 $47.06 Class H (1): High $48.00 $57.88 $50.81 $42.38 Low $31.50 $42.75 $35.00 $30.38 - ------------------ (1)The principal market is the New York Stock Exchange, and prices are based on the Composite Tape. $1-2/3 par value common stock is also listed on the Chicago and Philadelphia stock exchanges and on the Pacific Exchange. II-1 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 6. Selected Financial Data (Unaudited) Years Ended December 31 ----------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Dollars in Millions Except Per Share Amounts) Total net sales and revenues $176,558 $155,445 $172,580 $158,281 $154,954 Income from continuing operations before cumulative effect of accounting changes $5,576 $3,049 $6,483 $4,100 $4,726 Income (loss) from discontinued operations 426 (93) 215 863 2,207 Cumulative effect of accounting changes - - - - (52)(1) -------- -------- -------- -------- ------- Net income $6,002 $2,956 $6,698 $4,963 $6,881 ===== ===== ===== ===== ===== $1-2/3 par value common stock Basic earnings per share (EPS) from continuing operations $8.70 $4.40 $8.52 $5.08 $5.57 Basic earnings (loss) per share from discontinued operations $0.66 $(0.14) $0.18 $0.98 $1.71 Diluted EPS from continuing operations $8.53 $4.32 $8.45 $5.04 $5.52 Diluted earnings (loss) per share from discontinued operations $0.65 $(0.14) $0.17 $0.98 $1.69 Cash dividends declared per share $2.00 $2.00 $2.00 $1.60 $1.10 Class H common stock (3) Basic EPS from continuing operations $ - $ - $2.30 $1.83 $1.39 Basic EPS from discontinued operations $ - $ - $0.87 $1.05 $1.38 Diluted EPS from continuing operations $ - $ - $2.30 $1.83 $1.39 Diluted EPS from discontinued operations $ - $ - $0.87 $1.05 $1.38 Cash dividends declared per share $ - $ - $1.00 $0.96 $0.92 Class H common stock (4) Basic (loss) earnings per share from continuing operations $(0.77) $0.68 $0.02 $ - $ - Diluted (loss) earnings per share from continuing operations $(0.77) $0.68 $0.02 $ - $ - Cash dividends declared per share $ - $ - $ - $ - $ - Class E common stock Basic EPS from discontinued operations $ - $ - $ - $0.04 $1.96 Diluted EPS from discontinued operations $ - $ - $ - $0.04 $1.96 Cash dividends declared per share $ - $ - $ - $0.30 $0.52 Total assets $274,730 $246,688 $221,767 $216,965 $209,520 Long-term debt (2) $7,415 $7,118 $5,669 $5,352 $4,100 GM-obligated mandatorily redeemable preferred securities of subsidiary trusts $218 $220 $222 $ - $ - Stockholders' equity $20,644 $15,052 $17,584 $23,413 $23,310 - ------------------- 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)GM adopted the provisions of the EITF consensus on Issue No. 95-1, effective January 1, 1995, which resulted in an unfavorable cumulative effect of $52 million after-tax or $0.07 diluted loss per share of $1-2/3 par value common stock. (2)Calculated from Automotive, Communications Services, and Other Operations only. (3)Prior to its recapitalization on December 17, 1997. (4)Subsequent to its recapitalization on December 17, 1997. * * * * * * II-2 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, 1999, included as Exhibit 99 to this GM Annual Report on Form 10-K for the period ended December 31, 1999, 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, 1999, filed separately with the SEC. The financial data related to Delphi Automotive Systems Corporation (Delphi) is presented as discontinued operations for all periods presented (see Note 2 to the GM consolidated financial statements). Hughes, prior to the December 17, 1997 restructuring of the company, is hereinafter referred to as "former Hughes," and Hughes, subsequent to the December 17, 1997 restructuring of the company, is hereinafter referred to as "Hughes." All earnings per share amounts included in the MD&A are reported as diluted. GM presents separate supplemental consolidating financial information for the following businesses: Automotive, Communications Services, and Other Operations, and Financing and Insurance Operations. GM's reportable operating segments within its Automotive, Communications Services, and Other Operations business consist of: - GM Automotive (GMA) is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin America/Africa/Mid-East (GMLAAM). GMNA designs, manufactures, and markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, and Saturn. GME, GMAP, and GMLAAM meet the demands of customers outside North America with vehicles designed, manufactured, and marketed under the following nameplates: Opel, Vauxhall, Holden, Isuzu, 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, and certain non-segment specific revenues and expenditures. GM's reportable operating segments within its Financing and Insurance Operations 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, vehicle, and homeowners' insurance, and asset-based lending. The Financing and Insurance Operations' Other segment includes financing entities operating in Canada, Germany, and Brazil which 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 generally accepted accounting principles (GAAP) and certain expenses (primarily certain U.S. taxes related to non-U.S. operations) were included in the Automotive, Communications Services, and Other Operations' Other segment. 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 on a GAAP basis, may be materially different. RESULTS OF OPERATIONS In 1999, GM's consolidated income from continuing operations totaled $5.6 billion or $8.53 per share of $1-2/3 par value common stock, compared with $3.0 billion or $4.32 per share of $1-2/3 par value common stock and $6.5 billion or $8.45 per share of $1-2/3 par value common stock in 1998 and 1997, respectively. The 1999 financial results were impacted by net charges of $110 million after-tax, or $0.09 per share of $1-2/3 par value common stock, which included an increase to income of $553 million after-tax, or $0.84 per share of $1-2/3 par value common stock, related to the reversal of a liability for benefits payable to excess U.S. hourly employees (see below and Note 4 to the GM consolidated financial statements); a charge of $408 million after-tax, or $0.62 per share of $1-2/3 par value common stock, related to the benefit increase granted to hourly retirees in connection with the United Auto Workers (UAW) agreement (GM expenses this benefit in the period that the contract with the UAW is ratified; see GMA Financial Review below for more information); a charge of $165 million after-tax, or $0.17 per share of $1-2/3 par value common stock and $0.39 per share of GM Class H common stock, related to Hughes' decision to discontinue certain of its wireless manufacturing operations at Hughes Network Systems (HNS); and a charge of $90 million after-tax, or $0.14 per share of $1-2/3 par value common stock, related to a U.S. salaried early retirement program (approximately 1,700 people elected participation in this program). Excluding the impact of these special items, income from continuing operations was $5.7 billion or $8.62 per share of $1-2/3 par value common stock. II-3 GENERAL MOTORS CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS (concluded) The 1998 financial results were impacted by charges of $272 million of special items, which included $228 million after-tax, or $0.34 per share of $1-2/3 par value common stock, resulting from GM's 1998 competitiveness studies (see Competitiveness Studies below and Note 3 to the GM consolidated financial statements) and $44 million after-tax, or $0.06 per share of $1-2/3 par value common stock, related to work schedule modifications at Opel Belgium. Additionally, the 1997 financial results were impacted by two significant items: a $4.3 billion tax-free gain, or $5.87 per share of $1-2/3 par value common stock, resulting from the December 17, 1997 completion of the strategic restructuring of former Hughes (see Hughes Financial Review); and charges of $3.2 billion after-tax, or $4.36 per share of $1-2/3 par value common stock, resulting from GM's 1997 competitiveness studies (see Competitiveness Studies). Excluding the impact of these and other special items of $476 million in income for 1997, income from continuing operations was $3.3 billion, or $4.72 per share of $1-2/3 par value common stock and $4.9 billion, or $6.40 per share of $1-2/3 par value common stock for 1998 and 1997, respectively. On April 12, 1999, the GM Board of Directors (GM Board) approved the complete separation of Delphi from GM by means of a spin-off (which was tax-free to GM and its stockholders for U.S. federal income tax purposes) which was completed on May 28,1999 and, accordingly, the financial results related to Delphi for all periods presented are reported as discontinued operations. GM's net income for 1999, including the income from discontinued operations totaled $6.0 billion or $9.18 per share of $1-2/3 par value common stock compared with income of $3.0 billion or $4.18 per share of $1-2/3 par value common stock and income of $6.7 billion or $8.62 per share of $1-2/3 par value common stock in 1998 and 1997, respectively. Additional information regarding the spin-off of Delphi is contained in Note 2 to the GM consolidated financial statements. For information regarding the effect of current year acquisitions, refer to Note 23 to the GM consolidated financial statements. Automotive, Communications Services, and Other Operations - --------------------------------------------------------- Highlights of financial performance by GM's Automotive, Communications Services, and Other Operations business were as follows for the years ended December 31, (in millions): 1999 1998 1997 ---- ---- ---- Total net sales and revenues GMA $146,056 $129,054 $137,675 Hughes 7,594 6,095 5,624 Other 2,457 2,012 12,796 ------- --------- -------- Total net sales and revenues $156,107 $137,161 $156,095 ======= ======= ======= Net income (loss) GMA $4,981 $1,634 $449 Hughes (1) (270) 272 471 Other (669) (279) 4,245 ------ ----- ----- Income from continuing operations 4,042 1,627 5,165 Discontinued operations 426 (93) 215 ------ ------- ------ Net income $4,468 $1,534 $5,380 ===== ===== ===== (1)Excludes amortization of GM purchase accounting adjustments of $21 million in each of the years related to GM's acquisition of Hughes Aircraft Company (HAC) in 1985. Such amortization was allocated to GM's Other segment which is consistent with the basis upon which the segments are evaluated. The amounts above and the GMA and Hughes Financial Reviews that are presented on pages II-5 through II-11 reflect the change in GM's organizational structure resulting from the 1997 restructuring of former Hughes. As such, the 1997 amounts for Hughes exclude Delco and Hughes Defense and for Other include Hughes Defense. II-4 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Highlights Year Ended December 31, ----------------------- 1999 1998 1997 ----- ------ ------ (Dollars in Millions) GMNA Total net sales and revenues $115,132 $96,497 $102,628 ------- ------ ------- Pre-tax income (loss) 7,192 2,409 (249) Income tax expense (benefit) 2,339 787 (272) Earnings/(losses) of nonconsolidated associates and minority interests (31) 13 (35) ------ ------- -- GMNA income (loss) $4,822 $1,635 $(12) ===== ===== == GME Total net sales and revenues $26,225 $25,840 $24,918 ------ ------ ------ Pre-tax income 642 740 256 Income tax expense 220 319 121 Earnings/(losses) of nonconsolidated associates and minority interests 1 (2) (152) ---- ----- --- GME income (loss) $423 $419 $(17) === === == GMLAAM Total net sales and revenues $4,709 $7,553 $8,784 ----- ----- ----- Pre-tax (loss) income (266) (471) 536 Income tax (benefit) expense (156) (213) 43 Earnings/(losses) of nonconsolidated associates and minority interests 29 83 174 -- ---- --- GMLAAM (loss) income $(81) $(175) $667 == === === GMAP Total net sales and revenues $3,187 $3,044 $3,138 ----- ----- ----- Pre-tax loss (76) (82) (235) Income tax (benefit) expense (7) 9 (29) Earnings/(losses) of nonconsolidated associates and minority interests (149) (152) 34 --- --- ---- GMAP loss $(218) $(243) $(172) === === === GMA (1) Total net sales and revenues $146,056 $129,054 $137,675 ------- ------- ------- Pre-tax income 7,548 2,594 279 Income tax expense (benefit) 2,418 902 (149) Earnings/(losses) of nonconsolidated associates and minority interests (149) (58) 21 ------ ------- ---- GMA income $4,981 $1,634 $449 ===== ===== === - ----------------- (1) GMA's results include eliminations of transactions among GMNA, GME, GMLAAM, GMAP. II-5 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Vehicle Unit Deliveries of Cars and Trucks - GMA
Years Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- GM as GM as GM as a % of a % of a % of Industry GM Industry Industry GM Industry Industry GM Industry -------- -- -------- -------- -- -------- -------- -- -------- (Units in Thousands) United States Cars 8,700 2,591 29.8% 8,141 2,456 30.2% 8,273 2,689 32.5% Trucks 8,719 2,426 27.8% 7,825 2,148 27.4% 7,228 2,077 28.7% ------ ----- ------ ----- ------ ----- Total United States 17,419 5,017 28.8% 15,966 4,604 28.8% 15,501 4,766 30.7% Canada, Mexico and Other 2,549 689 27.0% 2,406 639 26.6% 2,196 629 28.6% ------ ----- ------ ----- ------ ----- Total GMNA 19,968 5,706 28.6% 18,372 5,243 28.5% 17,697 5,395 30.5% GME 20,138 1,979 9.8% 19,200 1,849 9.6% 18,099 1,833 10.1% GMLAAM 3,231 536 16.6% 4,164 654 15.7% 4,383 744 17.0% GMAP 11,610 457 3.9% 10,945 452 4.1% 13,366 593 4.4% ------ ----- ------ ----- ------ ------ Total Worldwide 54,947 8,678 15.8% 52,681 8,198 15.6% 53,545 8,565 16.0%
Years Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- (Units in Thousands) Wholesale Sales GMNA Cars 2,992 2,731 3,095 Trucks 2,882 2,340 2,454 ----- ----- ----- Total GMNA 5,874 5,071 5,549 ----- ----- ----- GME Cars 1,824 1,764 1,708 Trucks 144 118 142 ------ ------ ------ Total GME 1,968 1,882 1,850 ----- ----- ----- GMLAAM Cars 350 404 495 Trucks 173 248 290 --- --- --- Total GMLAAM 523 652 785 --- --- --- GMAP Cars 162 202 176 Trucks 259 217 416 --- --- --- Total GMAP 421 419 592 --- --- --- Total Worldwide 8,786 8,024 8,776 ===== ===== ===== GMA Financial Review GMA's income was $5.0 billion, $1.6 billion, and $449 million for 1999, 1998, and 1997, respectively. GMA's 1999 results included $257 million of special items which consist of the previously mentioned increase to income of $553 million after-tax related to the reversal of a liability for benefits payable to excess U.S. hourly employees (see below and Note 4 to the GM consolidated financial statements); a charge of $257 million after-tax related to the previously mentioned benefit increase granted to hourly retirees in connection with the UAW agreement; and a charge of $39 million after-tax related to the U.S. salaried early retirement program referred to previously. All of the previously mentioned 1998 special items totaling $272 million after-tax related to GMA's 1998 results. GMA's portion of the 1997 special items included a charge of $3.0 billion after-tax related to the 1997 competitiveness studies and an increase to income of $158 million after-tax related to the previously mentioned other 1997 special items. Excluding these special items, GMA's income was $4.7 billion or 3.2% of total net sales and revenues, $1.9 billion or 1.5% of total net sales and revenues, and $3.3 billion or 2.4% of total net sales and revenues for 1999, 1998, and 1997, respectively. The increase in 1999 income and net margin (excluding the special items) was primarily due to continued improvement in the profitability of new vehicles, higher production volumes at GMNA compared with the prior year when work stoppages at two component plants in Flint, Michigan halted production of wholesale units at 26 of 29 assembly plants in North America, and lower material costs. II-6 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review (continued) The decrease in 1998 income compared to 1997 (excluding the special items) was primarily due to lower production volumes at GMNA resulting from the work stoppages mentioned above, higher retail incentives, and the economic downturn throughout Latin America, partially offset by material, engineering, and structural cost savings. GMA's net sales and revenues for 1999 were $146.1 billion, which represented an increase of $17.0 billion compared with 1998. The increase was largely due to increases in wholesale sales volumes of 762,000 units from the prior year which were primarily due to the 1998 GMNA work stoppages previously mentioned. Total net sales and revenues for 1998 were $129.1 billion, which represented a decrease of $8.6 billion compared with 1997. The decrease was primarily due to a lower number of wholesale units sold as a result of the previously mentioned work stoppages and the economic downturn throughout Latin America. GMA's worldwide vehicle deliveries were approximately 8,678,000, which represented a market share of 15.8% for 1999, compared with approximately 8,198,000 deliveries and a 15.6% market share and approximately 8,565,000 deliveries and a 16.0% market share for 1998 and 1997, respectively. GMNA's 1999 market share was 28.6% compared with 28.5% and 30.5% for 1998 and 1997, respectively. GM is currently negotiating an agreement (which was announced in November 1999) with Commerce One, a recognized leader in business-to-business electronic procurement solutions, for development of an automotive focused e-commerce marketsite called the GM TradeXchange. In connection with this agreement, GM, Ford Motor Company, and DaimlerChrysler Corporation jointly announced on February 25, 2000 that they are planning to combine their efforts to form a business-to-business integrated supplier exchange through a single global portal. This venture will create the world's largest virtual marketplace. The new enterprise will offer open participation to all auto manufacturers around the world, and their respective market of suppliers, partners, and dealers. Eventually, this marketplace could be expanded to encompass other industries. The three automakers plan to have equal ownership in the new venture which would operate as a separate independent business. A definitive agreement for the venture is expected to be reached during the first quarter of 2000, subject to appropriate governmental and other approvals. Until then, all services currently associated with the existing exchange will continue to be offered. GMNA reported income of $4.8 billion for 1999 compared with income of $1.6 billion and a loss of $12 million for 1998 and 1997, respectively. GMNA's 1999 results were impacted by all of the 1999 special items referred to above relating to GMA. GMNA's portion of the 1998 and 1997 special items included a charge of $80 million after-tax related to the 1998 competitiveness studies and a charge of approximately $2.4 billion after-tax related to the 1997 competitiveness studies. Excluding these special items, GMNA's income was $4.6 billion, $1.7 billion, and $2.4 billion for 1999, 1998, and 1997, respectively. The improvement in 1999 income from 1998 (excluding the special items) was primarily due to the prior year's work stoppages, higher wholesale sales volumes, continued improvement in the cost and profitability of new vehicles, lower material costs, and reduced warranty expense resulting from improved quality. This improvement was partially offset by increased manufacturing costs and pre-production and launch costs associated with the new LeSabre, Impala, Monte Carlo, Saturn LS, DeVille, Aurora, Tahoe, Suburban, Yukon, and Yukon XL models as well as increased engineering costs for further innovation in GM's portfolio. Net price was unfavorable for 1999 at (0.3)% year-over-year. Net price comprehends the percent increase/decrease a customer pays in the current period for the same comparably equipped vehicle produced in the previous year's period. The decrease in GMNA income for 1998 compared to 1997 (excluding the special items) was primarily due to the previously discussed work stoppages, minimized by strong cost performance which more than offset price reductions driven by competitive market pressures. The 1998 cost performance resulted from quality initiatives, material performance, and reduced structural cost. The 1999 UAW labor contract was ratified on October 13, 1999, covering a four-year term from 1999-2003. The contract included an annual salary increase of 3% per year, an up-front signing bonus of $1,350 per UAW employee which will be amortized evenly over the life of the contract, and pension benefit increases. In addition, retiree benefit increases include lump sum payments and a $1.25 monthly benefit increase per year of service. The retiree lump sum payments resulted in the previously mentioned charge against GM's 1999 fourth quarter earnings of approximately $408 million after-tax (of which $151 million was allocated to GM's Other segment). The other pension benefit increases will be paid out of plan assets. The 1999 contract includes job security and sourcing provisions containing an employment floor set at 95% of 1996 employment levels in the event of net outsourcing. It also requires a level of attrition replacement based on a 1999 benchmark minimum employment level, which is reduced by 5% over the life of the contract. The 1999 Canadian Auto Workers (CAW) labor agreement was ratified on October 24,1999, covering a three-year term from 1999-2002. The contract included an annual salary increase of 3% per year and an up-front signing bonus of $1,000 Canadian (approximately $679 at the December 31, 1999 exchange rate) per active CAW employee, which will be amortized evenly over the life of the contract. In addition, hourly actives and retirees were granted pension benefit increases to be paid out of plan assets. The 1999 labor agreement continues to provide flexibility to cut costs and streamline operations. II-7 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review (continued) In the past, GM recorded 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. As of December 31, 1998, the total of these liabilities represented approximately 5,500 employees and totaled approximately $1.3 billion. 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. There were four factors that occurred in 1999 which significantly changed the assumptions previously used in measuring these liabilities: a stronger than expected U.S. vehicle market; a renewed and strengthened relationship between GM and the UAW; higher than expected levels of attrition at Delphi following the 1999 separation of Delphi from GM; and changes to the National Labor Agreement between GM and the UAW, which was ratified in October 1999. GM's redeployment assumptions (forecast of excess U.S. hourly employees) are used to evaluate the postemployment benefits liabilities. These assumptions are largely dependent on its forecast for U.S. vehicle production. Due to the unanticipated sustained strength in the U.S. economy, which resulted in 17.4 million units produced in the U.S. in 1999, GM increased its 1999 production, which created unanticipated demand for U.S. hourly employees. GM's relationship with the UAW is also a key factor in determining redeployment assumptions. On May 28, 1999, GM successfully completed the separation of Delphi and, subsequently, in October 1999 negotiated a new national labor agreement with the UAW, without any work stoppage. The Delphi separation from GM also had a significant impact on GM's redeployment assumptions. The separation of Delphi resulted in approximately 14,000 Delphi U.S. hourly employees electing retirement in order to take advantage of provisions allowing them to retire under GM's retirement program until January 1, 2000. The high level of retirements created a shortage of hourly employees at Delphi, which allowed GM to place excess employees from its closed plants into positions at Delphi plants, and limited the number of Delphi employees who could elect to return to open positions at GM. The 1999 UAW-GM National Agreement, ratified in October 1999, changed GM's ability to place excess employees from closed plants into open positions at other plants. This change has enabled GM to place workers from closed plants much more quickly than GM management had expected and more quickly than past experience. As a result of these factors, in the fourth quarter of 1999, GM reversed postemployment benefits liabilities for employees at closed plants through an adjustment to cost of sales totaling approximately $892 million ($553 million after-tax, or $0.84 earnings per share of $1-2/3 par value common stock). The 1999 adjustment of postemployment benefit costs reflects the decrease in the number of excess employees at December 31, 1999, as compared with December 31, 1998, as well as a shortened duration of benefit payments based on current redeployment assumptions. The remaining liability for postemployment benefits as of December 31, 1999 totals approximately $295 million, representing approximately 2,700 employees, of which approximately $222 million is expected to be paid out in cash over the next three years. The following table summarizes the activity from December 31, 1998 through December 31, 1999 for this liability (dollar amounts in 000's):
December 31, 1998 1999 Activity December 31, 1999 ----------------- ------------- ----------------- Closed Excess Interest Excess Plant Employees Balance Spending Accretion Adjustment Balance Employees ----- --------- ------- ----------------------------- ----------------- Buick City/ Flint V-6 (1) 2,123 $537,005 $(55,945) $29,378 $(460,219) $50,219 403 Kalamazoo 1,254 228,602 (44,923) 12,133 (152,348) 43,464 459 Flint V-8 876 223,516 (30,106) 11,450 (154,201) 50,659 659 Van Nuys 396 156,298 (17,425) 7,934 (50,548) 96,259 366 Tarrytown 79 29,803 (3,351) 1,526 (22,192) 5,786 61 Framingham 99 20,826 (1,689) 1,150 (3,795) 16,492 91 Danville 47 18,091 (1,627) 900 (13,710) 3,654 16 Other 658 72,925 (12,768) 3,235 (35,092) 28,300 615 ------ ---------- --------- ------- -------- -------- ----- Total 5,532 $1,287,066 $(167,834) $67,706 $(892,105) $294,833 2,670 ===== ========= ======= ====== ======= ======= =====
(1)The reduction in excess employees at the Buick City assembly and Flint V-6 engine plants was a result of redeployment to other GM and Delphi plants (1,239) and retirement (481). II-8 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review (concluded) GME reported income of $423 million for 1999 compared with income of $419 million and a loss of $17 million for 1998 and 1997, respectively. GME's 1998 results included after-tax charges of $44 million related to work schedule modifications at Opel Belgium. GME's portion of the previously mentioned other special items in 1997 included after-tax increases to income of $103 million related to the sale of GME's interest in Avis Europe and $55 million related to a settlement agreement with Volkswagen A.G. Additionally, 1997 results included after-tax charges of $488 million related to the 1997 competitiveness studies. Excluding GME special items in 1998 and 1997, GME's income was $463 million and $313 million for 1998 and 1997, respectively. The decrease in GME's 1999 income from 1998 (excluding the 1998 special items) was primarily due to increasing competitive pricing pressure, and increased engineering expense associated with the model year 2000 mid-life cycle enhancements for the Vectra and Omega and the new model year 2001 Corsa. These decreases were partially offset by continued material cost improvements as a result of GM's global purchasing efforts as well as improved manufacturing performance. The increase in 1998 earnings compared to 1997 (excluding the special items) was primarily due to savings on material costs and policy and warranty spending, as well as lower equity losses from Saab Automobile A.B. During 1999, the European parliament began consideration of legislation regarding end-of-life vehicles and the responsibility of manufacturers of such vehicles for dismantling and recycling vehicles they have sold. GME is currently assessing the impact of this potential legislation on their results of operations and financial position. GMLAAM reported a loss of $81 million for 1999 compared with a loss of $175 million and income of $667 million for 1998 and 1997, respectively. Excluding $51 million of after-tax charges related to the 1998 competitiveness studies, GMLAAM's losses were $124 million in 1998. The decrease in 1999 losses compared to 1998 (excluding the special items) was primarily due to nominal price increases and reduced structural costs (reducing employee and production costs), partially offset by lower industry volumes due to the economic crisis throughout Latin America and increased material and freight costs driven by GM do Brasil's and its suppliers' exposure to hard currencies. The decrease in 1998 earnings compared to 1997 (excluding the special items) was primarily due to the economic downturn throughout Latin America and higher incentive costs. In 1999, GMLAAM reduced employment levels by approximately 4% in an effort to resize operations to current conditions in addition to the approximate 11% reduction accomplished in 1998. Capital spending has also been greatly reduced to conserve cash in the region. Going forward, Latin America should continue its slow but steady recovery from this economic crisis in the region. GMAP reported a loss of $218 million in 1999 compared with losses of $243 million and $172 million for 1998 and 1997, respectively. Excluding $97 million and $170 million of after-tax competitiveness studies charges, GMAP's losses were $146 million and $2 million for 1998 and 1997, respectively. Increased losses for 1999 compared to 1998 (excluding the special items) were primarily due to start-up costs in the region and equity losses at Isuzu due to the economic downturn in Asia, partially offset by continued strong performance in Australia and earnings improvements at Shanghai GM. Increased losses from 1997 to 1998 (excluding the special items) were also attributable to equity losses at Isuzu due to the economic downturn in Asia and spending associated with GMAP's growth strategy. GMA's effective income tax (credit) rate for 1999 was 32.0% compared with 34.8% and (53.4)% for 1998 and 1997, respectively. Excluding the previously mentioned special items, the effective income tax rates for 1999, 1998, and 1997 were 31.7%, 34.7%, and 32.6%, respectively. Hughes Financial Highlights Years Ended December 31, --------------------------------- 1999 1998 1997(1) ------ ---- ---- (Dollars in Millions Except Per Share Amounts) Total net sales and revenues $7,594 $6,095 $5,624 ----- ----- ----- Pre-tax (loss) income (328) 310 734 Income tax (benefit) expense (194) (45) 237 Minority interests 32 24 25 Losses of nonconsolidated associates (189) (128) (72) --- --- ---- Net (loss) income $(291) $251 $450 === === === (Losses) earnings used for computation of Available Separate Consolidated Net Income (2) $(321) $272 $471 (Losses) earnings per share attributable to Class H common stock (3) $(0.77) $0.68 $1.18 - ------------ See notes on the following page. II-9 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes Financial Highlights (concluded) (1)The 1997 amounts relate only to the telecommunications and space business of former Hughes to reflect the changes to GM's organizational structure resulting from the Hughes Transactions which occurred in December 1997. See further discussion of Hughes Transactions below. (2)Excludes amortization of GM purchase accounting adjustments of $21 million in each of the years related to GM's acquisition of HAC in 1985. Includes accrued preferred stock dividends of $51 million in 1999. (3)For 1997, earnings per share attributable to GM Class H common stock are presented on a pro forma basis. Prior to the Hughes Transactions, such amounts were calculated based on the financial performance of former Hughes. Since the financial highlights for 1997 relate only to the telecommunications and space business of former Hughes, they do not reflect the earnings per share attributable to the former GM Class H common stock on a historical basis. The pro forma presentation, therefore, presents the financial results which would have been achieved for 1997 relative to the GM Class H common stock based solely on the performance of the telecommunications and space business of former Hughes. See Hughes Financial Review for further discussion. Hughes Financial Review On December 17, 1997, GM and former Hughes completed a series of transactions (Hughes Transactions) that were designed to address strategic challenges facing the three principal businesses of former Hughes (consisting of the defense electronics, automotive electronics, and telecommunications and space businesses). The Hughes Transactions included the tax-free spin-off of the defense electronics business of former Hughes (Hughes Defense) to holders of GM's $1-2/3 par value and Class H common stocks, the transfer of Delco from former Hughes to Delphi, and the recapitalization of Class H common stock into a new GM tracking stock, GM Class H common stock, that is linked to the remaining telecommunications and space businesses of Hughes. The Hughes Transactions were followed immediately by the merger of Hughes Defense with Raytheon Company. The 1997 financial information presented for Hughes relates only to the telecommunications and space businesses of former Hughes. Total net sales and revenues increased to $7.6 billion in 1999, compared with $6.1 billion in 1998 and $5.6 billion in 1997. The DIRECTV businesses were the primary contributors to the growth in revenues for 1999. This was a result of a significant increase in subscribers in both the U.S. and Latin America and additional revenues for the U.S. DIRECTV businesses from the PRIMESTAR and U.S. Satellite Broadcasting Company (USSB) acquisitions. Also contributing to the growth in 1999 revenues were increased sales of DIRECTV receiver equipment and a $155 million pre-tax gain that resulted from the settlement of a patent infringement case. The 1999 revenue growth was partially offset by decreased revenues at the satellite systems manufacturing businesses which was principally due to contract revenue adjustments and delayed revenue recognition that resulted from increased development costs and schedule delays on several new product lines, decreased activity associated with a contract with ICO Global Communications, and a decrease in interest income due to a decrease in cash and cash equivalents. The 1998 increase from 1997 was primarily due to subscriber growth at the U.S. DIRECTV businesses, an increase at PanAmSat Corporation (PanAmSat) resulting primarily from the May 1997 PanAmSat merger and increased operating lease revenues for video, data, and Internet-related services, higher commercial satellite sales, and higher sales of DIRECTV receiver equipment. Hughes had a pre-tax loss of $328 million in 1999, compared with pre-tax income of $310 million in 1998 and $734 million in 1997. The pre-tax loss for 1999 included a $272 million pre-tax charge related to discontinued wireless product lines at Hughes Network Systems (HNS), a pre-tax charge of $125 million for the satellite systems manufacturing businesses that resulted from increased development costs and schedule delays on several new product lines, a one-time pre-tax charge of $92 million resulting from the termination of the Asia-Pacific Mobile Telecommunications Satellite contract, an $85 million decrease in interest income as discussed above, and a $105 million increase in interest expense. The larger pre-tax loss in 1999 was also a result of increased subscriber acquisition costs and higher depreciation and amortization that resulted from 1999 acquisitions. These charges were offset by the $155 million pre-tax gain from the settlement of a patent infringement case and increased profitability due to the growth in revenues discussed above. The decrease in 1998 pre-tax income primarily resulted from the $490 million pre-tax gain recognized in connection with the PanAmSat merger in 1997, goodwill amortization associated with the PanAmSat merger, and a provision for uncollectible amounts due from certain wireless customers, offset by a decrease in interest expense and an increase in interest income. Hughes recognized an income tax benefit in 1999 of $194 million, compared to an income tax benefit of $45 million in 1998 and income tax expense of $237 million in 1997. The increased income tax benefit for 1999 compared to 1998 is due to the losses incurred in 1999. 1998 taxes benefited from an increase in research and development credits related to prior years and the favorable resolution of certain tax contingencies. (Losses) earnings used for computation of Available Separate Consolidated Net Income (Loss) in 1999 was a loss of $321 million, compared with earnings of $272 million in 1998 and earnings of $471 million in 1997. 1999 included $51 million of accrued preferred stock dividends. II-10 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes Financial Review (continued) Hughes has filed a shelf registration statement with the SEC with respect to an issuance of up to $2.0 billion of debt securities from time to time. No amounts have been issued as of December 31, 1999. On March 1, 2000, Hughes announced that DIRECTV Japan's operations will be discontinued and that its subscribers would migrate to SkyPerfecTV, a Japanese company providing direct-to-home satellite broadcasting. As a result of this transaction, Hughes will acquire a 6.8% interest in SkyPerfecTV, which is expected to complete an IPO during its fiscal year ending March 31, 2001. Hughes will be required to fund a substantial portion of the costs to be incurred over the next six to nine months to exit the DIRECTV Japan business. Hughes will accrue such exit costs during the first quarter of fiscal 2000. The first quarter charge will be offset by the fair value of the SkyPerfecTV interest received; however, the amounts are not yet estimable. In addition, Hughes will continue to record its share of DIRECTV Japan's operating losses during fiscal 2000. On January 13, 2000, Hughes announced that it had reached an agreement to sell its satellite systems manufacturing businesses to The Boeing Company for approximately $3.8 billion in cash. The final transaction, which is subject to regulatory approval, is expected to close in the second or third quarter of 2000 and result in an after-tax gain in excess of $1.0 billion. Also on January 13, 2000, Hughes announced the discontinuation of its mobile cellular and narrowband local loop product lines at Hughes Network Systems. As a result of this decision, Hughes recorded a fourth quarter 1999 pre-tax charge to continuing operations of approximately $272 million. The charge represents the write-off of receivables and inventories, licenses, software, and equipment with no alternative use. In September and November of 1999, DIRECTV Japan raised approximately $281 million in total through the issuance of bonds, convertible into common stock, to five of its major shareholders, including approximately $245 million issued to Hughes. On July 28, 1999, Galaxy Latin America, LLC (GLA) acquired Galaxy Brasil, Ltda. (GLB), the exclusive distributor of DIRECTV in Brazil, from Tevecap S.A. for approximately $114 million plus the assumption of debt. In connection with the transaction, Tevecap also sold its 10% equity interest in GLA to Hughes and The Cisneros Group of Companies, the remaining GLA partners, which increased Hughes' ownership interest in GLA to 77.8%. As part of the transaction, Hughes also increased its ownership interest in SurFin from 59.1% to 75.0%. The total consideration paid in the transactions amounted to approximately $101 million. On May 20, 1999, Hughes acquired by merger all of the outstanding capital stock of USSB, a provider of premium subscription television programming via the digital broadcasting system that it shares with DIRECTV. The total consideration of approximately $1.6 billion paid in July 1999 consisted of approximately $360 million in cash and 22.6 million shares of GM Class H common stock. On May 11, 1999, Hughes announced that it would collaborate with America Online, Inc. (AOL) on a new service that would combine digital satellite television programming from DIRECTV with AOL's new interactive television Internet service. HNS will design and build the initial dual purpose DIRECTV/AOL receiver equipment. The new service will be suited for both frequent Internet users and the mass market consumer who wants to connect to the Internet. In June 1999, Hughes announced a more extensive strategic alliance with AOL to develop and market digital entertainment and Internet services nationwide. The new alliance is expected to accelerate subscriber growth and revenue-per-subscriber for the DIRECTV and DirecPC services, as well as expand the subscriber base for AOL's developing AOL TV and AOL-Plus broadband services. As part of the alliance, Hughes and AOL plan to jointly develop new content and interactive services for U.S. and international markets. Additionally, an extensive cross-marketing initiative will be instituted to market each company's products through their respective retail outlets and to their respective subscribers. As part of its marketing initiative with AOL, Hughes is committed to increase its sales and marketing expenditures over the next three years by approximately $1.5 billion related to its DirecPC/AOL-Plus, DlRECTV, DlRECTV/AOL TV, and DirecDuo products and services. As part of the alliance described above, AOL invested $1.5 billion in shares of GM Series H 6.25% Automatically Convertible Preference Stock. GM immediately invested the $1.5 billion received from AOL in shares of Hughes Series A Preferred Stock which is designed to correspond to the financial terms of the GM Series H 6.25% Automatically Convertible Preference shares. Dividends on the Hughes Series A Preferred Stock are payable to GM quarterly at an annual rate of 6.25%. For further discussion, see Note 18 to the GM consolidated financial statements. On April 28, 1999, Hughes completed the acquisition of PRIMESTAR's 2.3 million subscriber medium-power direct-to-home satellite business. The purchase price consisted of $1.1 billion in cash and 4.9 million shares of GM Class H common stock, for a total purchase price of $1.3 billion. As part of the agreement to acquire PRIMESTAR, Hughes agreed to purchase the high-power satellite assets and related orbital frequencies of Tempo Satellite Inc., a wholly-owned subsidiary of TCI Satellite Entertainment, Inc. The purchase price for the Tempo Satellite assets consisted of $500 million in cash. Of this purchase price, $150 million was paid on March 10, 1999 for a satellite that has not yet been launched and the remaining $350 million was paid on June 4, 1999 for an in-orbit satellite and 11 related satellite orbital frequencies. In February 1999, Hughes acquired an additional ownership interest in Grupo Galaxy Mexicana, S.R.L. de C.V. (GGM), a Latin American local operating company which is the exclusive distributor of DIRECTV in Mexico, from Grupo MVS, S.R.L. de C.V. Hughes' equity ownership represents 49.0% of the voting equity and all of the non-voting equity of GGM. In October 1998, Hughes acquired from Grupo MVS an additional 10.0% interest in GLA, increasing Hughes' ownership interest to 70.0%. Hughes also acquired an additional 19.8% interest in SurFin, a company providing financing of subscriber receiver equipment for certain local operating companies located in Latin America and Mexico, increasing Hughes' ownership percentage from 39.3% to 59.1%. The aggregate purchase price for these transactions was $197 million in cash. II-11 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Financing and Insurance Operations - ---------------------------------- Highlights of financial performance by GM's Financing and Insurance Operations business were as follows for the years ended December 31, (in millions): 1999 1998 1997 ---- ---- ---- Total net sales and revenues GMAC $20,218 $17,914 $16,595 Other 233 370 (110) ------ ------ ------ Total net sales and revenues $20,451 $18,284 $16,485 ====== ====== ====== Net income GMAC $1,527 $1,325 $1,301 Other 7 97 17 ------ ------ ------ Total $1,534 $1,422 $1,318 ===== ===== ===== GMAC Financial Highlights Years Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- (Dollars in Millions) Financing revenues Retail and lease financing $4,303 $3,869 $3,571 Operating leases 7,429 7,233 7,260 Wholesale, commercial and other loans 2,046 1,629 1,746 ------ ------ ------ Total financing revenues 13,778 12,731 12,577 Interest and discount 6,526 5,787 5,256 Depreciation on operating leases 4,892 4,693 4,677 ----- ----- ----- Net financing revenue 2,360 2,251 2,644 Mortgage revenue 2,982 2,030 1,499 Insurance premiums earned 1,794 1,859 1,360 Other income 1,664 1,295 1,159 ----- ----- ----- Net financing revenue and other 8,800 7,435 6,662 Expenses 6,313 5,498 4,448 ----- ----- ----- Pre-tax income 2,487 1,937 2,214 Income tax expense 960 612 913 ------ ------ ------ Net income $1,527 $1,325 $1,301 ===== ===== ===== Net income from automotive and other financing operations $1,057 $984 $910 Net income from insurance operations 210 226 224 Net income from mortgage operations 260 115 167 ------ ------ ------ Net income $1,527 $1,325 $1,301 ===== ===== ===== II-12 GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMAC Financial Review In 1999, net income from automotive and other financing operations totaled $1.1 billion, which is 7.4% and 16.2% higher than 1998 and 1997, respectively. Earnings in 1999 were higher due to increased financing volumes and reduced credit losses, partially offset by a higher effective tax rate. The increase in 1998 from 1997 was primarily attributable to retail asset growth, reduced credit losses, and a lower effective income tax rate, partially offset by lower net interest margins and lower wholesale volume. Net income from insurance operations totaled $210 million in 1999 compared to $226 million and $224 million in 1998 and 1997, respectively. The decrease was primarily attributable to pricing pressure in the personal lines insurance business. Net income was relatively unchanged from 1997 to 1998. Net income from mortgage operations totaled $260 million in 1999 compared to $115 million and $167 million in 1998 and 1997, respectively. The strong year-over-year performance reflects improvement across all sectors. The unusually low earnings in 1998 were largely due to reduced mortgage asset values from higher prepayment levels. During 1999, GMAC financed 40.5% of new GM vehicle retail deliveries in the United States, down from 41.3% in 1998 and up from 33.1% in 1997. The decline in financing penetration from 1998 was primarily the result of competitive market conditions. The increase in 1998 over 1997 resulted from GMAC's special rate financing and lease incentive programs sponsored by GM. GMAC's automotive financing revenue totaled $13.8 billion in 1999, compared with $12.7 billion and $12.6 billion for 1998 and 1997, respectively. The increases were mainly due to higher average retail, operating lease, and other loan receivable balances which resulted from continued retail financing incentives sponsored by GM. GMAC's worldwide cost of borrowing, including the effects of derivatives, for 1999 averaged 5.67%, a decrease of 32 and 63 basis points from the comparable periods of 1998 and 1997, respectively. Total borrowing costs for U.S. operations averaged 5.66% for 1999, compared to 5.89% and 6.39% for 1998 and 1997, respectively. The lower average borrowing costs since 1997 were largely a result of lower short-term market interest rates. Net automotive financing revenue combined with mortgage revenue, insurance premiums, and other income increased to $8.8 billion, compared with $7.4 billion and $6.7 billion in 1998 and 1997, respectively. The increase in 1999 over 1998 was primarily due to results from mortgage operations. The increase in 1998 over 1997 was primarily due to results from mortgage and insurance operations, partially offset by reduced net automotive financing margins. Expenses increased by $815 million and $1.1 billion in 1999 and 1998, respectively. The increases in 1999 were a result of higher costs for salaries and benefits and other operating charges which reflect continued growth and acquisitions at GMAC Mortgage Group, Inc. The increase in 1999 over 1998 also includes an increase in goodwill amortization related to GMAC acquisitions. GMAC's effective income tax rate for 1999 was 38.6%, compared with 31.6% in 1998 and 41.2% in 1997. The differences in the effective tax rates from 1997 to 1999 can be attributed to a decrease in U.S. and foreign taxes assessed on foreign source income during 1998. Competitiveness Studies As a result of pricing pressure and excess capacity, GM initiated studies in 1997 concerning the long-term competitiveness of all facets of their businesses. These studies include periodic evaluations of the carrying value of long-lived assets to be held and used, when events and circumstances warrant such review. These evaluations and reviews are generally done in conjunction with the annual business planning cycle. (Additional information regarding the competitiveness studies is contained in Note 3 to the GM consolidated financial statements.) Based on the results of these reviews, GM did not record any pre-tax charges against income in 1999. In 1998 and 1997, GM recorded pre-tax charges against income totaling $224 million ($228 million after-tax, or $0.34 per share of $1-2/3 par value common stock) and $5.1 billion ($3.2 billion after-tax, or $4.36 per share of $1-2/3 par value common stock), respectively. In 1998, the pre-tax charges were comprised of $105 million ($80 million after-tax) for GMNA, $82 million ($51 million after-tax) for GMLAAM, and $37 million ($97 million after-tax) for GMAP. Overall, these charges had the effect of increasing 1998 cost of sales, depreciation and amortization, and other expenses by $92 million, $67 million, and $65 million, respectively. In 1997, the pre-tax charges were comprised of $3.8 billion ($2.4 billion after-tax) for GMNA, $848 million ($488 million after-tax) for GME, $174 million ($170 million after-tax) for GMAP, and $205 million ($128 million after-tax) for GM Automotive, Communications Services, and Other Operations' Other segment. These charges reduced 1997 net sales and revenues by $548 million and increased cost of sales, depreciation and amortization, and other expenses by $1.4 billion, $3.0 billion, and $72 million, respectively. Amounts related to capacity reduction and other expenses that were recorded in 1998 and 1997 that still remain as of December 31, 1999 total $795 million. Going forward, GM's future cash requirements relating to the 1998 and 1997 charges are expected to occur primarily over the next five years, with anticipated spending of approximately 61% in 2000 and 15% in 2001. II-13 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Competitiveness Studies (concluded) The competitiveness studies charges include amounts for underperforming assets pursuant to GM's policy for the valuation of long-lived assets. Future investments relating to underperforming product lines will be expensed. Charges also include amounts for voluntary early retirement and other separation programs, recorded when the employee accepts the offer in accordance with GM's policy for such programs; postemployment benefits payable to employees, pursuant to contractual agreements; costs associated with the disposal of assets at facilities subject to capacity reductions; and charges for losses on contracts associated with pricing pressures on used vehicles and the related effect on GM's retail-lease commitments. GM will continue to monitor the competitiveness of all aspects of its businesses, and further competitiveness studies will be undertaken when and if market conditions warrant. Year 2000 During 1999, GM successfully completed its comprehensive, worldwide program to address the Year 2000 issue. Final preparations included deployment of GM command centers around the world to monitor the transition to the new millennium. As expected, GM did not experience any material adverse effects on its business, products, results of operations, or financial condition as a result of the Year 2000 issue. GM will continue to monitor its own operations, and the operations of third parties that are critical to GM's operations, for potential Year 2000-related problems. However, GM does not anticipate that it will discover any future Year 2000 issues that will have a material effect on its business, products, results of operations, or financial condition. GM's direct Year 2000 program cost was expensed as incurred with the exception of capitalizable replacement hardware. Total incremental spending by GM was not material to the Corporation's operations, liquidity or capital resources. In addition to the work for which GM has direct financial responsibility, EDS provided Year 2000-related services to GM, as required under a Master Service Agreement. EDS provided these services as part of normal fixed price services and other ongoing payments to EDS. GM's current forecast of total direct expenditures, including the value of services performed by EDS attributable to GM's Year 2000 program, will approximate $615 million. This amount includes the following: - - An estimated $410 million in direct GM expenditures. This estimate includes GM's additional payment to EDS of approximately $62 million at the end of the first quarter of 2000, since the systems remediated by EDS under the Master Service Agreement did not cause a significant business disruption resulting in material financial loss to GM due to the millennium change; and - - Approximately $205 million representing the value of Year 2000 services that EDS is providing to GM as part of normal fixed price services and other ongoing payments to EDS under the Master Service Agreement. This estimate does not include the $62 million additional payment from GM to EDS at the end of the first quarter of 2000 mentioned above. GM incurred approximately $142 million of Year 2000 expense through 1997 and 1998, and an additional $187 million during 1999. Thus, the total direct expenditures by GM, and value of Year 2000-related services performed by EDS attributable to GM's Year 2000 program, for the period from January 1997 through December 1999, amounted to approximately $534 million. LIQUIDITY AND CAPITAL RESOURCES Automotive, Communications Services, and Other Operations - --------------------------------------------------------- Cash, marketable securities, and $3.0 billion of assets of the Voluntary Employees' Beneficiary Association (VEBA) trust invested in fixed-income securities, at December 31, 1999, totaled $14.4 billion compared with $13.1 billion at December 31, 1998. The increase in cash and marketable securities from 1998 to 1999 was primarily due to stronger operating cash flows due to the previously mentioned work stoppage in 1998. The total VEBA assets in the VEBA trust used to pre-fund part of GM's other postretirement benefits liability approximated $6.3 billion and $4.6 billion at December 31, 1999 and 1998, respectively. Net liquidity, calculated as cash and marketable securities less the total of loans payable and long-term debt, was $2.0 billion at December 31, 1999, an increase of $214 million from the prior year. 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 $7.4 billion at December 31, 1999, an increase of $297 million from the prior year. The ratio of long-term debt to long-term debt and GM investment in Automotive, Communications Services, and Other Operations was 43.7% and 58.1% at December 31, 1999 and 1998, respectively. The ratio of long-term debt and short-term loans payable to the total of this debt and GM investment was 49.6% and 61.8% at December 31, 1999 and 1998, respectively. II-14 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Automotive, Communications Services, and Other Operations (concluded) - --------------------------------------------------------- GM believes it has sufficient resources to meet anticipated future cash flow requirements. In addition to cash flows from operations, GM maintains substantial lines of credit with various financial institutions. Additional information on GM's available credit facilities is contained in Note 14 to the GM consolidated financial statements. Financing and Insurance Operations - ---------------------------------- Financing and Insurance Operations are conducted by GMAC, certain of its subsidiaries, and other financing entities operating in Canada, Germany, and Brazil. At December 31, 1999, GMAC owned assets and serviced automotive receivables totaling $162.3 billion, an increase of $23.2 billion over year-end 1998. Total consolidated assets of GMAC at December 31, 1999 were $148.8 billion, $17.0 billion above the previous year. The year-to-year increases were primarily the result of higher commercial and other loan receivables, serviced retail and wholesale loan receivables, operating lease assets, intangible assets, and receivables due from Automotive, Communications Services, and Other Operations. These increases were partially offset by a decline in real estate mortgage inventory held for sale. Consolidated automotive and commercial finance receivables serviced by GMAC, including sold receivables, amounted to $97.0 billion and $79.9 billion at December 31, 1999 and 1998, respectively. The year-to-year increase was primarily a result of a $7.4 billion increase in commercial and other loan receivables, a $5.1 billion increase in serviced retail receivables, and a $4.7 billion increase in serviced wholesale receivables. The change in commercial and other loan receivables was due to the acquisition of Bank of New York Financial Corporation (BNYFC) in July 1999 and increases in secured notes. The increase in wholesale receivable balances over the prior year was a result of the 1998 work stoppages previously mentioned and higher penetration. Continued retail financing incentives sponsored by GM contributed to the increase in serviced retail receivables. Principal balances of active trusts of sold wholesale receivables (including retained subordinated interests) during 1999 increased $5.1 billion, due to the completion of two sales in 1999. There were no sales of wholesale receivables during 1998. Additionally, outstanding principal balances of sold retail automotive receivables (including retained subordinated interests) increased by $1.6 billion due to the completion of three sales during 1999 compared to one sale in 1998. GMAC's liquidity, as well as its ability to profit from ongoing acquisition 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. In this regard, GMAC regularly accesses the short-term, medium-term, and long-term debt markets, principally through commercial paper, notes, and underwritten transactions. As of December 31, 1999, GMAC's total borrowings were $121.2 billion compared with $106.2 billion at December 31, 1998. Approximately 79% of this debt represented funding for operations in the United States and the remaining 21% represented borrowings for operations in Canada (9%), Germany (3%), and other countries (9%). GMAC's 1999 year-end ratio of total debt to total stockholder's equity was 10.9:1 compared to 10.8:1 for year-end 1998. The higher year-to-year debt balances were principally used to fund increased asset levels. Total short-term notes outstanding at December 31, 1999, amounted to $50.8 billion compared with $49.5 billion at year-end 1998. GMAC and its subsidiaries maintain substantial bank lines of credit, which totaled $46.2 billion at December 31, 1999 and $42.9 billion at December 31, 1998, respectively. The unused portion of these credit lines totaled $35.6 billion at December 31, 1999, $2.4 billion higher than at December 31, 1998. Book Value Per Share Book value per share of $1-2/3 par value common stock increased to $27.02 from $20.00 at December 31, 1999 and 1998, respectively. Book value per share of GM Class H common stock increased to $16.21 at December 31, 1999 from $12.00 at December 31, 1998. Book value per share was determined based on the liquidation rights of the various classes of common stock. Stock Repurchases During 1999, GM used $2.6 billion to acquire approximately 36 million shares of $1-2/3 par value common stock to complete the Corporation's $4.0 billion stock repurchase program announced in February 1998. GM also used approximately $727 million and $13 million to repurchase shares of $1-2/3 par value common stock and GM Class H common stock, respectively, for certain employee benefit plans and $501 million to repurchase and retire Series B preference stock during the year-ended December 31, 1999. II-15 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Return on Net Assets (RONA) As part of its shareholder value initiatives, GM has adopted RONA as a performance measure to heighten management's focus on balance sheet investments and the return on those investments. GM's RONA calculation is based on principles established by management and approved by the GM Board. GM's calendar year 1999 RONA for continuing operations, excluding Hughes, was 14.0%. CASH FLOWS Automotive, Communications Services, and Other Operations - --------------------------------------------------------- Net cash provided by operating activities was $16.2 billion, $8.7 billion, and $9.6 billion in 1999, 1998, and 1997, respectively. The increase in net cash provided by operating activities in 1999 primarily resulted from increased income from continuing operations and the net changes in operating assets and liabilities. These were primarily related to increases in accounts payable resulting from an extension of payment terms and increases in accrued liabilities primarily related to increased sales incentive allowances in North America and increased customer deposits resulting from increased volumes. These increases were offset partially by increases in pension and VEBA contributions. The decrease in net cash provided by operating activities in 1998 as compared to 1997 primarily resulted from a decrease in cash generated from lower net income primarily due to the work stoppages previously discussed, partially offset by lower VEBA contributions in 1998. Net cash used in investing activities was $14.1 billion, $7.0 billion, and $7.1 billion in 1999, 1998, and 1997, respectively. The increase in net cash used in investing activities in 1999 was primarily attributable to increased net cash used for investments in companies, investments in marketable securities, and operating leases. Net cash used in investing activities was relatively unchanged in 1998 from 1997 because the increase in cash due to the net change in investments in other marketable securities and operating leases in 1998 was offset by the proceeds from borrowings of Hughes Defense prior to the spin-off of Hughes Defense in 1997. Net cash used in financing activities was $2.3 billion, $2.8 billion, and $6.6 billion in 1999, 1998, and 1997, respectively. The decrease in net cash used for financing activities in 1999 was primarily due to proceeds from issuing preference stocks related to the strategic alliance between Hughes and America Online, Inc. in the second quarter of 1999 (see Note 18 to the GM consolidated financial statements for more information) and net increases in short-term loans payable, partially offset by increases in stock repurchases to complete the Corporation's stock repurchase program and net decreases in long-term debt. The decrease in net cash used for financing activities in 1998 from 1997 was primarily due to a $2.6 billion net increase in loans payable and long-term debt and a decrease in cash used for stock repurchases. Financing and Insurance Operations - ---------------------------------- Net cash provided by operating activities during 1999 totaled $10.8 billion, an increase from the $5.6 billion and $4.0 billion provided during the comparable 1998 and 1997 periods, respectively. The additional operating cash flow was primarily the result of an increase in proceeds from sales of mortgage loans and mortgage-related securities held for trading and a reduction in originations and purchases of mortgage loans and acquisitions of mortgage-related securities held for trading. These increases were partially offset by a decline in the net payables due to Automotive, Communications Services, and Other Operations, and other liabilities. Net cash used for investing activities during 1999 totaled $20.9 billion, compared with $22.6 billion and $12.1 billion during the same periods in 1998 and 1997, respectively. Net cash usage from 1998 to 1999 decreased primarily as a result of increased proceeds from sales of receivables, largely offset by net increases in acquisitions of finance receivables primarily related to the BNYFC acquisition, net increases in operating lease acquisitions related to strong lease incentive programs, and net investments in companies. The increase in net cash used in 1998 from 1997 was primarily a result of lower net finance receivable activity and a decrease in sales of retail receivables proceeds. Net cash provided by financing activities during 1999 totaled $10.8 billion, compared with $17.7 billion and $8.3 billion during the same periods in 1998 and 1997, respectively. The decrease in net cash provided from 1998 to 1999 was primarily the result of a reduction in short-term debt, partially offset by a net increase in long-term debt which was primarily used to fund the increases in finance receivables, operating lease assets, and current year acquisitions (see Note 23 to the GM consolidated financial statements). From 1997 to 1998 the increase in net cash provided was primarily the result of increases in short- and long-term debt and lower dividends paid to GM. II-16 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Dividends Dividends may be paid on common stocks only when, as, and if declared by the GM Board in its sole discretion. 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. In November 1999, the GM Board declared a quarterly cash dividend of $0.50 per share on $1-2/3 par value common stock, paid December 10, 1999 to holders of record as of November 11, 1999. The GM Board also declared quarterly dividends on the Series D and Series G Depositary Shares of $0.495 and $0.57 per share, respectively, paid February 1, 2000 to holders of record on January 3, 2000. The Series B preference stock was redeemed on April 5, 1999, and as a result, the amount paid on that date to the Series B shareholders of record included accrued and unpaid dividends as part of the total redemption price. With respect to GM Class H common stock, the GM Board determined that it will not pay any cash dividends at this time in order to allow the earnings of Hughes to be retained for investment in its telecommunications and space businesses. A quarterly dividend of $8.7793 per share for the GM Series H 6.25% Automatically Convertible Preference Stock was paid February 1, 2000, to holders of record on January 3, 2000. Health Care Expense and Other Postretirement Benefits Total health care expense is comprised of health care costs for active employees and for retirees. Expense associated with active employees consists of two components: health care costs (including medical, dental, and vision benefits) which have been incurred by active employees, and the expected cost of those benefits that active employees will incur once they are retired. Expense relating to retirees consists primarily of interest costs on the liability accrued before retirement. The components of postretirement benefits expense, the U.S. health care cost, and cash expenditures for GM's U.S. operations are set forth below (excluding cash expenditures for Hughes' and former Hughes' non-automotive employees, but including GMAC). GM is committed to reducing the burden of continuing health care cost increases. Since 1997, GM has pre-funded part of its other postretirement benefits through contributions that have resulted in a 1999 year-end balance of $6.3 billion in its VEBA trust. The VEBA assets have the effect of reducing GM's postretirement benefits liability on the consolidated balance sheet. Year Ended December 31, 1999 ---------------------------- Postretirement Health Pay-As-You-Go Benefits Care Cost Cost* -------- --------- ----- (Dollars in Millions) GM U.S. operations health care Postretirement medical, dental, and vision $2,324 $2,324 $ - Retired employees pay-as-you-go - - 2,239 Active employees pay-as-you-go - 1,321 1,321 ----- ----- ----- Total health care $2,324 $3,645 $3,560 ===== ===== Life insurance 420 Other subsidiaries - health care and life insurance 203 ----- Total postretirement benefits expense $2,947 ===== * Pay-as-you-go amounts for 1998 were $2.0 billion for retirees, $1.2 billion for active employees, and $3.2 billion in total. The master separation agreement (the "Separation Agreement") between GM and Delphi provides generally that other postretirement benefit liabilities related to Delphi's U.S. salaried active and inactive employees retiring after January 1, 1999, will be assumed by Delphi. The Separation Agreement provided that Delphi's U.S. hourly employees would continue to participate in the postretirement benefit plan for hourly workers administered by GM until full separation from GM. Generally, Delphi would assume the postretirement benefit obligations for U.S. hourly employees who retire after October 1, 1999, and GM would retain postretirement benefit obligations for U.S. hourly employees who retire on or before October 1, 1999. In connection with the UAW labor contract (see Note 1 to the GM consolidated financial statements), the October 1, 1999 date for Delphi's assumption of these retirement obligations was extended to January 1, 2000. As of December 31, 1999, the estimate of employee retirements exceeded the amount used in the allocation of GM's and Delphi's postretirement benefit liability at the time of the separation. As a result, GM increased its postretirement benefit liability by $1.0 billion to reflect the increased estimate of Delphi retirees as of year-end, and recorded a receivable from Delphi (see Note 12 to the GM consolidated financial statements) in accordance with the terms of the Separation Agreement and the UAW labor contract provision explained above. In addition, interest shall accrue on the outstanding amount until such amount is paid in full, at a rate of 6.75% per annum, as agreed to by both parties. GM received $483 million from Delphi in January 2000 related to this outstanding receivable balance. The finalization of the amount receivable from Delphi will occur in 2000, at which time an adjustment will be recorded. GM does not anticipate that the finalization of these retirement obligations will have a significant effect on its financial position. II-17 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Health Care Expense and Other Postretirement Benefits (concluded) GM has disclosed in its consolidated financial statements certain amounts associated with estimated future postretirement benefits other than pensions and classified such amounts as "accumulated postretirement benefit obligations," "liabilities," or "obligations." Notwithstanding the recording of such amounts and the use of these terms, GM does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of GM (other than pensions) represent legally enforceable liabilities of GM. GM Card GM sponsors a credit card program, entitled the GM Card program, which was introduced in the U.S. in September 1992 and subsequently in Canada, Australia, Brazil, Mexico, Chile, and the United Kingdom. A cardholder's use of the card generates entitlements to rebates that can be used in connection with the cardholder's purchase or lease of a new GM vehicle. As the sponsor of the GM Card program, GM does not provide consumer credit. The program is used as a marketing tool to increase product sales. Independent banks issue the GM Card and are responsible for evaluating, extending, and funding credit to the cardholders, and are fully responsible for any credit card losses with no recourse against GM. In the U.S., GM Card rebates accumulate at a rate equal to 5% of all spending for goods or services charged on the GM Card up to a maximum rebate amount of $500 per year. The rebates, which expire in seven years, may be applied over and above all sales allowances in the market at the time of vehicle purchase or lease. GM is solely responsible to cardholders for rebates. Provisions for GM Card rebates are recorded as reductions in revenue at the time of vehicle sale. GM has the right to prospectively modify the plan. Rebates redeemed worldwide during 1999, 1998, and 1997 were $778 million, $705 million, and $656 million, respectively. Cardholder rebates available worldwide for future redemption when the cardholder purchases or leases a new GM vehicle amounted to $3.7 billion, $3.7 billion, and $3.5 billion (net of deferred program income) at December 31, 1999, 1998, and 1997, respectively. GM anticipates that profits from incremental sales resulting from the GM Card program, along with deferred program income, will more than offset future rebate costs associated with the GM Card. Deferred Income Taxes At December 31, 1999, GM's consolidated balance sheet included a net deferred tax asset of approximately $16.1 billion related to net future deductible temporary differences in the United States of which approximately $13.7 billion related to the obligation for postretirement benefits other than pensions. Realization of the net deferred tax asset is dependent upon profitable operations in the United States and future reversals of existing taxable temporary differences. Although realization is not assured, GM believes that it is more likely than not that such benefits will be realized through the reduction of future income taxes. Management has carefully considered various factors in assessing the probability of realizing this deferred tax asset including: . The operating results of GMNA over the most recent three-year period and overall financial forecasts of book and taxable income. Further improvements are expected by continuing efforts to maintain GM's competitiveness, including actions relating to reducing material costs through global sourcing and increasing efficiency through lean manufacturing. . Operating results of GMAC and Hughes, which generated U.S. pre-tax income of approximately $1.5 billion, $1.8 billion, and $3.3 billion in 1999, 1998, and 1997, respectively. . The ability to utilize tax planning, such as capitalization of research and experimentation costs for tax purposes, so that GM does not have, and does not expect to generate in the near future, any significant U.S. federal tax net operating loss carryforwards. . The extended period of time over which the tax assets can be utilized. Postretirement benefits become tax deductions over periods up to 50 years. . The fact that GM has never lost deferred federal tax assets due to the expiration of U.S. tax carryforwards. Dividends received from foreign operations for U.S. federal income tax purposes totaled approximately $3.5 billion, $3.1 billion, and $2.6 billion in 1999, 1998, and 1997, respectively. II-18 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Pensions At December 31, 1999, GM's total worldwide funded position was $4.5 billion ($7.5 billion for the U.S. automotive qualified hourly/salary plans and $(3.0) billion for all other plans worldwide). This compares to an unfunded position of $6.3 billion a year ago ($1.2 billion for the U.S. automotive qualified hourly/salary plans and $5.1 billion for all other plans worldwide). The predominant factors that contributed to the funded position of the U.S. automotive qualified plans in 1999 was the separation of Delphi combined with a 100 basis point increase in the discount rate used to measure the pension obligation at the end of 1999 compared to 1998 (7.75% and 6.75%, respectively). GM made pension contributions to the U.S. hourly and salary plans of $794 million in 1999, $1.1 billion in 1998, and $1.5 billion in 1997. In addition, GM made pension contributions to all other U.S. plans of $67 million, $51 million, and $35 million in 1999, 1998, and 1997, respectively, On an economic basis, GM continues to maintain a fully-funded status for its U.S. hourly and salary pension plans as of December 31, 1999. The economic basis for measuring the U.S. hourly and salary pension liability differs from the Statement of Financial Accounting Standards (SFAS) No. 87 basis, Employers' Accounting for Pensions, required by GAAP, but GM believes it to be a better measure of GM's ongoing economic exposure for pension obligations and as such uses this as a measure to determine its funded status. The economic basis discounts pension liabilities at the long-term asset earnings rate assumption (currently 10.0%) rather than at a variable, year-end market rate as required by SFAS No. 87 (currently 7.75%). In periods of low interest rates, as in the current market environment, the SFAS No. 87 liability will generally exceed the liability calculated on an economic basis, whereas in periods of high interest rates the economic basis liability will generally exceed the SFAS No. 87 liability. The Separation Agreement between Delphi and GM provides generally that pension plan assets and liabilities related to Delphi's U.S. salaried active and inactive employees retiring after January 1, 1999 will be assumed by Delphi. Delphi has established defined benefit pension plans for its salaried employees under the same terms that existed for the GM plans as of January 1, 1999. The Separation Agreement provided that Delphi's U.S. hourly employees would continue to participate in the defined benefit pension plan for hourly workers administered by GM until full separation from GM. Generally, Delphi would assume the pension obligations for U.S. hourly employees who retire after October 1, 1999, and GM would retain pension obligations for U.S. hourly employees who retire on or before October 1, 1999. In connection with the UAW labor contract (see Note 1 to the GM consolidated financial statements), the October 1, 1999 date for Delphi's assumption of these retirement obligations was extended to January 1, 2000. As of December 31, 1999, the estimate of employee retirements exceeded the amount used in the allocation of GM's and Delphi's pension liability at the time of the separation. As a result,GM increased its pension liability by $498 million to reflect the increased estimate of Delphi retirees as of year-end, and recorded a receivable from Delphi (see Note 12 to the GM consolidated financial statements) in accordance with the terms of the Separation Agreement and the UAW labor contract provision explained above. In addition, interest shall accrue on the outstanding amount until such amount is paid in full, at a rate of 6.75% per annum, as agreed to by both parties. GM received $231 million from Delphi in January 2000 related to this outstanding receivable balance. The finalization of the amount receivable from Delphi will occur in 2000, at which time an adjustment will be recorded. GM does not anticipate that the finalization of these retirement obligations will have a significant effect on its financial position. The net obligation attributable to Delphi classified as discontinued operations was $0 and $1.6 billion at December 31, 1999 and 1998, respectively. Additional information related to employee benefit arrangements affected by the Delphi separation can be found in Note 2 to the GM consolidated financial statements. Environmental Matters 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 also in various stages of investigation and remediation for sites where contamination has been alleged. The liability for worldwide environmental cleanup was approximately $404 million, $500 million, and $590 million at December 31, 1999, 1998, and 1997, respectively. In future periods, new laws or regulations, advances in technologies, additional information about the ultimate remedy selected at new and existing sites, and GM's share of the cost of such remedies could significantly change GM's estimates. The net decreases in this liability from 1997 to 1999 are a result of actual expenditures. In 1999, 1998, and 1997, GM expensed $109 million, $72 million, and $63 million, respectively, for environmental investigation, remediation, and waste management. In addition, worldwide capital expenditures, as discussed previously, included $81 million, $83 million, and $91 million in 1999, 1998, and 1997, respectively, for various environmental matters. The process of estimating such liabilities is complex and dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, the uncertainty as to what remedy and technology will be required, the outcome of discussions with regulatory agencies and other potentially responsible parties (PRPs) at multi-party sites, and the number and financial viability of other PRPs. II-19 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Euro Conversion On January 1, 1999, 11 of 15 member countries of the European Union established fixed conversion rates between their existing currencies and adopted the Euro as their new common currency. The Euro trades on currency exchanges and the legacy currencies remain legal tender in the participating countries for a transition period until January 1, 2002. Beginning on January 1, 2002, Euro denominated bills and coins will be issued and legacy currencies will be withdrawn from circulation. GM has established plans to assess and address the impact to GM as a result of the Euro conversion. The introduction of the Euro on January 1, 1999 has increased the pace of price harmonization throughout Europe. GM has developed a comprehensive program to identify, analyze, and determine the best strategy to address this price harmonization. GM is analyzing all aspects of its pricing strategy to minimize any potential risk of this pricing harmonization. In addition, the Corporation has reviewed and has made required modifications to applicable information technology systems and contracts based on the new currency. As of December 31, 1999, the conversion to the euro has not resulted in any material adverse impact on GM's financial position and results of operations, or had any material tax consequences. GM believes that the remaining transition will not result in material adverse financial or tax consequences. GM also believes that the Euro conversion reduces its overall foreign exchange risk as the number of currencies in which it transacts is now reduced. Employment and Payrolls Worldwide employment at December 31, (in thousands) 1999 1998(3) 1997(3) ---- ---- ---- GMNA 217 226 237 GME 81 84 79 GMLAAM 23 24 27 GMAP 10 10 10 GMAC 28 24 21 Hughes 18 15 14 Other 11 13 10 ---- ---- ---- Total employees 388 396 398 === === === Worldwide payrolls - continuing operations (in billions) $21.8 $20.4 $22.3 U.S. hourly payrolls (in billions) (1)(2) $10.0 $8.8 $10.2 Average labor cost per active hour worked U.S. hourly (1) $50.51 $46.17 $45.10 - ---------------- (1) Amounts have been adjusted to exclude Delphi's, Hughes', and former Hughes' non-automotive employees. (2) Includes employees "at work" (excludes laid-off employees receiving benefits). (3) Amounts have been adjusted to reflect the changes to GM's organizational structure resulting from the restructuring of former Hughes which occurred in December 1997, and the separation of Delphi in 1999. New Accounting Standards In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No. 133. This statement defers, for one year, the effective date of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to those fiscal years beginning after June 15, 2000. SFAS No. 133 requires all derivatives to be recorded as either assets or liabilities and the instruments to be measured at fair value. Gains or losses resulting from changes in the values of those derivatives are to be recognized immediately or deferred depending on the use of the derivative and whether or not it qualifies as a hedge. GM will adopt SFAS No. 133 by January 1, 2001, as required. Management is currently assessing the impact of this statement on GM's results of operations and financial position. Forward-Looking Statements Following are the principal important factors which may cause actual results to differ materially from those expressed in forward-looking statements made by the managements of GM and Hughes: . Changes in economic conditions, currency exchange rates, or political stability 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. II-20 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Forward-Looking Statements (concluded) . 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 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, ability to obtain export licenses, competition, ability to achieve cost reductions, technological risk, limitations on access to distribution channels, the success and timeliness of satellite launches, in-orbit performance of satellites, ability of customers to obtain financing, and Hughes' ability to access capital to maintain its financial flexibility. Additionally, Hughes and its 81% owned subsidiary, PanAmSat Corporation, have experienced satellite anomalies in the past and may experience satellite anomalies in the future that could lead to the loss or reduced capacity of such satellites that could materially affect Hughes' operations. * * * * * * II-21 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. In order to manage the risk arising from these exposures, GM enters into a variety of foreign exchange, interest rate, and commodity forward contracts and options. A discussion of GM's accounting policies for derivative instruments is included in Note 1 to the GM consolidated financial statements and further disclosure is provided in Notes 14, 21, and 22 to the GM consolidated financial statements. GM maintains risk management control systems to monitor foreign exchange, interest rate, commodity and equity price risks, and related hedge positions. Positions are monitored using a variety of analytical techniques including market value, sensitivity analysis, and value-at-risk models. The following analyses are based on sensitivity analysis tests which assume instantaneous, parallel shifts in exchange rates, interest rate yield curves, and commodity and equity prices. For options and instruments with non-linear returns, models appropriate to the instrument are utilized to determine the impact of market shifts. Foreign Currency 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 uncertainty to which future earnings or assets and liability values are exposed due to operating cash flows and various financial instruments that are denominated in foreign currencies. GM's most significant foreign currency exposures relate to Canada, Mexico, Western European countries (primarily Germany, United Kingdom, Spain, Italy, Belgium, and France), Australia, Japan, and Brazil. As of December 31, 1999 and 1998, the net fair value liability of financial instruments with exposure to foreign currency risk was approximately $11.2 billion and $3.5 billion, respectively. The potential loss in fair value for such financial instruments from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be approximately $1.0 billion and $161 million for 1999 and 1998, respectively. The model assumes a parallel shift in the foreign currency exchange rates. Exchange rates rarely move in the same direction. The assumption that exchange rates change in a parallel fashion may overstate the impact of changing exchange rates on assets and liabilities denominated in a foreign currency. Interest Rate Risk GM is subject to market risk from exposure to changes in interest rates based on its financing, investing, and cash management activities. GM enters into various financial instrument transactions to maintain the desired level of exposure to the risk of interest rate fluctuations and to minimize interest expense. More specifically, General Motors Acceptance Corporation (GMAC) and its affiliates have also entered into contracts to provide commercial and retail financing, to retain mortgage servicing rights, and to retain various assets related to mortgage securitization. Certain exchange traded future and option contracts, interest rate caps and floors, along with various investments, have been entered into to reduce the interest rate risk related to these activities and manage potential prepayment activity associated with mortgage servicing rights. The GMAC Mortgage Group, Inc. (GMACMG) manages prepayment risk associated with its capitalized mortgage servicing rights with U.S. Treasury options and futures. Since the derivative instruments do not have identical characteristics to the underlying mortgage servicing rights, GM is exposed to basis risk. GMACMG mitigates this risk through a historical review of value change in various interest rate scenarios when establishing and maintaining its hedge program. As of December 31, 1999 and 1998, the net fair value liability of all financial instruments held for purposes other than trading with exposure to interest rate risk was approximately $18.8 billion and $15.9 billion, respectively. The potential decrease in fair value resulting from a hypothetical 10% shift in interest rates would be approximately $127 million and $90 million for 1999 and 1998, respectively. The net fair value asset of all financial instruments held for trading purposes with exposure to interest rate risk was approximately $2.7 billion and $3.2 billion for 1999 and 1998, respectively. The potential loss in fair value resulting from a hypothetical 10% shift in interest rates would be approximately $39 million and $84 million for 1999 and 1998, respectively. The SEC disclosures on market risk require that all financial instruments, as defined by Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of Financial Instruments, should be included in the quantitative disclosure calculation. Operating leases are not required to be disclosed by SFAS No. 107 and have not been presented as part of the sensitivity analysis. This is a significant limitation to the analysis presented. While the sensitivity analysis will show a fair market value change for the debt which funds GM's operating lease portfolio, a corresponding change for GM's operating lease portfolio, which had a book value of $42.8 billion and $37.1 billion as of December 31, 1999 and 1998, respectively, was not considered by the model. As a result, the overall impact to the fair market value of financial instruments from a hypothetical change in interest rates may be overstated. II-22 GENERAL MOTORS CORPORATION AND SUBSIDIARIES Interest Rate Risk (concluded) There are certain shortcomings inherent in the sensitivity analyses presented. The model assumes interest rate changes are instantaneous parallel shifts in the yield curve. In reality, changes are rarely instantaneous. Although certain assets and liabilities may have similar maturities or periods to repricing, they may not react correspondingly to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate with changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Finance receivables are less susceptible to prepayments when interest rates change, while prepayments on many mortgage-related instruments are directly affected by a change in interest rates. As such, GM's model does not address prepayment risk for automotive-related finance receivables, but does consider prepayment risk for mortgage-related instruments that are highly sensitive to prepayment risk. However, in the event of a change in interest rates, actual loan prepayments may deviate significantly from assumptions used in the model. Further, certain assets, such as adjustable rate loans, have features, such as annual and lifetime caps, that restrict changing the interest rates both on a short-term basis and over the life of the asset. Finally, the ability of certain borrowers to make scheduled payments on their adjustable rate loans may decrease in the event of an interest rate increase. Commodity Price Risk GM enters into commodity forward and option contracts. Such contracts are executed to offset GM's exposure to the potential change in prices mainly for various non-ferrous metals used in the manufacturing of automotive components. The net fair value asset (liability) of such contracts, excluding the underlying exposures, as of December 31, 1999 and 1998 was approximately $151 million and ($172) million, respectively. The potential change in the fair value of commodity forward and option contracts, assuming a 10% change in the underlying commodity price, would be approximately $210 million and $203 million at December 31, 1999 and 1998, respectively. This amount excludes the offsetting impact of the price risk inherent in the physical purchase of the underlying commodities. Equity Price Risk GM holds investments in various available-for-sale equity securities which are subject to price risk. The fair value of such investments, as of December 31, 1999 and 1998, was approximately $3.2 billion and $2.3 billion, respectively. The potential change in the fair value of these investments, assuming a 10% change in prices, would be approximately $323 million and $230 million for 1999 and 1998, respectively. Forward-Looking Statements The above discussion and the estimated amounts generated from the sensitivity analyses referred to above 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 previously 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 GM of future events or losses. * * * * * * II-23 RESPONSIBILITIES FOR CONSOLIDATED FINANCIAL STATEMENTS The following consolidated financial statements of General Motors Corporation and subsidiaries were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on judgments of management. Management is further responsible for maintaining internal control designed to provide reasonable assurance that the books and records reflect the transactions of the companies and that established policies and procedures are carefully followed. From a stockholder's point of view, perhaps the most important feature in internal control is that it is continually reviewed for effectiveness and is augmented by written policies and guidelines, the careful selection and training of qualified personnel, and a strong program of internal audit. Deloitte & Touche LLP, an independent auditing firm, is engaged to audit the consolidated financial statements of General Motors Corporation and subsidiaries and issue reports thereon. The audit is conducted in accordance with generally accepted auditing standards that comprehend the consideration of internal control and tests of transactions to the extent necessary to form an independent opinion on the financial statements prepared by management. The Independent Auditors' Report appears on the next page. The Board of Directors, through the Audit Committee (composed entirely of non-employee Directors), is responsible for assuring that management fulfills its responsibilities in the preparation of the consolidated financial statements. The Audit Committee selects the independent auditors annually in advance of the Annual Meeting of Stockholders and submits the selection for ratification at the Meeting. In addition, the Audit Committee reviews the scope of the audits and the accounting principles being applied in financial reporting. The independent auditors, representatives of management, and the internal auditors meet regularly (separately and jointly) with the Audit Committee to review the activities of each, to ensure that each is properly discharging its responsibilities, and to assess the effectiveness of internal control. It is management's conclusion that internal control at December 31, 1999 provides reasonable assurance that the books and records reflect the transactions of the companies and that established policies and procedures are complied with. To ensure complete independence, Deloitte & Touche LLP has full and free access to meet with the Audit Committee, without management representatives present, to discuss the results of the audit, the adequacy of internal control, and the quality of financial reporting. /s/John F. Smith, Jr. /s/J. Michael Losh John F. Smith, Jr. J. Michael Losh Chairman and Chief Executive Officer Executive Vice President and Chief Financial Officer II-24 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, 1999 and 1998, and the related Consolidated Statements of Income, Cash Flows, and Stockholders' Equity for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed at Item 14. These financial statements and the financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 financial statements present fairly, in all material respects, the financial position of General Motors Corporation and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/DELOITTE & TOUCHE LLP - ------------------------ DELOITTE & TOUCHE LLP Detroit, Michigan January 20, 2000 (March 7, 2000 as to Note 27) II-25 ITEM 8 CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- (Dollars in Millions Except Per Share Amounts) GENERAL MOTORS CORPORATION AND SUBSIDIARIES Manufactured products sales and revenues (Notes 1 and 3) $152,635 $134,276 $148,143 Financing revenues (Note 1) 14,734 13,585 12,762 Other income (Note 25) 9,189 7,584 11,675 ------- ------- ------- Total net sales and revenues 176,558 155,445 172,580 ------- ------- ------- Cost of sales and other operating expenses, exclusive of items listed below (Notes 3 and 4) 126,809 114,542 128,225 Selling, general and administrative expenses 18,845 15,915 14,777 Depreciation and amortization expense (Notes 1 and 3) 12,318 11,147 14,646 Interest expense (Note 14) 7,750 6,629 5,883 Other expenses (Notes 3 and 25) 1,789 2,268 1,480 ------- ------- ------- Total costs and expenses 167,511 150,501 165,011 ------- ------- ------- Income from continuing operations before income taxes and minority interests 9,047 4,944 7,569 Income tax expense (Note 9) 3,118 1,636 1,025 Minority interests (28) (20) 44 Losses of nonconsolidated associates (325) (239) (105) ------ ------ ------ Income from continuing operations $5,576 $3,049 $6,483 Income (loss) from discontinued operations (Notes 1 and 2) 426 (93) 215 ------ ------- ------ Net income $6,002 $2,956 $6,698 Premium on exchange of preference stocks (Note 17) - - (26) Dividends on preference stocks (Note 18) (80) (63) (72) ----- ----- ----- Earnings attributable to common stocks $5,922 $2,893 $6,600 ===== ===== ===== Basic earnings (losses) per share attributable to common stocks (Note 19) $1-2/3 par value Continuing operations $8.70 $4.40 $8.52 Discontinued operations (Notes 1 and 2) 0.66 (0.14) 0.18 ---- ---- ---- Earnings per share attributable to $1-2/3 par value $9.36 $4.26 $8.70 ==== ==== ==== Class H (prior to its recapitalization on December 17, 1997) (Note 1) Continuing operations $ - $ - $2.30 Discontinued operations (Notes 1 and 2) - - 0.87 ----- ------ ---- Earnings per share attributable to Class H (prior to its recapitalization on December 17, 1997) (Note 1) $ - $ - $3.17 ===== ===== ==== Earnings per share attributable to Class H (subsequent to its recapitalization on December 17, 1997) (Note 1) $(0.77) $0.68 $0.02 ==== ==== ==== Diluted earnings (losses) per share attributable to common stocks (Note 19) $1-2/3 par value Continuing operations $8.53 $4.32 $8.45 Discontinued operations (Notes 1 and 2) 0.65 (0.14) 0.17 ---- ---- ---- Earnings per share attributable to $1-2/3 par value $9.18 $4.18 $8.62 ==== ==== ==== Class H (prior to its recapitalization on December 17, 1997) (Note 1) Continuing operations $ - $ - $2.30 Discontinued operations (Notes 1 and 2) - - 0.87 ---- ----- ---- Earnings per share attributable to Class H (prior to its recapitalization on December 17, 1997) (Note 1) $ - $ - $3.17 ==== ===== ==== Earnings per share attributable to Class H (subsequent to its recapitalization on December 17, 1997) (Note 1) $(0.77) $0.68 $0.02 ==== ==== ==== Reference should be made to the notes to consolidated financial statements. II-26 CONSOLIDATED STATEMENTS OF INCOME - concluded Years Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- (Dollars in Millions) AUTOMOTIVE, COMMUNICATIONS SERVICES, AND OTHER OPERATIONS Manufactured products sales and revenues (Notes 1 and 3) $152,635 $134,276 $148,143 Other income (Note 25) 3,472 2,885 7,952 ------- ------- -------- Total net sales and revenues 156,107 137,161 156,095 ------- ------- ------- Cost of sales and other operating expenses, exclusive of items listed below (Notes 3 and 4) 126,809 114,542 128,225 Selling, general and administrative expenses 14,250 11,848 11,971 Depreciation and amortization expense (Notes 1 and 3) 6,873 6,227 9,833 ------- ------- ------- Total operating costs and expenses 147,932 132,617 150,029 ------- ------- ------- Interest expense (Note 14) 828 786 633 Other expenses (Notes 3 and 25) 503 792 210 Net expense (income) from transactions with Financing and Insurance Operations (Note 1) 308 82 (101) ------ ------- ------ Income from continuing operations before income taxes and minority interests 6,536 2,884 5,324 Income tax expense (Note 9) 2,167 1,018 111 Minority interests (2) - 57 Losses of nonconsolidated associates (325) (239) (105) ----- ----- ----- Income from continuing operations 4,042 1,627 5,165 Income (loss) from discontinued operations (Notes 1 and 2) 426 (93) 215 ----- ------ ----- Net income - Automotive, Communications Services, and Other Operations $4,468 $1,534 $5,380 ===== ===== ===== Years Ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- (Dollars in Millions) FINANCING AND INSURANCE OPERATIONS Financing revenues (Note 1) $14,734 $13,585 $12,762 Insurance, mortgage, and other income (Note 25) 5,717 4,699 3,723 ------ ------ ------ Total revenues and other income 20,451 18,284 16,485 ------ ------ ------ Interest expense (Note 14) 6,922 5,843 5,250 Depreciation and amortization expense (Note 1) 5,445 4,920 4,813 Operating and other expenses 4,595 4,067 2,806 Provisions for financing losses (Notes 1 and 25) 404 463 523 Insurance losses and loss adjustment expenses (Note 25) 882 1,013 747 ------ ------ ------ Total costs and expenses 18,248 16,306 14,139 ------ ------ ------ Net (income) expense from transactions with Automotive, Communications Services, and Other Operations (Note 1) (308) (82) 101 ------ ------ ------ Income before income taxes 2,511 2,060 2,245 Income tax expense (Note 9) 951 618 914 Minority interests (26) (20) (13) ------ ------ ------ Net income - Financing and Insurance Operations $1,534 $1,422 $1,318 ===== ===== ===== The above supplemental consolidating information is explained in Note 1, "Nature of Operations". Reference should be made to the notes to consolidated financial statements. II-27 CONSOLIDATED BALANCE SHEETS December 31, ------------ GENERAL MOTORS CORPORATION AND SUBSIDIARIES 1999 1998 ---- ---- ASSETS (Dollars in Millions) Automotive, Communications Services, and Other Operations Cash and cash equivalents $9,730 $9,728 Marketable securities 1,698 402 ------- ------- Total cash and marketable securities (Notes 1 and 5) 11,428 10,130 Accounts and notes receivable (less allowances) 5,093 4,750 Inventories (less allowances) (Note 7) 10,638 10,437 Net assets of discontinued operations (Notes 1 and 2) - 77 Equipment on operating leases (less accumulated depreciation) (Note 8) 5,744 4,954 Deferred income taxes and other current assets (Note 9) 9,006 10,051 ------- ------ Total current assets 41,909 40,399 Equity in net assets of nonconsolidated associates 1,711 950 Property - net (Note 10) 32,779 32,222 Intangible assets - net (Notes 1 and 11) 8,527 9,994 Deferred income taxes (Note 9) 15,277 14,967 Other assets (Note 12) 25,358 16,062 -------- -------- Total Automotive, Communications Services, and Other Operations assets 125,561 114,594 Financing and Insurance Operations Cash and cash equivalents (Note 1) 712 146 Investments in securities (Note 5) 9,110 8,748 Finance receivables - net (Note 6) 80,627 70,436 Investment in leases and other receivables (Note 8) 36,407 32,798 Other assets (Note 12) 21,312 19,150 Net receivable from Automotive, Communications Services, and Other Operations (Note 1) 1,001 816 ------- ------- Total Financing and Insurance Operations assets 149,169 132,094 ------- ------- Total assets $274,730 $246,688 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Automotive, Communications Services, and Other Operations Accounts payable (principally trade) $17,254 $13,542 Loans payable (Note 14) 1,991 1,204 Accrued expenses (Note 13) 32,854 30,548 Net payable to Financing and Insurance Operations (Note 1) 1,001 816 ------ ------ Total current liabilities 53,100 46,110 Long-term debt (Note 14) 7,415 7,118 Postretirement benefits other than pensions (Note 15) 34,166 33,503 Pensions (Note 15) 3,339 4,410 Other liabilities and deferred income taxes (Note 13) 17,426 17,807 -------- -------- Total Automotive, Communications Services, and Other Operations liabilities 115,446 108,948 Financing and Insurance Operations Accounts payable 4,262 4,148 Debt (Note 14) 122,282 107,753 Other liabilities and deferred income taxes (Note 13) 11,282 10,004 -------- -------- Total Financing and Insurance Operations liabilities 137,826 121,905 Minority interests 596 563 General Motors - obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of General Motors (Note 17) Series D 79 79 Series G 139 141 Stockholders' equity (Notes 18 and 20) Preference stocks - 1 $1-2/3 par value common stock (issued, 619,412,233 and 655,008,344 shares) (Note 19) 1,033 1,092 Class H common stock (issued, 137,115,187 and 106,159,776 shares) 14 11 Capital surplus (principally additional paid-in capital) 13,794 12,661 Retained earnings 6,961 6,984 ------- ------- Subtotal 21,802 20,749 Accumulated foreign currency translation adjustments (2,033) (1,089) Net unrealized gains on securities 996 481 Minimum pension liability adjustment (121) (5,089) -------- ------- Accumulated other comprehensive loss (1,158) (5,697) -------- ------- Total stockholders' equity 20,644 15,052 -------- ------- Total liabilities and stockholders' equity $274,730 $246,688 ======= ======= Reference should be made to the notes to consolidated financial statements. II-28 CONSOLIDATED BALANCE SHEETS - concluded December 31, ------------ AUTOMOTIVE, COMMUNICATIONS SERVICES, and OTHER OPERATIONS 1999 1998 ---- ---- (Dollars in Millions) ASSETS Cash and cash equivalents $9,730 $9,728 Marketable securities 1,698 402 ------- -------- Total cash and marketable securities (Notes 1 and 5) 11,428 10,130 Accounts and notes receivable (less allowances) 5,093 4,750 Inventories (less allowances) (Note 7) 10,638 10,437 Net assets of discontinued operations (Notes 1 and 2) - 77 Equipment on operating leases (less accumulated depreciation) (Note 8) 5,744 4,954 Deferred income taxes and other current assets (Note 9) 9,006 10,051 ------- ------ Total current assets 41,909 40,399 Equity in net assets of nonconsolidated associates 1,711 950 Property - net (Note 10) 32,779 32,222 Intangible assets - net (Notes 1 and 11) 8,527 9,994 Deferred income taxes (Note 9) 15,277 14,967 Other assets (Note 12) 25,358 16,062 -------- -------- Total Automotive, Communications Services, and Other Operations assets $125,561 $114,594 ======= ======= LIABILITIES AND GM INVESTMENT Accounts payable (principally trade) $17,254 $13,542 Loans payable (Note 14) 1,991 1,204 Accrued expenses (Note 13) 32,854 30,548 Net payable to Financing and Insurance Operations (Note 1) 1,001 816 ------ ------ Total current liabilities 53,100 46,110 Long-term debt (Note 14) 7,415 7,118 Postretirement benefits other than pensions (Note 15) 34,166 33,503 Pensions (Note 15) 3,339 4,410 Other liabilities and deferred income taxes (Note 13) 17,426 17,807 -------- -------- Total Automotive, Communications Services, and Other Operations liabilities 115,446 108,948 Minority interests 574 511 GM investment in Automotive, Communications Services, and Other Operations 9,541 5,135 ------- ------- Total Automotive, Communications Services, and Other Operations liabilities and GM investment $125,561 $114,594 ======= ======= December 31, ------------ FINANCING AND INSURANCE OPERATIONS 1999 1998 ---- ---- (Dollars in Millions) ASSETS Cash and cash equivalents (Note 1) $712 $146 Investments in securities (Note 5) 9,110 8,748 Finance receivables - net (Note 6) 80,627 70,436 Investment in leases and other receivables (Note 8) 36,407 32,798 Other assets (Note 12) 21,312 19,150 Net receivable from Automotive, Communications Services, and Other Operations (Note 1) 1,001 816 ------- ------- Total Financing and Insurance Operations assets $149,169 $132,094 ======= ======= LIABILITIES AND GM INVESTMENT Accounts payable $4,262 $4,148 Debt (Note 14) 122,282 107,753 Other liabilities and deferred income taxes (Note 13) 11,282 10,004 -------- -------- Total Financing and Insurance Operations liabilities 137,826 121,905 Minority interests 22 52 GM investment in Financing and Insurance Operations 11,321 10,137 -------- -------- Total Financing and Insurance Operations liabilities and GM investment $149,169 $132,094 ======= ======= The above supplemental consolidating information is explained in Note 1, "Nature of Operations". Reference should be made to the notes to consolidated financial statements. II-29 CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years Ended December 31, ------------------------------------ 1999 1998 1997 ---- ---- ---- (Dollars in Millions) GENERAL MOTORS CORPORATION AND SUBSIDIARIES Cash flows from operating activities Income from continuing operations $5,576 $3,049 $6,483 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Depreciation and amortization expenses 12,318 11,147 14,646 Gain on Hughes Defense spin-off (Note 1) - - (4,269) Postretirement benefits other than pensions, net of payments and VEBA contributions (1,036) 188 (874) Pension expense, net of contributions (808) 223 269 Originations and purchases of mortgage loans (53,006) (54,433) (30,878) Proceeds on sales of mortgage loans 55,777 51,582 28,543 Originations and purchases of mortgage securities (1,309) (2,237) (2,516) Proceeds on sales of mortgage securities 1,545 849 1,449 Change in other investments and miscellaneous assets 395 770 1,457 Change in other operating assets and liabilities (Note 1) 7,500 1,558 (1,552) Other 78 1,647 826 ------ ------ ------ Net cash provided by operating activities 27,030 14,343 13,584 ------ ------ ------ Cash flows from investing activities Expenditures for property (7,384) (8,231) (8,647) Investments in marketable securities - acquisitions (25,406) (34,162) (30,594) Investments in marketable securities - liquidations 23,479 37,960 28,958 Mortgage servicing rights - acquisitions (1,424) (1,862) (479) Mortgage servicing rights - liquidations 35 80 23 Finance receivables - acquisitions (186,379) (155,613) (163,614) Finance receivables - liquidations 130,293 114,662 129,615 Proceeds from sales of finance receivables 48,178 27,681 31,191 Operating leases - acquisitions (23,165) (23,525) (21,073) Operating leases - liquidations 12,079 15,386 12,187 Proceeds from borrowings of Hughes Defense prior to the Hughes Defense spin-off (Note 1) - - 4,006 Investments in companies, net of cash acquired (5,108) (1,144) (2,272) Other (192) (1,131) 765 ------ ------ ------ Net cash used in investing activities (34,994) (29,899) (19,934) ------ ------ ------ Cash flows from financing activities Net (decrease) increase in loans payable (2,360) 8,186 5,346 Long-term debt - borrowing 35,561 24,035 14,971 Long-term debt - repayments (21,359) (12,869) (12,500) Repurchases of common and preference stocks (3,870) (3,089) (4,365) Proceeds from issuing common and preference stocks 2,005 343 614 Cash dividends paid to stockholders (1,367) (1,388) (1,620) ----- ------- ----- Net cash provided by financing activities 8,610 15,218 2,446 ----- ------ ----- Effect of exchange rate change on cash and cash equivalents (206) 317 (482) --- --- ------ Net cash provided by (used in) continuing operations 440 (21) (4,386) Net cash provided by (used in) discontinued operations (Notes 1 and 2) 128 (378) 1,567 --- --- ----- Net increase (decrease) in cash and cash equivalents 568 (399) (2,819) Cash and cash equivalents at beginning of the year 9,874 10,273 13,092 ----- ------ ------ Cash and cash equivalents at end of the year $10,442 $9,874 $10,273 ====== ====== ====== Reference should be made to the notes to consolidated financial statements. II-30 CONSOLIDATED STATEMENTS OF CASH FLOWS - concluded
For The Years Ended December 31, -------------------------------- 1999 1998 1997 ----------------------- ----------------------- ---------------------- Automotive, Financing Automotive, Financing Automotive, Financing Comm.Serv., and Comm.Serv., and Comm.Serv., and and Other Insurance and Other Insurance and Other Insurance --------- --------- --------- --------- --------- --------- Cash flows from operating activities (Dollars in Millions) Income from continuing operations $4,042 $1,534 $1,627 $1,422 $5,165 $1,318 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Depreciation and amortization expenses 6,873 5,445 6,227 4,920 9,833 4,813 Gain on Hughes Defense spin-off (Note 1) - - - - (4,269) - Postretirement benefits other than pensions, net of payments and VEBA contributions (1,057) 21 157 31 (900) 26 Pension expense, net of contributions (808) - 223 - 269 - Originations and purchase of mortgage loans - (53,006) - (54,433) - (30,878) Proceeds on sales of mortgage loans - 55,777 - 51,582 - 28,543 Originations and purchases of mortgage securities - (1,309) - (2,237) - (2,516) Proceeds on sales of mortgage securities - 1,545 - 849 - 1,449 Change in other investments and miscellaneous assets 522 (127) (162) 932 (51) 1,508 Change in other operating assets and liabilities (Note 1) 7,523 (23) 90 1,468 (993) (559) Other (866) 944 581 1,066 563 263 ------ ------ ------ ----- ------ ------ Net cash provided by operating activities 16,229 10,801 8,743 5,600 9,617 3,967 ------ ------ ------ ----- ----- ------ Cash flows from investing activities Expenditures for property (7,061) (323) (7,952) (279) (8,409) (238) Investments in marketable securities - acquisitions (4,149) (21,257) (13,010) (21,152) (12,864) (17,730) Investments in marketable securities - liquidations 2,886 20,593 16,272 21,688 12,663 16,295 Mortgage servicing rights - acquisitions - (1,424) - (1,862) - (479) Mortgage servicing rights - liquidations - 35 - 80 - 23 Finance receivables - acquisitions - (186,379) - (155,613) - (163,614) Finance receivables - liquidations - 130,293 - 114,662 - 129,615 Proceeds from sales of finance receivables - 48,178 - 27,681 - 31,191 Operating leases - acquisitions (6,415) (16,750) (6,397) (17,128) (5,680) (15,393) Operating leases - liquidations 4,243 7,836 5,609 9,777 3,711 8,476 Proceeds from borrowings of Hughes Defense prior to the Hughes Defense spin-off (Note 1) - - - - 4,006 - Investments in companies, net of cash acquired (2,706) (2,402) (971) (173) (1,850) (422) Net investing activity with Financing and Insurance Operations 75 - 338 - 750 - Other (924) 732 (889) (242) 554 211 ------- -------- ------ ------- ------ ----- Net cash used in investing activities (14,051) (20,868) (7,000) (22,561) (7,119) (12,065) ------ ------ ----- ------ ----- ------ Cash flows from financing activities Net increase (decrease) in loans payable 140 (2,500) (94) 8,280 (398) 5,744 Long-term debt - borrowings 9,090 26,471 2,937 21,098 384 14,587 Long-term debt - repayments (8,281) (13,078) (1,492) (11,377) (1,189) (11,311) Net financing activity with Automotive, Communications Services, and Other Operations - (75) - (338) - (750) Repurchases of common and preference stocks (3,870) - (3,089) - (4,365) - Proceeds from issuing common and preference stocks 2,005 - 343 - 614 - Cash dividends paid to stockholders (1,367) - (1,388) - (1,620) - ----- ------ ----- ------ ----- ----- Net cash (used in) provided by financing activities (2,283) 10,818 (2,783) 17,663 (6,574) 8,270 ----- ------ ----- ------ ----- ----- Effect of exchange rate changes on cash and cash equivalents (206) - 315 2 (482) - Net transactions with Automotive/Financing Operations 185 (185) 1,135 (1,135) 338 (338) ----- ----- ----- ----- ----- ----- Net cash (used in) provided by continuing operations (126) 566 410 (431) (4,220) (166) Net cash provided by (used in) discontinued operations (Notes 1 and 2) 128 - (378) - 1,567 - --- ---- --- --- ----- --- Net increase (decrease) in cash and cash equivalents 2 566 32 (431) (2,653) (166) Cash and cash equivalents at beginning of the year 9,728 146 9,696 577 12,349 743 ----- ---- ----- --- ------ --- Cash and cash equivalents at end of the year $9,730 $712 $9,728 $146 $9,696 $577 ===== === ===== === ===== ===
The above supplemental consolidating information is explained in Note 1, "Nature of Operations". Reference should be made to the notes to consolidated financial statements. II-31 GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Accumulated Total Compre- Other Total Capital Capital hensive Retained Comprehensive Stockholders' Stock Surplus Income Earnings Loss Equity ----- ------- ------ -------- ---- ------ (Dollars in Millions) Balance at January 1, 1997 $1,272 $19,189 $6,137 $(3,185) $23,413 Shares reacquired (Note 18) (122) (4,243) - - (4,365) Shares issued 17 619 - - 636 Preference stock exchange - (196) (26) - (222) Hughes Defense spin-off - - (5,773) - (5,773) Comprehensive income: Net income - - $6,698 6,698 - 6,698 ----- Other comprehensive income (loss) (Note 18): Foreign currency translation adjustments - - (692) - - - Unrealized gains on securities - - 81 - - - Minimum pension liability adjustment - - (572) - - - ----- Other comprehensive loss - - (1,183) - (1,183) (1,183) ----- Comprehensive income - - $5,515 - - - ===== Cash dividends (Note 20) - - (1,620) - (1,620) ----- ------ ----- ----- ----- Balance at December 31, 1997 1,167 15,369 5,416 (4,368) 17,584 Shares reacquired (Note 18) (75) (3,105) - - (3,180) Shares issued 12 397 - - 409 Comprehensive income: Net income - - $2,956 2,956 - 2,956 ----- Other comprehensive income (loss) (Note 18): Foreign currency translation adjustments - - (279) - - - Unrealized losses on securities - - (23) - - - Minimum pension liability adjustment - - (1,027) - - - ----- Other comprehensive loss - - (1,329) - (1,329) (1,329) ----- Comprehensive income - - $1,627 - - - ===== Cash dividends (Note 20) - - (1,388) - (1,388) ----- ------ ----- ----- ------ Balance at December 31, 1998 1,104 12,661 6,984 (5,697) 15,052 Shares reacquired (Note 18) (76) (3,794) - - (3,870) Shares issued 19 3,588 - - 3,607 Comprehensive income: Net income - - $6,002 6,002 - 6,002 ----- Other comprehensive income (loss) (Note 18): Foreign currency translation adjustments - - (944) - - - Unrealized gains on securities - - 515 - - - Minimum pension liability adjustment - - 4,968 - - - ----- Other comprehensive income - - 4,539 - 4,539 4,539 ------ Comprehensive income - - $10,541 - - - ====== Cash dividends (Note 20) - - (1,367) - (1,367) Delphi initial public offering (Note 2) - 1,244 - 1,244 Delphi spin-off (Note 2) - 95 (4,658) - (4,563) ----- ------ ----- ----- ------ Balance at December 31, 1999 $1,047 $13,794 $6,961 $(1,158) $20,644 ===== ====== ===== ===== ======
Reference should be made to the notes to consolidated financial statements. II-32 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 (hereinafter referred to as the 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, prior to the December 17, 1997 restructuring of the company (hereinafter referred to as "former Hughes") and subsequent to the December 17, 1997 restructuring of the company (hereinafter referred to as "Hughes") (see "Hughes Transactions" below) (collectively referred to as "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. The financial data related to Delphi Automotive Systems Corporation (Delphi) is presented as discontinued operations for all periods presented. GM encourages reference to the GMAC Annual Report on Form 10-K for the period ended December 31, 1999, filed separately with the 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, 1999 and related Hughes Annual Report on Form 10-K filed separately with the Securities and Exchange Commission. Certain amounts for 1998 and 1997 have been reclassified to conform with the 1999 classifications. Nature of Operations GM presents separate supplemental consolidating financial information for the following businesses: (1) Automotive, Communications Services, and Other Operations 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) Financing and Insurance Operations which consists primarily of GMAC, which 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. Transactions between businesses have been eliminated in the Corporation's consolidated statements of income. Automotive, Communications Services, and Other Operations' net expense (income) from transactions with Financing and Insurance Operations was as follows (in millions): Years Ended December 31, 1999 1998 1997 ---- ---- ---- Interest $306 $140 $89 Service fees 56 58 34 Insurance - net (53) (24) (127) Other (1) (92) (97) ---- -- -- Net expense (income) $308 $82 $(101) === == === Use of Estimates in the Preparation of the Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from those estimates. Revenue Recognition Sales are generally recorded when products are shipped or when services are rendered to independent dealers or other third parties. Provisions for normal dealer sales incentives, returns and allowances, and GM Card rebates are made at the time of vehicle sales. Costs related to special sales incentive programs are recognized as reductions to sales when determinable. Financing revenue is recorded over the terms of the receivables using the interest method. Certain loan origination costs are deferred and amortized to financing revenue over the lives of the related loans using the interest method. Income from operating lease assets is recognized on a straight-line basis over the scheduled lease term. Certain operating lease origination costs are deferred and amortized to financing revenue over the lives of the related operating leases using the straight-line method. Insurance premiums are earned on a basis related to coverage provided over the terms of the policies. Commission, 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. The liability for losses and loss expenses includes a provision for unreported losses, based on past experience, net of the estimated salvage and subrogation recoverable. II-33 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 1. Significant Accounting Policies (continued) Product-Related Expenses Advertising and sales promotion, research and development, and other product-related costs are charged to expense as incurred. Provisions for estimated expenses related to product warranty are made at the time the products are sold. Advertising expense was $4.5 billion in 1999, $3.7 billion in 1998, and $4.0 billion in 1997. Research and development expense was $6.8 billion in 1999, $6.3 billion in 1998, and $6.5 billion in 1997. Depreciation and Amortization Depreciation is provided based on the estimated useful lives of property groups generally using accelerated methods, which accumulate depreciation of approximately two-thirds of the depreciable cost during the first half of the estimated useful lives. Leasehold improvements are amortized over the period of the lease or the life of the property, whichever is shorter, with the amortization applied directly to the asset account. Depreciation on capitalized leases with terms of five years or less is provided using the straight-line method; leases with terms in excess of five years are depreciated using the foregoing accelerated methods. Equipment on operating leases is depreciated on a straight-line basis over a period of time consistent with the term of the underlying operating 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. Expenditures for special tools are amortized over their estimated useful lives, primarily using the units of production method. Amortization is applied directly to the asset account. Replacement of special tools for reasons other than changes in products is charged directly to cost of sales. Goodwill is amortized on a straight-line basis over periods ranging from 20 to 40 years. Depreciation and amortization expense was as follows (in millions): Years Ended December 31, ------------------------------ 1999 1998 1997 ---- ---- ---- Automotive, Communications Services, and Other Operations - --------------------------------------------------------- Depreciation (Note 3) $4,155 $3,772 $4,178 Amortization of special tools (Note 3) 2,492 2,350 5,427 Amortization of intangible assets (Note 11) 226 105 228 ------ ------ ------ Total $6,873 $6,227 $9,833 ===== ===== ===== Financing and Insurance Operations - ---------------------------------- Depreciation and amortization expense $5,445 $4,920 $4,813 ===== ===== ===== Internal-Use Software As of January 1, 1999, GM adopted Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which, on a prospective basis, revised the accounting for software development costs. Based on this accounting standard, certain internal-use software costs historically expensed are now capitalized once specific criteria are met and these costs are amortized on a straight-line basis over a three-year period. The adoption of this statement did not have a material impact on the Corporation's financial statements. Foreign Currency Translation Foreign currency exchange transaction and translation losses on an after-tax basis included in consolidated net income in 1999, 1998, and 1997, pursuant to Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation, amounted to $162 million, $298 million, and $497 million, respectively. Cash and Cash Equivalents Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less. II-34 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 1. Significant Accounting Policies (continued) Statement of Cash Flows Supplementary Information Years Ended December 31, ------------------------------ 1999 1998 1997 ---- ---- ---- (Dollars in Millions) Automotive, Communications Services, and Other Operations - --------------------------------------------------------- Changes in other operating assets and liabilities were as follows: Accounts receivable $(659) $(80) $(1,006) Prepaid expenses and other deferred charges (623) 217 1,006 Inventories (66) (494) (808) Accounts payable 5,606 1,249 1,212 Deferred taxes and income taxes payable (160) (2,315) (3,565) Accrued expenses and other liabilities 3,425 1,513 2,168 ----- ----- ----- Total $7,523 $90 $(993) ===== == === Cash paid for interest and income taxes was as follows: Interest $526 $435 $449 Income taxes $2,166 $1,132 $1,120 Years Ended December 31, ------------------------------ 1999 1998 1997 ---- ---- ---- (Dollars in Millions) Financing and Insurance Operations - ---------------------------------- Changes in other operating assets and liabilities were as follows: Other receivables $(269) $206 $(714) Other assets (83) (36) (55) Accounts payable 114 858 624 Deferred taxes and other liabilities 215 440 (414) --- ------ --- Total $(23) $1,468 $(559) == ===== === Cash paid for interest and income taxes was as follows: Interest $6,618 $5,695 $5,202 Income taxes $214 $138 $338 Allowance for Credit Losses An allowance for credit losses is generally established during the period in which receivables are acquired and is maintained at a level deemed appropriate by management based on historical and other factors that affect collectibility. Losses arising from the sale of repossessed collateral are charged to the allowance for credit losses. Where repossession has not taken place, receivables are charged off as soon as it is determined that the collateral cannot be repossessed, generally not more than 150 days after default. Repossessed Property and Impaired Loans Losses arising from the repossession of collateral supporting doubtful accounts and property supporting defaulted operating leases are recognized upon repossession. Repossessed assets are recorded at the lower of historical cost or estimated realizable value and are reclassified from finance receivables or operating leases to nonearning assets with the related adjustments to the valuation allowance included in other operating expenses. Non-retail finance receivables are reduced to the lower of book value or the estimated fair value of collateral when determined to be impaired or uncollectible. Valuation of Long-Lived Assets GM periodically evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, 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 market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. II-35 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 1. Significant Accounting Policies (continued) Derivative Instruments GM is party to a variety of foreign exchange, interest rate, 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. GM's Risk Management Committee reviews, approves, and monitors the Corporation's financial risk strategies, policies, and procedures. The Committee reviews and approves all new risk management strategies, establishes approval authority guidelines for approved programs, and monitors compliance and performance of existing risk management programs. GM does not enter into derivative transactions for trading purposes. As part of the hedging program approval process, GM's management is required to identify the specific financial risk which the derivative transaction will minimize, the appropriate hedging instrument to be used to reduce the risk, and the correlation between the financial risk and the hedging instrument. Purchase orders, letters of intent, vehicle production forecasts, capital planning forecasts, and historical data are used as the basis for determining the anticipated values of the transactions to be hedged. Generally, GM does not enter into derivative transactions that do not have a high correlation with the underlying financial risk. In the infrequent instances in which a derivative transaction is entered into that does not have a high correlation with the underlying exposure, the derivative is marked to market and the related gains and losses are included in net income on a current basis. The hedge positions, as well as the correlation between the transaction risks and the hedging instruments, are reviewed by management on an ongoing basis. Foreign exchange forward and option contracts are accounted for as hedges to the extent they are designated, and are effective, as hedges of firm foreign currency commitments. Additionally, certain foreign exchange option contracts receive hedge accounting treatment to the extent such contracts hedge certain anticipated foreign currency transactions. Other such foreign exchange contracts and options are marked to market and the related gains and losses are included in net income on a current basis. Interest rate swaps and options that are designated, and are effective, as hedges of underlying debt obligations are not marked to market and the related gains and losses are not included in net income, but are used to adjust interest expense recognized over the lives of the underlying debt agreements. Gains and losses from terminated hedge contracts are deferred and amortized over the remaining period of the original swap or the remaining term of the underlying exposure, whichever is shorter. Open interest rate contracts are reviewed regularly to ensure that they remain effective as hedges of interest rate exposure. Written options (including swaptions, interest rate caps and collars, and swaps with embedded swaptions) and other swaps that do not qualify for hedge accounting are marked to market and the related gains and losses are included in net income on a current basis. GM also enters into commodity forward and option contracts. Since GM has the discretion to settle these transactions either in cash or by taking physical delivery, these contracts are not considered financial instruments for accounting purposes. Commodity forward contracts and options are accounted for as hedges to the extent they are designated, and are effective, as hedges of firm or anticipated commodity purchase contracts. Other commodity forward contracts and options are marked to market and the related gains and losses are included in net income on a current basis. Postemployment Benefits and Employee Termination Benefits GM's postemployment benefits primarily relate to GM's extended disability benefit program in the United States and employee job security and supplemental unemployment compensation benefits (mainly pursuant to union or other contractual agreements). Extended disability benefits are accrued on a service-driven basis, and employee job security and supplemental unemployment compensation benefits are accrued on an event-driven basis. Accruals for postemployment benefits represent the discounted future cash expenditures expected during the period between the idling of affected employees and the time when such employees are redeployed, retire or otherwise terminate their employment. Voluntary termination benefits are accrued when the employees accept the offer. Involuntary termination benefits are accrued when management has committed to a termination plan and the benefit arrangement is communicated to affected employees. Environmental Liabilities GM recognizes environmental liabilities when a loss is probable and can be reasonably estimated. Such liabilities are generally not subject to insurance coverage. The cost of each environmental liability is estimated by engineering, financial, and legal specialists within GM based on current law. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that other potentially responsible parties (PRPs) will be able to fulfill their commitments at the sites where GM may be jointly and severally liable. At sites being addressed under the U.S. Comprehensive Environmental Response, Compensation and Liability Act or similar state laws (the "Superfund Sites"), GM typically recognizes a loss once it has been named as a PRP and has determined that some loss is II-36 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 1. Significant Accounting Policies (continued) Environmental Liabilities (concluded) probable and estimable. The Superfund Sites are primarily multi-PRP sites not owned or operated by GM. For GM's operating plants, an estimated liability is typically recognized either upon completion of an environmental assessment or when GM proposes an agreement with the appropriate regulatory agency to take action at a site. For closed or closing plants owned by GM and properties being sold, an estimated liability is typically recognized at the time the closure decision is made or sale is recorded and is based on an environmental assessment of the plant property. GM's estimates for environmental obligations are dependent primarily on the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, uncertainty as to what remedy and technology will be required, the outcome of discussions with regulatory agencies and other PRPs at multi-party sites, the number and financial viability of other PRPs, and the timing of expenditures; accordingly, such estimates could change materially as GM periodically evaluates and revises such estimates based on expenditures against established reserves and the availability of additional information. New Accounting Standards In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an Amendment of FASB Statement No. 133. This statement defers, for one year, the effective date of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to those fiscal years beginning after June 15, 2000. SFAS No. 133 requires all derivatives to be recorded as either assets or liabilities and the instruments to be measured at fair value. Gains or losses resulting from changes in the values of those derivatives are to be recognized immediately or deferred depending on the use of the derivative and whether or not it qualifies as a hedge. GM will adopt SFAS No. 133 by January 1, 2001, as required. Management is currently assessing the impact of this statement on GM's results of operations and financial position. Labor Force GM, on a worldwide basis, has a concentration of its labor supply in employees working under union collective bargaining agreements, of which certain contracts expired in 1999. The 1999 United Auto Workers (UAW) labor contract was ratified on October 13, 1999 covering a four-year term from 1999-2003. The contract included an annual salary increase of 3% per year, an up-front signing bonus of $1,350 per UAW employee which will be amortized evenly over the life of the contract, and pension benefit increases. In addition, retiree benefit increases include lump sum payments and a $1.25 monthly benefit increase per year of service. The retiree lump sum payments resulted in a charge against GM's 1999 fourth quarter earnings of approximately $408 million after-tax. The other pension benefit increases will be paid out of plan assets. The 1999 contract includes job security and sourcing provisions containing an employment floor set at 95% of 1996 employment levels in the event of net outsourcing. It also requires a level of attrition replacement based on a 1999 benchmark minimum employment level, which is reduced by 5% over the life of the contract. The 1999 Canadian Auto Workers (CAW) labor agreement was ratified on October 24,1999 covering a three-year term from 1999-2002. The contract included an annual salary increase of 3% per year and an up-front signing bonus of $1,000 Canadian (equivalent to approximately $679 at the December 31, 1999 exchange rate) per active CAW employee, which will be amortized evenly over the life of the contract. In addition, hourly actives and retirees were granted pension benefit increases to be paid out of plan assets. The 1999 labor agreement continues to provide flexibility to cut costs and streamline operations. Hughes Transactions On December 17, 1997, GM and former Hughes completed a series of related transactions (Hughes Transactions) that were designed to address strategic challenges facing the three principal businesses of former Hughes and unlock stockholder value in GM. The Hughes Transactions included the tax-free spin-off of the defense electronics business of former Hughes (Hughes Defense) to holders of $1-2/3 par value and Class H common stocks, which was then followed immediately by the merger of Hughes Defense with Raytheon Company (Raytheon). Concurrently, Delco Electronics Corporation (Delco), the automotive electronics subsidiary of former Hughes, was transferred from former Hughes to Delphi. Finally, Class H common stock was recapitalized into a GM tracking stock, GM Class H common stock, that is linked to the telecommunications and space businesses of Hughes. II-37 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 1. Significant Accounting Policies (concluded) Hughes Transactions (concluded) The spin-off of Hughes Defense and merger with Raytheon had a total value to GM and its stockholders of approximately $9.8 billion that consisted of approximately $4.0 billion cash retained by Hughes from debt proceeds incurred by Hughes Defense prior to its spin-off and $5.8 billion of Hughes Defense Class A common stock distributed to holders of $1-2/3 par value and GM Class H common stock. Substantially all of the proceeds from the debt obligation of Hughes Defense were made available to Hughes. The distribution of Hughes Defense to the $1-2/3 par value and GM Class H common stockholders was recorded by GM at fair value and resulted in the recognition of a $4.3 billion gain that was included in other income. In addition, GM's total stockholders' equity was reduced by approximately $1.5 billion as a result of the Hughes Transactions. GM distributed a total of 102,630,503 shares of Class A common stock of Hughes Defense, 44,308,316 shares or 43.2% to $1-2/3 par value stockholders and 58,322,187 shares or 56.8% to GM Class H stockholders, which represented approximately 30% of the total equity of the newly combined Hughes Defense/Raytheon Company. The distribution to GM Class H common stockholders, which had a total value of approximately $3.3 billion, accounted for their tracking stock interest in Hughes Defense valued at approximately $1.5 billion, plus an additional amount to compensate them for the elimination of their tracking stock interest in Delco and other factors valued at approximately $1.8 billion. NOTE 2. Discontinued Operations Delphi is a diverse supplier of automotive systems and components. Delphi offers products and services in the areas of electronics and mobile communication; safety, thermal and electrical architecture; and dynamics and propulsion. On February 5, 1999, Delphi completed an initial public offering (IPO) of 100 million shares of its common stock, which represented 17.7% of its outstanding common shares. On April 12, 1999, the GM Board of Directors (GM Board) approved the complete separation of Delphi from GM by means of a spin-off (which was tax-free to GM and its stockholders for U.S. federal income tax purposes). On May 28, 1999 GM distributed to holders of its $1-2/3 par value common stock 80.1% of the outstanding shares of Delphi, which resulted in 0.69893 shares of Delphi common stock being distributed for each share of GM $1-2/3 par value common stock outstanding on the record date of May 25, 1999. In addition, GM contributed the remaining 2.2% of Delphi shares (around 12.4 million shares), to a Voluntary Employee Beneficiary Association (VEBA) trust established by GM to fund benefits to its hourly retirees. The financial data related to GM's investment in Delphi through May 28, 1999 is classified as discontinued operations for all periods presented. The financial data of Delphi reflect the historical results of operations and cash flows of the businesses that were considered part of the Delphi business segment of GM during each respective period; they do not reflect many significant changes that will occur in the operations and funding of Delphi as a result of the separation from GM and the IPO. The Delphi financial data classified as discontinued operations reflect the assets and liabilities transferred to Delphi in accordance with the terms of a master separation agreement to which Delphi and GM are parties (the "Separation Agreement"). Delphi and Delco were under the common control of GM during such periods; therefore, the Delphi financial data includes amounts relating to Delco for all periods presented, although Delco was not integrated with Delphi until December 1997. Delphi net sales (including sales to GM) included in discontinued operations totaled $12.5 billion, $28.5 billion, and $31.4 billion for the years ended December 31, 1999, 1998, and 1997, respectively. Income (loss) from Delphi discontinued operations of $426 million, $(93) million, and $215 million for the years ended December 31, 1999, 1998, and 1997 is reported net of income tax expense (benefit) of $314 million, $(173) million, and $44 million, respectively. II-38 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 2. Discontinued Operations (concluded) The net assets of Delphi were as follows (in millions): December 31, 1998 ---- Current assets $6,405 Property and equipment - net 4,965 Deferred income taxes and other assets 4,136 Current liabilities (4,057) Long-term debt (3,141) Other liabilities (8,299) Accumulated translation adjustments 68 ----- Net assets of discontinued operations $77 == In the first quarter of 1999, GM recorded an increase to stockholders' equity of $1.2 billion reflecting a gain, as a result of Delphi's IPO, of $1.7 billion, less the cost of GM's investment in Delphi and the costs of the IPO and establishing Delphi as an independent entity. As a result of the complete separation of Delphi by means of the spin-off (which was tax-free to GM and its stockholders for U.S. federal income tax purposes) and VEBA trust contribution on May 28, 1999, GM recorded a decrease to stockholders' equity of $5.2 billion in the second quarter of 1999. This amount reflects the elimination of Delphi net assets of $3.4 billion and the allocation to Delphi of pension plan assets and obligations and other related adjustments totaling $1.8 billion (see Note 15 to the GM consolidated financial statements). During the fourth quarter of 1999, GM recorded an increase to stockholders' equity of $585 million as a result of a deferred tax asset established for the increased pension and other postretirement benefit liabilities discussed below. In total, the complete separation of Delphi for the year ended December 31, 1999 resulted in a reduction to stockholders' equity of approximately $3.3 billion. The Separation Agreement provided that Delphi's U.S. hourly employees would continue to participate in the defined benefit pension plan for hourly workers and other postretirement benefit plans administered by GM until full separation from GM. Generally, Delphi would assume the pension and other postretirement benefit obligations for U.S. hourly employees who retire after October 1, 1999 and GM would retain pension and other postretirement benefit obligations for U.S. hourly employees who retire on or before October 1, 1999. In connection with the 1999 UAW labor contract (see Note 1 to the GM consolidated financial statements), the October 1, 1999 date for Delphi's assumption of these retirement obligations was extended to January 1, 2000. The allocation of pension and other postretirement benefit obligations between Delphi and GM assumed certain levels of employee retirements prior to October 1, 1999, based on historical experience and conditions surrounding the separation. Prior to the spin-off, Delphi and GM agreed to recalculate the allocation of those liabilities based on the actual level of retirements on or before October 1, 1999, which was subsequently extended to January 1, 2000 in connection with the 1999 UAW labor contract. Accordingly, if and to the extent that greater than the assumed number of employees retire on or before January 1, 2000, Delphi would be required to make a payment to GM. If and to the extent that less than the assumed number of employees retire on or before January 1, 2000, GM would be required to make a payment to Delphi. As of December 31, 1999, the estimate of employee retirements exceeded the amount used in the allocation of GM's and Delphi's pension and other postretirement benefit liabilities at the time of the separation. As a result, GM increased its pension and other postretirement benefit liabilities by $498 million and $1.0 billion, respectively, to reflect the increased estimate of Delphi retirees as of year-end, and recorded a receivable from Delphi for the total $1.5 billion (see Note 12 to the GM consolidated financial statements) in accordance with the terms of the Separation Agreement and the UAW labor contract provision explained above. In addition, interest shall accrue on the outstanding amount until such amount is paid in full, at a rate of 6.75% per annum, as agreed to by both parties. GM received $714 million from Delphi in January 2000 related to this outstanding receivable balance. The finalization of the amount receivable from Delphi will occur in 2000, at which time an adjustment will be recorded. GM does not anticipate that the finalization of these retirement obligations will have a significant effect on its financial position. NOTE 3. Competitiveness Studies GM periodically evaluates the carrying value of long-lived assets to be held and used, when events and circumstances warrant such review. These evaluations and reviews are generally done in conjunction with the annual business planning cycle. II-39 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 3. Competitiveness Studies (concluded) Based on the results of these reviews, GM did not record any pre-tax charges against income in 1999. In 1998 and 1997, GM recorded pre-tax charges against income totaling $224 million ($228 million after-tax, or $0.34 per share of $1-2/3 par value common stock) and $5.1 billion ($3.2 billion after-tax, or $4.36 per share of $1-2/3 par value common stock), respectively. Following are the pre-tax components of the charges: Years Ended December 31, ------------------------ 1998 1997 ---- ---- (Dollars in Millions) Underperforming assets, including both vehicle and component-manufacturing assets $122 $2,941 Capacity reductions and employee separation programs 102 1,318 Other - 803 ----- ------ Total $224 $5,062 === ===== In 1998, the pre-tax charges were comprised of $105 million ($80 million after-tax) for GMNA, $82 million ($51 million after-tax) for GMLAAM, and $37 million ($97 million after-tax) for GMAP. Overall, these charges had the effect of increasing 1998 cost of sales, depreciation and amortization, and other expenses by $92 million, $67 million, and $65 million, respectively. In 1997, the pre-tax charges were comprised of $3.8 billion ($2.4 billion after-tax) for GMNA, $848 million ($488 million after-tax) for GME, $174 million ($170 million after-tax) for GMAP, and $205 million ($128 million after-tax) for GM Automotive, Communications Services, and Other Operations' Other segment. These charges reduced 1997 net sales and revenues by $548 million and increased cost of sales, depreciation and amortization, and other expenses by $1.4 billion, $3.0 billion, and $72 million, respectively. Amounts related to capacity reduction and other expenses that were recorded in 1998 and 1997 that still remain as of December 31, 1999 total $795 million. Going forward, GM's future cash requirements relating to the 1998 and 1997 charges are expected to occur primarily over the next five years, with anticipated spending of approximately 61% in 2000 and 15% in 2001. In 1998, the amount included for underperforming assets represents charges recorded pursuant to GM's policy for the valuation of long-lived assets. GM re-evaluated the carrying values of its long-lived assets during its annual business planning cycle. This re-evaluation was performed using product specific cash flow information. As a result, the carrying values of certain tooling and other property, plant, and equipment was determined to be impaired as the separately identifiable, anticipated, undiscounted future cash flows from such assets were less than their respective carrying values. The resulting pre-tax impairment charges represented the amount by which the carrying values of such assets exceeded their respective fair market values. The amount included for employee separation programs represents voluntary early retirement and other separation programs affecting approximately 3,300 and 1,150, for GMLAAM and employees involved in the restructuring of the U.S. sales and service field organizations, respectively. In 1997, the amount included for underperforming assets, principally tooling, property, plant, and equipment, and investments in joint ventures, represents charges recorded pursuant to GM's policy for the valuation of long-lived assets. The amount included for capacity reductions represents postemployment benefits payable to employees, pursuant to contractual agreements and costs associated with the disposal of assets at facilities subject to capacity reductions. This affects approximately 10,000 employees at GMNA's Buick City Assembly and V-6 Powertrain plants in Flint, Michigan; Detroit Truck Assembly in Detroit, Michigan; and certain GME facilities. Pursuant to some of these actions, additional charges of $74 million ($44 million after-tax) related to work schedule modifications at Opel Belgium were recorded during the second quarter of 1998. The amount included as other primarily represents losses on contracts associated with pricing pressures on used vehicles and the related effect on GM's retail-lease commitments. These pricing pressures are primarily a result of increased industry sales incentives on new vehicles. In connection with the 1997 evaluation of long-lived assets, GM reviewed its remaining previously recorded reserve for plant closings and reclassified the reserve to the consolidated balance sheet accounts that reflected the nature of the specified reserve components, primarily the accrual for postemployment benefit costs. Such accrual for postemployment benefit costs, together with certain postemployment benefit costs provided in connection with the 1997 Competitiveness Studies, were adjusted in 1999. Refer to Note 4 to the GM consolidated financial statements for further details. II-40 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 4. 1999 Adjustment of Postemployment Benefit Costs In the past, GM recorded 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. As of December 31, 1998, the total of these liabilities represented approximately 5,500 employees and totaled approximately $1.3 billion. 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. There were four factors that occurred in 1999 which significantly changed the assumptions previously used in measuring these liabilities: a stronger than expected U.S. vehicle market; a renewed and strengthened relationship between GM and the UAW; higher than expected levels of attrition at Delphi following the 1999 separation of Delphi from GM; and changes to the National Labor Agreement between GM and the UAW, which was ratified in October 1999. GM's redeployment assumptions (forecast of excess U.S. hourly employees) are used to evaluate the postemployment benefits liabilities. These assumptions are largely dependent on its forecast for U.S. vehicle production. Due to the unanticipated sustained strength in the U.S. economy, which resulted in 17.4 million units produced in the U.S. in 1999, GM increased its 1999 production, which created unanticipated demand for U.S. hourly employees. GM's relationship with the UAW is also a key factor in determining redeployment assumptions. On May 28, 1999, GM successfully completed the separation of Delphi and, subsequently, in October 1999 negotiated a new national labor agreement with the UAW, without any work stoppage. The Delphi separation from GM also had a significant impact on GM's redeployment assumptions. The separation of Delphi resulted in approximately 14,000 Delphi U.S. hourly employees electing retirement in order to take advantage of provisions allowing them to retire under GM's retirement program until January 1, 2000. The high level of retirements created a shortage of hourly employees at Delphi which allowed GM to place excess employees from its closed plants into positions at Delphi plants, and limited the number of Delphi employees who could elect to return to open positions at GM. The 1999 UAW-GM National Agreement, ratified in October 1999, changed GM's ability to place excess employees from closed plants into open positions at other plants. This change has enabled GM to place workers from closed plants much more quickly than GM management had expected and more quickly than past experience. As a result of these factors, in the fourth quarter of 1999, GM reversed postemployment benefits liabilities for employees at closed plants through an adjustment to cost of sales totaling approximately $892 million ($553 million after-tax, or $0.84 earnings per share of $1-2/3 par value common stock). The 1999 adjustment of postemployment benefit costs reflects the decrease in the number of excess employees at December 31, 1999, as compared with December 31, 1998, as well as a shortened duration of benefit payments based on current redeployment assumptions. The remaining liability for postemployment benefits as of December 31, 1999 totals approximately $295 million, representing approximately 2,700 employees, of which approximately $222 million is expected to be paid out in cash over the next three years. The following table summarizes the activity from December 31, 1998 through December 31, 1999 for this liability (dollar amounts in 000's):
December 31, 1998 1999 Activity December 31, 1999 ----------------- ------------- ----------------- Closed Excess Interest Excess Plant Employees Balance Spending Accretion Adjustment Balance Employees ----- --------- ------- ----------------------------- ----------------- Buick City/ Flint V-6 (1) 2,123 $537,005 $(55,945) $29,378 $(460,219) $50,219 403 Kalamazoo 1,254 228,602 (44,923) 12,133 (152,348) 43,464 459 Flint V-8 876 223,516 (30,106) 11,450 (154,201) 50,659 659 Van Nuys 396 156,298 (17,425) 7,934 (50,548) 96,259 366 Tarrytown 79 29,803 (3,351) 1,526 (22,192) 5,786 61 Framingham 99 20,826 (1,689) 1,150 (3,795) 16,492 91 Danville 47 18,091 (1,627) 900 (13,710) 3,654 16 Other 658 72,925 (12,768) 3,235 (35,092) 28,300 615 ------ ---------- --------- ------- -------- -------- ----- Total 5,532 $1,287,066 $(167,834) $67,706 $(892,105) $294,833 2,670 ===== ========= ======= ====== ======= ======= =====
(1)The reduction in excess employees at the Buick City assembly and Flint V-6 engine plants was a result of redeployment to other GM and Delphi plants (1,239) and retirement (481). II-41 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 5. Marketable and Other Securities Marketable securities held by GM are classified as available-for-sale, except for certain mortgage-related securities of GMAC, which are classified as trading securities. Unrealized gains and losses, net of related income taxes, for available-for-sale 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. Automotive, Communications Services, and Other Operations - --------------------------------------------------------- Investments in marketable securities were as follows (in millions): December 31, 1999 -------------------------------------- Fair Unrealized Unrealized Cost Value Gains Losses ---- ----- ----- ------ Type of Security Bonds, notes, and other securities United States government and governmental agencies, and authorities $533 $528 $- $5 States, municipalities, and political subdivisions 21 21 - - Corporate debt securities and other 1,154 1,149 1 6 ----- ----- - --- Total marketable securities $1,708 $1,698 $1 $11 ===== ===== = == December 31, 1998 -------------------------------------- Fair Unrealized Unrealized Cost Value Gains Losses ---- ----- ----- ------ Type of Security Bonds, notes, and other securities United States government and governmental agencies, and authorities $286 $286 $ - $ - States, municipalities, and political subdivisions 11 11 - - Corporate debt securities and other 98 105 7 - ---- --- - -- Total marketable securities $395 $402 $7 $ - === === = == Debt securities totaling $1.1 billion mature within one year and $590 million mature after one through five years. Proceeds from sales of marketable securities totaled $2.0 billion in 1999, $4.4 billion in 1998, and $10.9 billion in 1997. The gross gains related to sales of marketable securities were $21 million, $17 million, and $121 million in 1999, 1998, and 1997, respectively. The gross losses related to sales of marketable securities were $6 million, $11 million, and $51 million in 1999, 1998, and 1997, respectively. Other securities classified as cash equivalents, which consisted primarily of commercial paper, repurchase agreements and certificates of deposit, were $3.4 billion and $9.2 billion at December 31, 1999 and 1998, respectively. Financing and Insurance Operations - ---------------------------------- Investments in securities were as follows (in millions): December 31, 1999 -------------------------------------- Fair Unrealized Unrealized Cost Value Gains Losses ---- ----- ----- ------ Type of Security Bonds, notes, and other securities United States government and governmental agencies, and authorities $488 $476 $- $12 States, municipalities, and political subdivisions 1,534 1,540 47 41 Mortgage-backed securities 480 453 10 37 Corporate debt securities and other 2,515 2,491 39 63 ----- ----- -- --- Total debt securities available-for-sale 5,017 4,960 96 153 Mortgage-backed securities held for trading purposes 2,889 2,889 - - ----- ----- ---- ----- Total debt securities 7,906 7,849 96 153 Equity securities 685 1,261 634 58 ------ ----- --- ---- Total investment in securities $8,591 $9,110 $730 $211 ===== ===== === === II-42 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 5. Marketable and Other Securities (concluded) December 31, 1998 -------------------------------------- Fair Unrealized Unrealized Cost Value Gains Losses ---- ----- ----- ------ Type of Security Bonds, notes, and other securities United States government and governmental agencies, and authorities $445 $456 $12 $1 States, municipalities, and political subdivisions 1,495 1,600 117 12 Mortgage-backed securities 415 383 6 38 Corporate debt securities and other 1,895 1,926 66 35 ----- ----- ---- -- Total debt securities available-for-sale 4,250 4,365 201 86 Mortgage-backed securities held for trading purposes 3,173 3,173 - - ----- ----- ----- ---- Total debt securities 7,423 7,538 201 86 Equity securities 779 1,210 534 103 ------ ----- --- --- Total investment in securities $8,202 $8,748 $735 $189 ===== ===== === === Debt securities totaling $940 million mature within one year, $1.5 billion mature after one through five years, $1.1 billion mature after five years through 10 years, and $4.3 billion mature after 10 years. Proceeds from sales of marketable securities totaled $2.9 billion in 1999, $3.6 billion in 1998, and $2.7 billion in 1997. The gross gains related to sales of marketable securities were $292 million, $218 million, and $176 million in 1999, 1998, and 1997, respectively. The gross losses related to sales of marketable securities were $126 million, $49 million, and $45 million in 1999, 1998, and 1997, respectively. Other securities classified as cash equivalents, which consisted primarily of commercial paper, repurchase agreements, and certificates of deposit, were $119 million and $155 million at December 31, 1999 and 1998, respectively. NOTE 6. Finance Receivables - Net Finance receivables - net included the following (in millions): December 31, -------------------- 1999 1998 ---- ---- U.S. Retail $35,608 $33,321 Wholesale 17,717 17,722 Commercial 2,383 71 Leasing and lease financing 627 632 Term loans to dealers and others 8,774 4,853 ------ ------ Total U.S. 65,109 56,599 ------ ------ Canada, Mexico, and Other International Retail 10,428 9,337 Wholesale 6,270 6,668 Commercial 1,167 - Leasing and lease financing 2,054 2,023 Term loans to dealers and others 866 857 ------ ------ Total Canada, Mexico, and Other International 20,785 18,885 ------ ------ Total finance receivables 85,894 75,484 Less- Unearned income (4,153) (4,027) Allowance for financing losses (1,114) (1,021) ------ ------ Total finance receivables - net $80,627 $70,436 ====== ====== The aggregate amount of total finance receivables maturing in each of the five years following December 31, 1999 is as follows: 2000-$46.1 billion; 2001-$15.5 billion; 2002-$13.3 billion; 2003-$6.4 billion; 2004-$2.9 billion; and 2005 and thereafter-$1.7 billion. II-43 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 6. Finance Receivables - Net (concluded) GMAC participates in various sales of receivables programs and has sold retail finance receivables through special purpose subsidiaries with principal aggregating $5.1 billion in 1999 and $1.6 billion in 1998. These subsidiaries generally retain a subordinated investment of no greater than 7.0% of the total receivables pool and market the remaining portion. Pre-tax gains relating to such sales amounted to $64 million in 1999 and $31 million in 1998. GMAC's sold retail finance receivables servicing portfolio amounted to $5.6 billion and $4.0 billion at December 31, 1999 and 1998, respectively. GMAC has sold wholesale receivables on a revolving basis resulting in decreases in wholesale outstandings of $8.4 billion and $3.3 billion at December 31, 1999 and 1998, respectively. GMAC is committed to sell eligible wholesale receivables arising in certain dealer accounts. GMAC's interest-only strip receivables cash flows, cash deposits, and other related amounts are generally restricted assets and subject to limited recourse provisions. NOTE 7. Inventories Inventories included the following for Automotive, Communications Services, and Other Operations (in millions): December 31, ---------------------- 1999 1998 --------- --------- Productive material, work in process, and supplies $5,505 $5,377 Finished product, service parts, etc. 7,023 6,962 ------- ------- Total inventories at FIFO 12,528 12,339 Less LIFO allowance 1,890 1,902 ------- ------- Total inventories (less allowances) $10,638 $10,437 ====== ====== Inventories are stated generally at cost, which is not in excess of market. The cost of substantially all U.S. inventories other than the inventories of Saturn Corporation (Saturn) and Hughes is determined by the last-in, first-out (LIFO) method. The cost of non-U.S., Saturn and Hughes inventories is determined generally by either the first-in, first-out (FIFO) or average cost methods. NOTE 8. 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. Automotive, Communications Services, and Other Operations - --------------------------------------------------------- Equipment on operating leases and other assets was as follows (in millions): December 31, ------------ 1999 1998 ---- ---- Equipment on operating leases $10,754 $9,064 Less accumulated depreciation (1,099) (935) ------ ------ Net book value $9,655 $8,129 ===== ===== Current $5,744 $4,954 Noncurrent (Note 12) 3,911 3,175 ----- ----- Net book value $9,655 $8,129 ===== ===== Financing and Insurance Operations - ---------------------------------- Equipment on operating leases included in investment in leases and other receivables was as follows (in millions): December 31, --------------------- 1999 1998 ---- ---- Equipment on operating leases $41,522 $35,952 Less accumulated depreciation (8,336) (6,965) ------ ------ Net book value $33,186 $28,987 ====== ====== The lease payments to be received related to equipment on operating leases maturing in each of the five years following December 31, 1999 are as follows: Automotive, Communications Services, and Other Operations - 2000-$2.2 billion; 2001-$626 million; 2002-$575 million; 2003-$539 million; and 2004-$503 million; Financing and Insurance Operations - 2000-$6.8 billion; 2001-$4.6 billion; 2002-$2.0 billion; 2003-$200 million; and 2004-$27 million. II-44 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 9. Income Taxes Income from continuing operations before income taxes and minority interests included the following (in millions): Years Ended December 31, ---------------------------- 1999 1998 1997 ---- ---- ---- U.S. income $4,156 $1,783 $3,536 Foreign income 4,891 3,161 4,033 ----- ----- ----- Total $9,047 $4,944 $7,569 ===== ===== ===== The provision for income taxes was estimated as follows (in millions): Years Ended December 31, ---------------------------- 1999 1998 1997 ---- ---- ---- Income taxes estimated to be payable currently U.S. federal $156 $83 $458 Foreign 1,368 1,952 1,590 U.S. state and local 308 295 166 ------ ------ ------ Total payable currently 1,832 2,330 2,214 ----- ----- ----- Deferred income tax expense (credit) - net U.S. federal 1,026 373 (552) Foreign 244 (852) (349) U.S. state and local 34 (196) (261) ------ --- ------ Total deferred 1,304 (675) (1,162) ----- --- ----- Investment tax credits (18) (19) (27) ------- ------- ------- Total income taxes $3,118 $1,636 $1,025 ===== ===== ===== 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 invested. Taxes have not been provided on foreign subsidiaries' earnings, which are deemed essentially permanently reinvested, of $13.2 billion at December 31, 1999 and $9.8 billion at December 31, 1998. 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 (in millions): Years Ended December 31, ---------------------------- 1999 1998 1997 ---- ---- ---- Tax at U.S. federal statutory income tax rate $3,166 $1,730 $2,649 Hughes Defense spin-off - - (1,494) Foreign rates other than 35% (109) 1 (154) Taxes on unremitted earnings of subsidiaries 138 92 73 Tax credits (207) (203) (161) Subsidiary settlement of affirmative claim with IRS - (92) - Other adjustments 130 108 112 ----- ----- ----- Total income tax $3,118 $1,636 $1,025 ===== ===== ===== Deferred income tax assets and liabilities for 1999 and 1998 reflect the impact of temporary differences between amounts of assets and liabilities for financial reporting purposes and the bases of such assets and liabilities as measured by tax laws. The net deferred tax asset in the U.S. was $16.1 billion and $17.9 billion at December 31, 1999 and 1998, respectively. II-45 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 9. Income Taxes (concluded) Temporary differences and carryforwards that gave rise to deferred tax assets and liabilities included the following (in millions): December 31, ------------- 1999 1998 ---- ---- Deferred Tax Deferred Tax ------------ ------------ Assets Liabilities Assets Liabilities ------ ----------- ------- ----------- Postretirement benefits other than pensions $14,351 $ - $14,560 $ - Minimum pension liability adjustment 897 - 3,054 - Employee benefit plans 2,292 7,596 1,063 5,816 Policy and warranty reserves 2,471 - 2,534 - Sales and product reserves 2,587 - 2,176 - Profits on long-term contracts 105 213 146 156 Alternative minimum tax credit carryforwards 845 - 690 - Depreciation and amortization expense 577 3,696 594 3,263 Capitalized research and experimentation 358 - 82 - U.S. state net operating loss carryforwards 529 - 559 - Financing losses 424 - 407 - Tax credit carryforwards 1,452 - 879 - Lease transactions - 3,844 - 3,624 Tax on unremitted profits - 225 - 330 Other U.S. 6,189 3,811 5,461 2,850 Miscellaneous foreign 3,233 887 2,763 922 ------- ------- ------- ------- Subtotal 36,310 20,272 34,968 16,961 Valuation allowances (789) - (607) - ------- ------- ------- ------- Total deferred taxes $35,521 $20,272 $34,361 $16,961 ====== ====== ====== ====== Realization of the net deferred tax assets is dependent on future reversals of existing taxable temporary differences and adequate future taxable income, exclusive of reversing temporary differences and carryforwards. Although realization is not assured, management believes that it is more likely than not that the net deferred tax assets will be realized. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if actual future income taxes are lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable temporary differences. The alternative minimum tax credit can be carried forward indefinitely. The U.S. state net operating loss carryforwards will expire in the years 2000 - 2014 and 2018 - 2019 if not used; however, a substantial portion will not expire until after the year 2004. The other tax credit carryforwards will expire in the years 2004, 2010 - 2012, and 2018 - 2019 if not used. NOTE 10. Property - Net Property - net included the following for Automotive, Communications Services, and Other Operations (in millions): Estimated December 31, Useful ---------------- Lives (Years) 1999 1998 ------------- ---- ---- Land - $751 $714 Land improvements 7-30 1,682 1,709 Leasehold improvements - less amortization 2-10 225 207 Buildings 29-40 11,779 11,425 Machinery and equipment 3-30 39,650 39,914 Furniture and office equipment 3-20 1,092 925 Capitalized leases 5-40 811 1,026 Construction in progress - 3,787 3,645 ------- ------- Real estate, plants, and equipment 59,777 59,565 Less accumulated depreciation (34,363) (34,641) ------ ------ Real estate, plants, and equipment - net 25,414 24,924 Special tools - net 7,365 7,298 ------- ------- Total property - net $32,779 $32,222 ====== ====== II-46 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 10. Property - Net (concluded) Financing and Insurance Operations had net property of $496 million and $386 million recorded in other assets at December 31, 1999 and 1998, respectively. NOTE 11. Intangible Assets - Net Intangible assets - net included the following for Automotive, Communications Services, and Other Operations (in millions): December 31, ------------------ 1999 1998 ---- ---- Pensions $713 $6,434 Intangible assets relating to acquisition of HAC 409 427 Goodwill relating to all other acquisitions 7,405 3,133 ----- ------ Total intangible assets - net $8,527 $9,994 ===== ===== Intangible assets related to pensions decreased due to the hourly pension plan becoming fully funded in 1999 (see Note 15 to the GM consolidated financial statements). Intangible assets relating to the acquisition of Hughes Aircraft Company (HAC) are applicable to Hughes. Such intangible assets relate to patents and related technology and other intangible assets that were originally recorded in 1985. Goodwill relating to all other acquisitions includes approximately $3.1 billion associated with Hughes' 1997 merger with, and additional 1998 investment in, PanAmSat Corporation as well as approximately $3.5 billion associated with Hughes' acquisitions of PRIMESTAR, Tempo Satellite assets, United States Satellite Broadcasting Company, Inc. (USSB), and Galaxy Brazil in 1999. Financing and Insurance Operations had net intangible assets of $2.9 billion and $855 million recorded in other assets at December 31, 1999 and 1998, respectively. This increase primarily relates to the acquisition of the asset-based lending and factoring business unit of The Bank of New York in 1999. NOTE 12. Other Assets Automotive, Communications Services, and Other Operations - --------------------------------------------------------- Other assets included the following (in millions): December 31, -------------------- 1999 1998 ---- ---- Equipment on operating leases - noncurrent (Note 8) $3,911 $3,175 Notes receivable from Delphi (Note 2) 1,538 3,141 Investments in equity securities (1) 1,970 1,088 U.S. prepaid pension assets (Note 15) 15,267 5,903 Deferred charges 833 1,579 Other 1,839 1,176 ------ ------ Total other assets $25,358 $16,062 ====== ====== - ---------------- (1)Amounts represent 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 greater than one year. Balances include historical costs of $1.3 billion and $989 million with unrealized gains of $687 million and $109 million and unrealized losses of $36 million and $10 million at December 31, 1999 and 1998, respectively. II-47 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 12. Other Assets (concluded) Financing and Insurance Operations - ---------------------------------- Other assets included the following (in millions): December 31, -------------------- 1999 1998 ---- ---- Mortgage servicing rights $3,422 $2,435 Real estate mortgage - held for sale 5,678 7,970 - held for investment 1,497 1,297 - lending receivables 1,801 2,064 Other mortgage - related assets 1,094 723 Receivables purchased from factored clients 765 - Due and deferred from receivables sales 742 454 Rental car buybacks 712 658 Intangible assets 2,898 855 Other 2,703 2,694 ------ ------ Total other assets $21,312 $19,150 ====== ====== NOTE 13. 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 (in millions): December 31, -------------------- 1999 1998 ---- ---- Warranties, dealer and customer allowances, claims, and discounts $15,284 $14,634 Deferred revenue 9,504 8,548 Payrolls and employee benefits (excludes postemployment) 5,211 6,436 Unpaid losses under self-insurance programs 1,923 1,774 Taxes, other than income taxes 1,084 942 Interest 1,542 1,227 Income taxes 1,006 368 Deferred income taxes 2,926 2,635 Postemployment benefits 1,802 3,110 Other 9,998 8,681 ------ ------ Total accrued expenses, other liabilities, and deferred income taxes $50,280 $48,355 ====== ====== Financing and Insurance Operations - ---------------------------------- Other liabilities and deferred income taxes included the following (in millions): December 31, --------------------- 1999 1998 ---- ---- Unpaid insurance losses, loss adjustment expenses, and unearned insurance premiums $3,811 $3,918 Postemployment benefits 722 704 Income taxes 439 552 Deferred income taxes 3,730 2,910 Interest 1,602 1,276 Other 978 644 ------ ------ Total other liabilities and deferred income taxes $11,282 $10,004 ====== ====== II-48 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 14. Long-Term Debt and Loans Payable Automotive, Communications Services, and Other Operations - --------------------------------------------------------- Long-term debt and loans payable were as follows (in millions): December 31, Weighted-Average ---------------- Interest Rate(1) 1999 1998 ---------------- ---- ---- Long-term debt and loans payable Payable within one year Current portion of long-term debt 6.3% $681 $256 Commercial paper (2) 5.8% 405 381 All other (2) 4.8% 905 567 Payable beyond one year 2000 - - 759 2001 9.0% 438 419 2002 4.7% 848 36 2003 4.9% 603 595 2004 1.3% 510 12 2005 and after 10.8% 5,045 5,314 Unamortized discount (29) (17) ----- ----- Total long-term debt and loans payable $9,406 $8,322 ===== ===== - ---------------- (1) The 1999 weighted-average interest rate for commercial paper includes the impact of interest rate swap agreements. (2) The 1998 weighted-average interest rate for commercial paper and other short-term borrowings was 5.7% and 8.2%, respectively. Amounts payable beyond one year after consideration of foreign currency swaps at December 31, 1999 included $742 million in currencies other than the U.S. Dollar, primarily the Brazilian Real ($152 million), the Canadian Dollar ($60 million), the Swiss Franc ($12 million), and the Japanese Yen ($488 million). At December 31, 1999 and 1998, long-term debt and loans payable for Automotive, Communications Services, and Other Operations included $7.4 billion and $7.2 billion, respectively, of obligations with fixed interest rates and $2.0 billion and $1.1 billion, respectively, of obligations with variable interest rates (predominantly based on the London Interbank Offering Rate - i.e., LIBOR), after considering the impact of interest rate swap agreements. To achieve its desired balance, between fixed and variable rate debt, within prescribed limits, GM has entered into interest rate swap and cap agreements. The notional amounts of such agreements as of December 31, 1999 for Automotive, Communications Services, and Other Operations were approximately $600 million ($400 million pay variable and $200 million pay fixed) and $100 million, respectively. The notional amounts of such agreements as of December 31, 1998 were approximately $1.8 billion ($600 million pay variable and $1.2 billion pay fixed), and $100 million, respectively. GM and its subsidiaries maintain substantial bank lines of credit with various banks that totaled $9.6 billion at December 31, 1999, of which $3.9 billion represented short-term credit facilities and $5.7 billion represented long-term credit facilities. At December 31, 1998, bank lines of credit totaled $14.5 billion, of which $6.7 billion represented short-term credit facilities and $7.8 billion represented long-term credit facilities. The unused short-term and long-term portions of the credit lines totaled $3.5 billion and $4.8 billion at December 31, 1999, compared with $6.2 billion and $7.2 billion at December 31, 1998. Certain bank lines of credit contain covenants with which the Corporation and applicable subsidiaries were in compliance during the year ended December 31, 1999. II-49 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 14. Long-Term Debt and Loans Payable (concluded) Financing and Insurance Operations - ----------------------------------- Debt was as follows (in millions): December 31, Weighted-Average ---------------- Interest Rate(1) 1999 1998 ---------------- ---- ---- Debt Payable within one year Current portion of debt 6.6% $14,996 $12,701 Commercial paper (2) 5.8% 33,229 34,487 All other (2) 4.6% 18,727 15,208 Payable beyond one year 2000 - - 13,154 2001 6.0% 16,854 10,322 2002 5.7% 15,100 8,561 2003 6.1% 8,786 7,919 2004 6.6% 5,550 1,208 2005 and after 7.4% 9,662 4,864 Unamortized discount (622) (671) --------- --------- Total debt $122,282 $107,753 ======= ======= - ---------------- (1) The 1999 weighted-average interest rate for commercial paper includes the impact of interest rate swap agreements. (2) The 1998 weighted-average interest rate for commercial paper and other short-term borrowings was 5.3% and 7.5%, respectively. Amounts payable beyond one year after consideration of foreign currency swaps at December 31, 1999 included $10.3 billion in currencies other than the U.S. Dollar, primarily the Canadian Dollar ($5.5 billion), the Euro ($1.9 billion), the U.K. Pound Sterling ($1.5 billion), and the Australian Dollar ($1.0 billion). At December 31, 1999 and 1998, debt for Financing and Insurance Operations included $78.3 billion and $72.8 billion, respectively, of obligations with fixed interest rates and $44.0 billion and $35.0 billion, respectively, of obligations with variable interest rates (predominantly based on the London Interbank Offering Rate - i.e., LIBOR), after considering the impact of interest rate swap agreements. To achieve its desired balance, between fixed and variable rate debt, within prescribed limits, GM has entered into interest rate swap, cap, floor, and option agreements. The notional amounts of such agreements as of December 31, 1999 for financing and insurance operations were approximately $26.1 billion ($18.1 billion pay variable and $8.0 billion pay fixed), $483 million, $93 million, and $0, respectively. The notional amounts for interest rate swap, cap, floor, and option agreements as of December 31, 1998, were approximately $13.2 billion ($9.5 billion pay variable and $3.7 billion pay fixed), $400 million, $1.0 billion, and $1.0 billion, respectively. GM's financing and insurance subsidiaries maintain substantial bank lines of credit with various banks that totaled $46.9 billion at December 31, 1999, of which $16.8 billion represented short-term credit facilities and $30.1 billion represented long-term credit facilities. At December 31, 1998, bank lines of credit totaled $44.3 billion, of which $17.3 billion represented short-term credit facilities and $27.0 billion represented long-term credit facilities. The unused short-term and long-term portions of the credit lines totaled $6.3 billion and $29.3 billion at December 31, 1999 compared with $7.5 billion and $25.7 billion at December 31, 1998. Certain bank lines of credit contain covenants with which the Corporation and applicable subsidiaries were in compliance during the year ended December 31, 1999. II-50 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 15. Pensions and Other Postretirement Benefits GM has a number of defined benefit pension plans covering substantially all 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 salary history. GM also has certain nonqualified pension plans covering executives that are based on targeted wage replacement percentages and are unfunded. The measurement dates used for the principal U.S. pension plans of the Corporation and Hughes were December 31 and December 1, respectively. For non-U.S. pension plans, the measurement dates were December 1 for Canadian plans and October 1 for other foreign plans. Pension plan assets are primarily invested in U.S. Government obligations, equity and fixed income securities, commingled pension trust funds, insurance contracts, the Corporation's $1-2/3 par value common stock (valued as of the 1999 measurement date at $4.2 million), and EDS common stock (valued as of the 1999 measurement date at $4.7 billion). In March 1995, under the terms of an agreement between the Corporation and the Pension Benefit Guarantee Corporation (PBGC), the Corporation contributed to the GM Hourly-Rate Employees Pension Plan (Hourly Plan) 173.2 million shares of Class E common stock valued at $6.3 billion on such date. Subsequent to the split-off of EDS, the Class E stock held by the Hourly Plan was exchanged for EDS common stock. The trustees for the Hourly Plan have, from time-to-time, sold shares of former Class E common stock and EDS common stock, with the effect of reducing the number of shares of EDS common stock held by the Hourly Plan. 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 $794 million in 1999, $1.1 billion in 1998, and $1.5 billion in 1997. In addition, GM made pension contributions to all other U.S. plans of $67 million, $51 million, and $35 million in 1999, 1998, and 1997, 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 VEBA trust are invested primarily in fixed income securities. 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. II-51 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 15. Pensions and Other Postretirement Benefits (continued) U.S. Plans Non-U.S. Plans Pension Benefits Pension Benefits Other Benefits ---------------- ---------------- --------------- 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- Change in benefit obligations (in millions) Benefit obligation at beginning of year $76,963 $73,570 $10,283 $9,824 $47,346 $44,294 Service cost 1,007 1,270 202 214 502 663 Interest cost 4,722 4,974 604 643 2,802 3,113 Plan participants' contributions 37 43 29 28 41 31 Amendments 5,326 208 381 81 4 - Actuarial (gains)/losses (4,565) 1,973 (700) 92 32 1,622 Benefits paid (5,636) (5,196) (391) (349) (2,368) (2,287) Divestitures-Delphi Spin-Off (4,652) - - - (3,590) - Curtailment charges and other 67 121 (680) (250) (86) (90) ------ ------ ---- ------ ------- ------ Benefit obligation at end of year 73,269 76,963 9,728 10,283 44,683 47,346 ------ ------ ----- ------ ------ ------ Change in plan assets Fair value of plan assets at beginning of year 75,007 72,280 5,976 6,075 4,574 3,000 Actual return on plan assets 13,582 6,438 965 328 207 249 Employer contributions 861 1,151 566 206 1,970 1,700 Plan participants' contributions 37 43 29 28 - - Benefits paid (5,636) (5,196) (391) (349) (460) (375) Divestitures-Delphi Spin-Off (3,369) - - - - - Settlement charges and other (20) 291 (83) (312) - - ------ ------ ----- ----- ----- ----- Fair value of plan assets at end of year 80,462 75,007 7,062 5,976 6,291 4,574 ------ ------ ----- ----- ----- ----- Funded status 7,193 (1,956) (2,666) (4,307) (38,392) (42,772) Unrecognized actuarial (gain)/loss (2,463) 10,368 586 1,880 1,842 2,209 Unrecognized prior service cost 9,850 7,064 1,048 764 212 (448) Unrecognized transition (asset) obligation (47) (64) 52 48 - - ------ ------ ----- ----- ------- ------- Net amount recognized including discontinued operations 14,533 15,412 $(980) (1,615) (36,338) (41,011) Discontinued operations - 1,635 - - - 4,573 ------ ------ --- ----- ------ ------ Net amount recognized $14,533 $17,047 $(980) $(1,615)$(36,338)$(36,438) ====== ====== === ===== ====== ====== Amounts recognized in the consolidated balance sheets consist of: Prepaid benefit cost $15,267 $5,903 $809 $898 $ - $ - Accrued benefit liability (815) (2,181) (2,612) (3,814) (36,338) (36,438) Intangible asset 13 5,961 700 504 - - Accumulated other comprehensive income 68 7,364 123 797 - - ------ ------ --- ----- ------ ------ Net amount recognized $14,533 $17,047 $(980) $(1,615)$(36,338)$(36,438) ====== ====== === ===== ====== ====== The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $7.3 billion, $6.8 billion, and $3.5 billion, respectively, as of December 31, 1999, and $56.7 billion, $56.0 billion, and $47.8 billion, respectively, as of December 31, 1998.
U.S. Plans Non-U.S. Plans Pension Benefits Pension Benefits Other Benefits ---------------- ---------------- -------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- ---- ----- ---- (in millions) Components of expense Service cost $1,007 $1,270 $1,332 $202 $214 $191 $502 $663 $639 Interest cost 4,722 4,974 5,261 604 643 633 2,802 3,113 3,128 Expected return on plan assets (6,726) (6,815) (6,630) (526) (516) (524) (377) (286) - Amortization of prior service cost 926 1,173 1,170 99 99 99 (104) (116) (116) Amortization of transition asset (37) (44) (85) (17) (17) (20) - - - Recognized net actuarial loss 348 331 308 79 75 60 124 97 72 Discontinued operations (98) (279) (422) - - - - (966)(1,047) Curtailments, settlements, and other 2,351 207 53 22 48 2 - - (2) Discontinued operations (2,251) (130) (18) - - - - - - ----- --- ---- --- --- ----- ----- ---- ---- Net expense $242 $687 $969 $463 $546 $441 $2,947 $2,505 $2,674 ==== === === === === === ===== ===== =====
II-52 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 15. Pensions and Other Postretirement Benefits (concluded)
U.S. Plans Non-U.S. Plans Pension Benefits Pension Benefits Other Benefits ---------------- ---------------- -------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- ---- ----- ---- Weighted-average assumptions Discount rate 7.8% 6.8% 7.0% 7.1% 6.4% 6.8% 7.7% 6.7% 7.2% Expected return on plan assets 10.0% 10.0% 10.0% 9.0% 9.2% 9.2% 8.3% 7.7% - Rate of compensation increase 5.0% 5.0% 5.0% 4.0% 3.5% 4.1% 4.4% 4.4% 4.4%
For measurement purposes, an approximate 8.8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease on a linear basis to 5.0% through 2006 and remain at that level thereafter. A one percentage point increase in the assumed health care trend rate would have increased the Accumulated Projected Benefit Obligation (APBO) by $4.6 billion at December 31, 1999, and increased the aggregate service and interest cost components of non-pension postretirement benefit expense for 1999 by $443 million. A one percentage point decrease would have decreased the APBO by $3.9 billion and decreased the aggregate service and interest cost components of non-pension postretirement benefit expense for 1999 by $368 million. The allocation of pension and other postretirement benefit obligations between Delphi and GM assumed certain levels of employee retirements prior to October 1, 1999, based on historical experience and conditions surrounding the separation (see Note 2 to the GM consolidated financial statements). Prior to the spin-off, Delphi and GM agreed to recalculate the allocation of those liabilities based on the actual level of retirements on or before October 1, 1999, which was subsequently extended to January 1, 2000 in connection with the 1999 UAW labor contract. Accordingly, if and to the extent that greater than the assumed number of employees retire on or before January 1, 2000, Delphi would be required to make a payment to GM. If and to the extent that less than the assumed number of employees retire on or before January 1, 2000, GM would be required to make a payment to Delphi. GM has disclosed in the consolidated financial statements certain amounts associated with estimated future postretirement benefits other than pensions and characterized such amounts as "accumulated postretirement benefit obligations," "liabilities," or "obligations." Notwithstanding the recording of such amounts and the use of these terms, GM does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of GM (other than pensions) represent legally enforceable liabilities of GM. NOTE 16. Commitments and Contingent Matters Commitments GM had the following minimum commitments under noncancelable operating leases having terms in excess of one year primarily for real property: 2000-$565 million; 2001-$488 million; 2002-$423 million; 2003-$396 million; 2004-$306 million; and $1.1 billion in 2005 and thereafter. Certain of the leases contain escalation clauses and renewal or purchase options. Rental expenses under operating leases were $825 million in 1999 and $826 million in 1998 and 1997. GM sponsors a credit card program, entitled the GM Card program, that offers rebates that can be applied against the purchase or lease of GM vehicles. The amount of rebates available to qualified cardholders at December 31, 1999, 1998, and 1997 was $3.7 billion, $3.7 billion, and $3.5 billion, respectively. Provisions for GM Card rebates are recorded as reductions in revenues at the time of vehicle sale. As part of a marketing agreement entered into with America Online, Inc. (AOL) on June 21, 1999, Hughes committed to increase its sales and marketing expenditures over the next three years by approximately $1.5 billion relating to DirecPC/AOL-Plus, DlRECTV, DlRECTV/AOL TV and DirecDuo. On December 10, 1999, GM and Fuji Heavy Industries Ltd. (Fuji) entered into an Agreement of Strategic Alliance (the "Alliance Agreement") in which GM will subscribe for and purchase a number of newly-issued shares of Fuji's voting common stock, par value 50 yen ((Y)50) per share, which shall equal an equity interest in Fuji of 20% on a fully diluted basis, at the time of payment. This investment will be accounted for using the equity method of accounting and Fuji will remain an independent company with GM as its largest shareholder. The transaction is expected to be completed during the second quarter of 2000 at an estimated price of $1.2 billion. This Alliance Agreement will allow GM and Fuji to collaborate in the design, development and manufacturing of cars, trucks, and related technology. II-53 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 16. Commitments and Contingent Matters (continued) Contingent Matters There is a pending grand jury investigation into whether Hughes should be accused of criminal violations of the export control laws arising out of the participation of two of its employees on a committee formed to review the findings of Chinese engineers regarding the failure of a Long March rocket in China in 1996. Hughes is also subject to the authority of the State Department to impose sanctions for non-criminal violations of the Arms Export Control Act. The possible criminal and/or civil sanctions could include fines as well as debarment from various export privileges and participating in government contracts. If Hughes were to enter into a settlement of this matter prior to the closing of The Boeing Company (Boeing) transaction (see Note 27 to the GM consolidated financial statements) that involves a debarment from sales to the U.S. government or a material suspension of Hughes' export licenses or other material limitation on projected business activities of the satellite systems manufacturing businesses, Boeing would not be obligated to complete the purchase of Hughes' satellite systems manufacturing businesses. Hughes does not expect the grand jury investigation or State Department review to result in a material adverse effect upon its business. However, there can be no assurance as to such a favorable outcome. In connection with the 1997 spin-off of Hughes Defense and the subsequent merger with Raytheon, the terms of the merger agreement provided processes for resolving disputes that might arise in connection with post-closing financial adjustments that were also called for by the terms of the merger agreement. These financial adjustments might require a cash payment from Raytheon to Hughes or vice versa. Disputes currently exist regarding the post-closing adjustments which Hughes and Raytheon have proposed to one another and related issues regarding the adequacy of disclosures made by Hughes to Raytheon in the period prior to consummation of the merger. Raytheon and Hughes are now proceeding with the dispute resolution processes as to these matters. It is possible that ultimate resolution of the post-closing financial adjustment and of related disclosure issues may result in Hughes making a payment to Raytheon that would be material to Hughes. However, the amount of any payment that either party might be required to make to the other cannot be determined at this time. Hughes intends to vigorously pursue resolution of the disputes through the arbitration processes, opposing the adjustments proposed by Raytheon, and seeking the payment from Raytheon that Hughes has proposed. General Electric Capital Corporation (GECC) and DIRECTV, Inc. (DIRECTV) entered into a contract on July 31, 1995, in which GECC agreed to establish and manage a private label consumer credit program for consumer purchases of hardware and related DIRECTV programming. Under the contract, GECC also agreed to provide certain related services to DIRECTV, including credit risk scoring, billing, and collections services. DIRECTV agreed to act as a surety for loans complying with the terms of the contract. Hughes guaranteed DIRECTV's performance under the contract. A complaint and counterclaim have been filed by the parties in the U.S. District Court for the District of Connecticut concerning GECC's performance and DIRECTV's obligation to act as a surety. GECC claims damages from DIRECTV in excess of $140 million. DIRECTV is seeking damages from GECC in excess of $45 million. Hughes intends to vigorously contest GECC's allegations and pursue Hughes' own contractual rights and remedies. Hughes does not believe that the litigation will have a material adverse impact on its results of operations or financial position. Pretrial discovery is completed. No specific trial date has been set, but a trial may be held in 2000. Hughes Space and Communications International (HSCI), a wholly owned subsidiary of Hughes Space and Communications Company, has certain contracts with ICO Global Communications Operations (ICO Global) to build the satellites and related components for a global wireless communications system. Hughes owns approximately 2.6% of the equity in ICO's parent company, ICO Global Communications (Holdings) (ICO) (which Hughes has agreed to sell to Boeing as part of the sale of Hughes' satellite systems manufacturing businesses) (see Note 27 to the GM consolidated financial statements). On August 27, 1999, ICO filed for bankruptcy protection under Chapter 11 in U.S. Bankruptcy Court in Wilmington, Delaware. On December 3, 1999, the U.S. Bankruptcy Court in this case granted final approval of debtor-in-possession financing in the amount of $500 million to a group led by Craig McCaw, the Chairman of Teledesic LLC, a company establishing a global broadband Internet-in-the-Sky satellite communications network. In October 1999, McCaw and his group also agreed to provide an additional $700 million in financing upon ICO's emergence from bankruptcy court protection, to the extent that this financing is not provided by other investors. This exit financing is expected to be completed in mid-2000, upon court approval and consummation of the ICO reorganization plan. There can be no assurance when the consummation of the reorganization plan will occur or if ICO will be successful in confirming any plan of reorganization. If it is unable to do so the most likely outcome would be a liquidation proceeding. In the event that liquidation becomes probable, Hughes would expect to record a pre-tax charge to income of up to approximately $350 million. A portion of the purchase price to be paid by Boeing will be placed in escrow under certain circumstances if prior to completing this sale to Boeing, Hughes' contracts with ICO are not assumed by ICO with bankruptcy court approval or new similar contracts are not entered into with bankruptcy court approval. On June 3, 1999, the National Rural Telecommunications Cooperative (NRTC) filed a lawsuit against DIRECTV, Inc. and Hughes Communications Galaxy, Inc. (together "DIRECTV") in the United States District Court for the Central District of California, alleging that DIRECTV has breached the DBS Distribution Agreement (the "DBS Agreement") with the NRTC. The DBS Agreement provides the NRTC with certain rights, in certain specified portions of the United States, with respect to DIRECTV 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 USSB over the other five frequencies at 101 degrees. 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. The NRTC's complaint seeks, in the alternative, the right to distribute former USSB programming on a non-exclusive basis and the recovery of related revenues from the date USSB was acquired by Hughes. II-54 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 16. Commitments and Contingent Matters (concluded) Contingent Matters (concluded) DIRECTV maintains that the NRTC's right under the DBS Agreement is to market and sell the former USSB programming as its agent and is not entitled to the claimed revenues. DIRECTV intends to vigorously defend against the NRTC claims. DIRECTV has also filed a counterclaim against the NRTC seeking a declaration of the parties' rights under the DBS Agreement. On August 26, 1999, the NRTC filed a second lawsuit against DIRECTV in which it alleges that DIRECTV has breached the agreement it has with NRTC. 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. Pegasus Satellite Television, Inc. and Golden Sky Systems, Inc., the two largest NRTC affiliates, filed an action on January 11, 2000 against DIRECTV in United States District Court in Los Angeles. The plaintiffs allege, among other things, that DIRECTV has interfered with their contractual relationship with the NRTC. The plaintiffs plead that their rights and damages are derivative of the rights and claims asserted by the NRTC in its two cases against DIRECTV. The plaintiffs also allege that DIRECTV has interfered with their contractual relationships with manufacturers and distributors by preventing those parties from selling receiving equipment to the plaintiffs' dealers. DIRECTV denies that it has wrongly interfered with any of the plaintiffs' business relationships and will vigorously defend the lawsuit. Although an amount of loss, if any, cannot be estimated at this time, an unfavorable outcome could be reached in the NRTC and Pegasus litigation that could be material to Hughes' results of operations or financial position. In Anderson, et al v. General Motors Corporation, a jury in a Los Angeles Superior Court returned a verdict of $4.9 billion against GM in a product liability lawsuit involving a post-collision fuel fed fire in a 1979 Chevrolet Malibu. In post-trial developments, the trial court has reduced the punitive damages from $4.8 billion to $1.1 billion and has entered an order which stays execution of the judgment pending resolution of all appeals by GM and has released the bond GM had posted for the punitive and compensatory damages (the cost of which was not material to the Corporation). GM continues to pursue its appellate rights, including efforts to secure a new trial and the complete elimination of responsibility to pay any damages in this matter consistent with GM's view that the design of the Chevrolet Malibu was not responsible for plaintiffs' injuries. In connection with GM's disposition of certain businesses (including Delphi), GM has granted the UAW guarantees covering benefits to be provided to certain former U.S. hourly employees of GM who became employees of the disposed businesses. These guarantees have limited terms that do not extend beyond October 2007. In connection with such guarantees relating to certain of Delphi's U.S. hourly employees, GM and Delphi entered into an agreement, the provisions of which are designed to prevent or mitigate the risk that GM's guarantee relating to Delphi's employees would ever be called upon, or, if it is, any payments thereunder by GM would result in the obligation of Delphi to indemnify and hold GM harmless as to such amounts. GM believes that the likelihood it will make payments under any of these various guarantees is remote and that if such payments are made they will not be material to GM's financial position or results of operations. GM is subject to potential liability under government regulations and various claims and legal actions which are pending or may be asserted against them. Some of the pending actions purport to be class actions. The aggregate ultimate liability of GM under these government regulations and under these claims and actions, was not determinable at December 31, 1999. 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. NOTE 17. Preferred Securities of Subsidiary Trusts General Motors - Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts In July 1997, the General Motors Capital Trust D (Series D Trust) issued approximately $79 million of its 8.67% Trust Originated Preferred Securitiessm (TOPrSsm) Series D, (Series D Preferred Securities), in a one-for-one exchange for 3,055,255 of the outstanding GM Series D 7.92% Depositary Shares, each representing one-fourth of a share of GM Series D Preference Stock, $0.10 par value per share. In addition, the General Motors Capital Trust G (Series G Trust) issued approximately $143 million of its 9.87% TOPrS, Series G (Series G Preferred Securities), in a one-for-one exchange for 5,064,489 of the outstanding GM Series G 9.12% Depositary Shares, each representing one-fourth of a share of GM Series G Preference Stock, $0.10 par value per share. II-55 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 17. Preferred Securities of Subsidiary Trusts (concluded) Concurrently with the exchanges and the related purchases by GM from the Series D and Series G Trusts (Trusts) of the common securities of such Trusts, which represent approximately 3% of the total assets of such Trusts, GM issued to the wholly-owned Trusts, as the Series D Trust's sole assets its 8.67% Junior Subordinated Deferrable Interest Debentures, Series D, due July 1, 2012 and as the Series G Trust's sole assets, its 9.87% Junior Subordinated Deferrable Interest Debentures, Series G, due July 1, 2012 (the "Series D Debentures" and "Series G Debentures" or collectively the "Debentures"), having aggregate principal amounts equal to the aggregate stated liquidation amounts of the Series D and Series G Preferred Securities and the related common securities, respectively ($79 million with respect to the Series D Debentures and $131 million with respect to the Series G Debentures). The Series D Debentures are redeemable, in whole or in part, at GM's option on or after August 1, 1999, at a redemption price equal to 100% of the outstanding principal amount of the Series D Debentures plus accrued and unpaid interest. The Series D Preferred Securities will be redeemed upon the maturity or earlier redemption of the Series D Debentures (see Note 27 to the GM consolidated financial statements). The Series G Debentures are redeemable, in whole or in part, at GM's option on or after January 1, 2001, at a redemption price equal to 100% of the outstanding principal amount of the Series G Debentures plus accrued and unpaid interest, or, under certain circumstances, prior to January 1, 2001, at a redemption price equal to 114% of the outstanding principal of the Series G Debentures from the Series G expiration date through December 31, 1997, declining ratably on each January 1 thereafter to 100% on January 1, 2001, plus accrued and unpaid interest. The Series G Preferred Securities will be redeemed upon the maturity or earlier redemption of the Series G Debentures. GM has guaranteed the payment in full to the holders of the Series D and Series G Preferred Securities (collectively the "Preferred Securities") of all distributions and other payments on the Preferred Securities to the extent not paid by the Trusts only if and to the extent that the Trusts have assets. GM has made payments of interest or principal on the related Debentures. These guarantees, when taken together with GM's obligations under the Preferred Securities Guarantees, the Debentures, and the Indentures relating thereto and the obligations under the Declaration of Trust of the Trusts, including the obligations to pay certain costs and expenses of the Trusts, constitute full and unconditional guarantees by GM of each Trust's obligations under its Preferred Securities. - ------------------- sm "Trust Originated Preferred Securities" and "TOPrS" are service trademarks of Merrill Lynch & Co. NOTE 18. Stockholders' Equity The following table presents changes in capital stock for the period from January 1, 1997 to December 31, 1999 (in millions):
Common Stocks ----------------------------------- Total Preference $1-2/3 Capital Stocks(1) par value Class H(2) Class H(3) Stock --------- --------- ---------- ---------- ----- Balance at January 1, 1997 $1 $1,261 $- $10 $1,272 Shares reacquired - (122) - - (122) Shares issued - 17 - - 17 Recapitalization of Class H Common Stock - - 10 (10) - --- ------ --- -- ------ Balance at December 31, 1997 1 1,156 10 - 1,167 Shares reacquired - (75) - - (75) Shares issued - 11 1 - 12 --- ------ --- -- ----- Balance at December 31, 1998 1 1,092 11 - 1,104 Shares reacquired (1) (75)(4) - - (76) Shares issued - 16 3 - 19 -- ----- --- -- ----- Balance at December 31, 1999 $ - $1,033 $14 $ - $1,047 === ===== == == =====
See notes on next page. II-56 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 18. Stockholders' Equity (continued) (1)The following describes the Corporation's preference stocks (in millions except par value, stated value, and per share amounts): Preference Stock, $0.10 par value (authorized 100 shares): - Series B 9-1/8% Preference Stock, represented by Series B 9-1/8% Depositary Shares, liquidation preference $100 per share. - Series D 7.92% Preference Stock, represented by Series D 7.92% Depositary Shares in which the stated value is $25 per share, redeemable at Corporation option on or after August 1, 1999; outstanding at December 31, 1999, one Series D 7.92% Depositaty Share is equivalent to one-fourth of a share of Series D 7.92% Preference Stock (see Note 17 to the GM consolidated financial statements). - Series G 9.12% Preference Stock, represented by Series G 9.12% Depositary Shares in which the stated value is $25 per share, redeemable at Corporation option on or after January 1, 2001; outstanding at December 31, 1999, one Series G 9.12% Depositary Share is equivalent to one-fourth of a share of Series G 9.12% Preference Stock (see Note 17 to the GM consolidated financial statements). - Series H 6.25% Automatically Convertible Preference Stock, stated value $561.875 per share, automatically convertible into GM Class H stock on June 24, 2002. (2) Subsequent to its recapitalization on December 17, 1997. (3) Prior to its recapitalization on December 17, 1997. (4) Includes approximately 8.5 million shares repurchased using a forward contract GM entered into as of December 31, 1999 (see Note 19 to the GM consolidated financial statements). Common Stocks The voting and liquidation rights of $1-2/3 par value common stock are one vote per share and one liquidation unit per share. The voting and liquidation rights of the recapitalized GM Class H common stock are 0.6 votes per share and 0.6 liquidation units per share. The liquidation rights of the $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 $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 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 the Corporation'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 $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 $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. Common Stock Repurchases During 1999, GM used $2.6 billion to acquire approximately 36 million shares of $1-2/3 par value common stock to complete the Corporation's $4.0 billion stock repurchase program announced in February 1998. GM also used approximately $727 million and $13 million to repurchase shares of $1-2/3 par value common stock and GM Class H common stock for certain employee benefit plans, respectively. Preference Stocks On April 5, 1999, approximately 20 million outstanding depositary shares of GM's Series B 9-1/8% Preference Stock were repurchased and retired for approximately $501 million. On June 24, 1999, as part of a strategic alliance with Hughes, AOL invested $1.5 billion in return for approximately 2.7 million shares of GM Series H 6.25% Automatically Convertible Preference Stock, par II-57 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 18. Stockholders' Equity (concluded) value $0.10 per share. This preference stock will automatically convert into GM Class H common stock in three years, based upon a variable conversion factor linked to the GM Class H common stock price at the time of conversion, and accrues quarterly dividends at a rate of 6.25% per year. It may be converted earlier in certain limited circumstances. 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 GM Series H 6.25% Automatically Convertible Preference Stock. Dividends on the Hughes Series A Preferred Stock are payable to GM quarterly at an annual rate of 6.25%. These preferred stock dividends payable to GM will reduce Hughes' earnings used for computation of the Available Separate Consolidated Net Income (Loss) (ASCNI) of Hughes, which will have an effect equivalent to the payment of dividends on the GM Series H 6.25% Automatically Convertible Preference Stock as if those dividends were paid by Hughes. Upon conversion of the GM Series H 6.25% Automatically Convertible Preference Stock into GM Class H common stock, Hughes will redeem the Series A Preferred Stock through a cash payment to GM equal to the fair market value of GM Class H common stock issuable upon the conversion. Simultaneous with GM's receipt of the cash redemption proceeds, GM will 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 ASCNI of Hughes will 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 will increase by the amount of the GM Class H common stock issued. Other Comprehensive Income The changes in the components of other comprehensive income (loss) are reported net of income taxes, as follows (in millions):
Years Ended December 31, --------------------------------------------------------------------------------- 1999 1998 1997 --------------------------- -------------------------- ------------------------- Pre-tax Tax Exp. Net Pre-tax Tax Exp. Net Pre-tax Tax Exp. Net Amount (Credit) Amount Amount (Credit) Amount Amount (Credit) Amount ------ -------- ------ ------ -------- ------ ------ -------- ------ Foreign currency translation adjustments $(1,519) $(575) $(944) $(280) $(1) $(279) $(1,140) $(448) $(692) Unrealized gain (loss) on securities: Unrealized holding gain 998 372 626 38 (14) 52 272 114 158 Reclassification adjustment (171) (60) (111) (115) (40) (75) (118) (41) (77) --- ---- --- --- --- -- --- --- --- Net unrealized gain (loss) 827 312 515 (77) (54) (23) 154 73 81 --- ---- --- --- --- --- --- --- --- Minimum pension liability adjustment 7,980 3,012 4,968 (1,657) (630) (1,027) (906) (334) (572) ----- ----- ----- ----- --- ----- --- --- --- Other comprehensive income (loss) from continuing operations $7,288 $2,749 $4,539 $(2,014) $(685) $(1,329) $(1,892) $(709) $(1,183) ===== ===== ===== ===== === ===== ===== === =====
NOTE 19. Earnings Per Share Attributable to Common Stocks Earnings per share 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 earnings per share attributable to each class of GM common stock considers the impact of potential common shares, unless the inclusion of the potential common shares would have an antidilutive effect. The attribution of earnings to each class of GM common stock was as follows (in millions): Years Ended December 31, ---------------------------- 1999 1998 1997 ---- ---- ---- Earnings (losses) attributable to common stocks $1-2/3 par value Continuing operations $5,592 $2,914 $6,149 Discontinued operations 426 (93) 127 ------ ------ ----- Earnings attributable to $1-2/3 par value $6,018 $2,821 $6,276 ===== ===== ===== Class H (prior to its recapitalization on December 17, 1997) Continuing operations $ - $ - $234 Discontinued operations - - 88 --- --- ---- Earnings attributable to Class H (prior to its recapitalization on December 17, 1997) $ - $ - $322 === === === (Losses) earnings attributable to Class H (subsequent to its recapitalization on December 17, 1997) $(96) $72 $2 == == = II-58 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 19. Earnings Per Share Attributable to Common Stocks (continued) Earnings attributable to $1-2/3 par value common stock for the period represent the earnings attributable to all GM common stocks for the period, reduced by the ASCNI of former Hughes and Hughes for the respective period. Losses attributable to GM Class H common stock for 1999 represent the ASCNI of Hughes. Losses used for computation of the ASCNI of Hughes are based on the separate consolidated net income (loss) of Hughes, excluding the effects of GM purchase accounting adjustments arising from GM's acquisition of HAC which remains after the spin-off of Hughes Defense, 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). The calculated loss used for computation of the ASCNI of Hughes is 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 during 1999 (125 million), 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 419 million during 1999. Upon conversion of the GM Series H 6.25% Automatically Convertible Preference Stock into GM Class H common stock, both the numerator and the denominator used in the computation of ASCNI will increase by the number of shares of the GM Class H common stock issued. Earnings attributable to GM Class H common stock for 1998 represent the ASCNI of Hughes, excluding the effects of GM purchase accounting adjustments arising from GM's acquisition of HAC which remains after the spin-off of Hughes Defense, calculated for such period and multiplied by a fraction, the numerator of which is equal to the weighted-average number of shares of GM Class H common stock outstanding for 1998 (105 million), 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 was 400 million during 1998. Earnings attributable to GM Class H common stock prior to its recapitalization on December 17, 1997 represented the ASCNI of former Hughes. The ASCNI of former Hughes was determined quarterly in amounts equal to the separate consolidated net income of former Hughes for each respective quarter, excluding the effects of purchase accounting adjustments arising at the time of the Corporation's acquisition of HAC, calculated for such period and multiplied by a fraction, the numerator of which was a number equal to the weighted-average number of shares of GM Class H common stock outstanding during the quarter (103 million in the fourth quarter of 1997), and the denominator of which was 400 million during the fourth quarter of 1997. Earnings attributable to GM Class H common stock for the period subsequent to the recapitalization of GM Class H common stock for 1997 represent the ASCNI of Hughes for the period December 18, 1997 through December 31, 1997, excluding the effects of purchase accounting adjustments arising from GM's acquisition of HAC which remains after the spin-off of Hughes Defense, calculated for such period and multiplied by a fraction, the numerator of which was a number equal to the weighted-average number of shares of GM Class H common stock outstanding during the period (104 million), and the denominator of which was 400 million. 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 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. In connection with the PRIMESTAR and USSB transactions (see further discussion in Note 23 to the GM consolidated financial statements), GM contributed to Hughes an amount of cash sufficient to enable Hughes to purchase from GM, for fair value as determined by the GM Board, the number of shares of GM Class H common stock delivered by Hughes. In accordance with the GM Restated Certificate of Incorporation, the GM Class H dividend base was increased to reflect that number of shares. The number of shares issued as part of the PRIMESTAR acquisition and the USSB merger have been included in the calculation of both the numerator and denominator of the fraction described above since the consummation dates of the transactions. II-59 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 19. Earnings Per Share Attributable to Common Stocks (continued) Effective January 1, 1999, 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. Prior to January 1, 1999, there was no dilutive effect resulting from the assumed exercise of stock options, because the exercise of stock options did not affect the GM Class H common stock dividend base (denominator). From time to time, 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. As of December 31, 1999, as part of GM's $1-2/3 par value common stock repurchase program, the Corporation entered into a forward contract to purchase approximately 8.5 million shares of its $1-2/3 par value common stock at a specified price. This forward contract is structured to give GM the option of settling the contract in either cash or net shares. Since the forward contract gives GM this settlement option, it is considered an equity instrument rather than a derivative instrument for accounting purposes. Changes in fair value of the forward contract are not recorded and final settlement is recorded in equity. Upon entering into the contract, GM immediately reduced its common shares outstanding used to calculate both basic and diluted EPS. The net gain or loss on the forward contract is included in the calculation of diluted EPS. II-60 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 19. Earnings Per Share Attributable to Common Stocks (concluded) The reconciliation of the amounts used in the basic and diluted earnings per share computations for income from continuing operations was as follows (in millions except per share amounts):
Class H Common Stock - Class H Common Stock - Prior to its recapitalization Subsequent to its recapitalization $1-2/3 Par Value Common Stock on December 17,1997 on December 17, 1997 ----------------------------- ------------------------------ ----------------------------------- Per Share Per Share Per Share Income Shares Amount ASCNI Shares Amount ASCNI Shares Amount ------ ------ ------ ----- ------ ------ ----- ------ ------ Year ended December 31, 1999 Income (loss) from continuing operations $5,657 $(81) Less:Dividends on preference stocks 65 15 ----- -- Basic EPS Income (loss) from continuing operations attributable to common stocks 5,592 643 $8.70 (96) 125 $(0.77) ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options - 12 - - ----- ---- -- --- Diluted EPS Adjusted income (loss) from continuing operations attributable to common stocks $5,592 655 $8.53 $(96) 125 $(0.77) ===== === ==== == === ==== Year ended December 31, 1998 Income from continuing operations $2,977 $72 Less:Dividends on preference stocks 63 - ----- -- Basic EPS Income from continuing operations attributable to common stocks 2,914 663 $4.40 72 105 $0.68 ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options (3) 11 3 4 ----- --- -- --- Diluted EPS Adjusted income from continuing operations attributable to common stocks $2,911 674 $4.32 $75 109 $0.68 ===== === ==== == === ==== Year ended December 31, 1997 Income from continuing operations $6,247 $234 $2 Less:Premium on exchange of preference stocks 26 - - Dividends on preference stocks 72 - - ----- --- --- Basic EPS Income from continuing operations attributable to common stocks 6,149 721 $8.52 234 101 $2.30 2 104 $0.02 ==== ==== ==== Effect of Dilutive Securities Assumed exercise of dilutive stock options (8) 6 8 4 - 3 ----- --- --- --- --- --- Diluted EPS Adjusted income from continuing operations attributable to common stocks $6,141 727 $8.45 $242 105 $2.30 $2 107 $0.02 ===== === ==== === === ==== = === ====
II-61 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 20. Dividends on Common Stock In connection with the consummation of the Hughes Transactions, the GM Board determined that the amount available for the payment of dividends on outstanding shares of $1-2/3 par value common stock would be the cumulative amount available for the payment of dividends on $1-2/3 par value common stock immediately prior to the closing of the Hughes Transactions, reduced by a pro rata portion of the net reduction in GM's total stockholders' equity resulting from the Hughes Transactions. In addition, the GM Board determined that the amount initially available for the payment of dividends on shares of GM Class H common stock would be the cumulative amount available for the payment of dividends on GM Class H common stock immediately prior to the closing of the Hughes Transactions, reduced by a pro rata portion of the net reduction in GM's total stockholders' equity resulting from the Hughes Transactions. The pro rata allocation of the net reduction in GM's total stockholders' equity resulting from the Hughes Transactions was based on the fraction used in determining the ASCNI of former Hughes immediately prior to the consummation of the Hughes Transactions. Dividends may be paid on $1-2/3 par value common stock to the extent of the amount determined to be available for the payment of dividends on $1-2/3 par value common stock in connection with the consummation of the Hughes Transactions, plus all of the earnings of GM after the consummation of the Hughes Transactions, other than the earnings attributed to the GM Class H common stock. Dividends may be paid on GM Class H common stock to the extent of the amount initially determined to be available for the payment of dividends on GM Class H common stock, plus the portion of earnings of GM after the closing of the Hughes Transactions attributed to GM Class H common stock. The amount available for the payment of dividends on each class of common stock will be reduced from time-to-time by dividends paid on that class and will be adjusted from time-to-time for changes to the amount of surplus attributed to the class resulting from the repurchase or issuance of shares of that class. As of December 31, 1999, the amount available for the payment of dividends on $1-2/3 par value and GM Class H common stock was $13.7 billion and $5.4 billion, respectively. Dividends may be paid on common stocks only when, as, and if declared by the GM Board in its sole discretion. 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. The GM Board does not currently intend to pay cash dividends on the GM Class H common stock, which was recapitalized on December 17, 1997, as part of the Hughes Transactions. Cash dividends per share of $1-2/3 par value common stock were $2.00 in 1999, 1998, and 1997. Cash dividends per share for GM Class H common stock, prior to its recapitalization on December 17, 1997, were $1.00 in 1997. NOTE 21. Derivative Financial Instruments and Risk Management GM is a party to financial instruments with off-balance-sheet risk. These financial instruments are used in the normal course of business to manage exposure to fluctuations in interest rates and foreign exchange rates, and to meet the financing needs of its customers. The primary classes of derivatives used by GM are foreign exchange forward contracts and options, interest rate swaps and options, and forward contracts to purchase or sell mortgages or mortgage-backed securities. Those instruments involve, to varying degrees, market risk, as the instruments are subject to rate and price fluctuations, and elements of credit risk in the event a counterparty should default. Credit risk is managed through the approval and periodic monitoring of financially sound counterparties. Derivative transactions are used to hedge underlying business exposures. Market risk in these instruments is offset by opposite movements in the underlying exposure. Cash receipts or payments on these contracts normally occur at maturity, or for interest rate swap agreements, at periodic contractually defined intervals. Foreign Exchange Forward Contracts and Options GM is an international corporation with operations in over 50 countries and has foreign currency exposures at these operations related to buying, selling, and financing in currencies other than the local currency. GM's most significant foreign currency exposures relate to Canada, Mexico, Western European countries (primarily Germany, United Kingdom, Spain, Italy, Belgium, and France), Australia, Japan, and Brazil. The magnitude of these exposures significantly varies over time depending upon the strength of local automotive markets and sourcing decisions. GM enters into agreements by which it seeks to manage certain of its foreign exchange exposures in accordance with established policy guidelines, primarily through foreign exchange forward contracts and purchased and written foreign exchange options. These agreements primarily hedge cash flows such as debt, firm commitments, and anticipated transactions involving vehicles, components, fixed assets, and subsidiary dividends. As a general practice, GM has not hedged the foreign exchange exposure related to II-62 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 21. Derivative Financial Instruments and Risk Management (continued) Foreign Exchange Forward Contracts and Options (concluded) either the translation of overseas earnings into U.S. dollars, or the translation of overseas equity positions back to U.S. dollars. At December 31, 1999 and 1998, the Automotive, Communications Services, and Other Operations held foreign exchange forward contracts of $3.5 billion and $6.3 billion (including cross-currency swaps of $0 and $70 million), respectively. At December 31, 1999 and 1998, the Automotive, Communications Services, and Other Operations had entered into foreign exchange options of $1.0 billion and $2.8 billion, respectively. At December 31, 1999 and 1998, the Financing and Insurance Operations held foreign exchange forward contracts of $13.3 billion and $8.0 billion (including cross-currency swaps of $5.2 billion and $3.4 billion), respectively. The Automotive, Communications Services, and Other Operations had deferred hedging losses on outstanding foreign exchange forward contracts hedging firm commitments to purchase inventory or fixed assets totaling $21 million and $3 million at December 31, 1999 and 1998, respectively. Deferred hedging losses on outstanding purchased foreign exchange option contracts hedging firm and anticipated transactions to purchase inventory or fixed assets totaled $1 million and $2 million at December 31, 1999 and 1998, respectively. The Financing and Insurance Operations had deferred hedging gains on outstanding foreign exchange forward contracts hedging firm commitments to purchase assets totaling $1 million and $13 million at December 31, 1999 and 1998, respectively. Such deferred amounts on outstanding foreign exchange forward and option contracts will be included in the cost of such assets when purchased, and subsequently recognized in operations as part of the basis of these assets. In the event the contract is terminated early or the anticipated transaction is no longer likely to occur, the derivative is then marked to market. Foreign exchange forward contracts, which hedge foreign exchange exposures of anticipated inventory, fixed assets, and sales transactions, are marked to market and recognized with other gains or losses on foreign exchange transactions in the consolidated statement of income. GM's firm commitments are typically up to one year and may extend for periods of up to three years. Interest Rate Swaps and Options GM's financing and cash management activities subject it to market risk from exposure to changes in interest rates. GM has entered into various financial instrument transactions to maintain the desired level of exposure to the risk of interest rate fluctuations and to minimize interest expense. To achieve this objective, GM will at times use written options in the management of these exposures. In a limited number of cases, interest rate swaps are matched to the anticipated roll-over of investments, wholesale assets, or debt, and are executed on a portfolio basis to achieve specific interest rate management objectives. Swaps are also matched to operating lease payments where interest rate exposure exists. The differential paid or received on such swaps is recorded as an adjustment to expense or income over the term of the underlying agreement or matched portfolio. Interest rate swaps are contractual agreements between GM and another party to exchange fixed and floating interest rate payments periodically over the life of the agreements without the exchange of underlying principal amounts. Interest rate options, including swaptions and interest rate caps and floors, may result in the future exchange of interest payments if market interest rates reach certain levels. At December 31, 1999 and 1998, the total notional amount of such agreements with off-balance-sheet risk was $1.0 billion and $2.1 billion, respectively, for the Automotive, Communications Services, and Other Operations. At December 31, 1999 and 1998, the Financing and Insurance Operations held such agreements with off-balance-sheet risk with notional amounts totaling $33.4 billion and $20.0 billion, respectively. Interest rate swaps used to hedge an underlying debt obligation are not marked to market, but are used to adjust interest expense recognized over the life of the underlying debt agreement. Gains and losses on terminated interest rate swaps are deferred and recognized as yield adjustments on the underlying debt. The Automotive, Communications Services, and Other Operations' unamortized net gains on interest rate swaps totaled approximately $3 million and $6 million at December 31, 1999 and 1998, respectively. Unamortized net gains on interest rate swaps for the Financing and Insurance Operations totaled approximately $45 million and $37 million at December 31, 1999 and 1998, respectively. Written options, including those embedded in interest rate swaps, written interest rate caps, interest rate collars, written swaptions, and interest rate swaps that do not meet settlement accounting criteria are marked to market with related gains and losses recognized in income on a current basis. II-63 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 21. Derivative Financial Instruments and Risk Management (concluded) Mortgage Contracts GMAC has also entered into contracts to purchase and sell mortgages at specific future dates and has entered into certain exchange-traded futures and option contracts to reduce exposure to interest rate risk. At December 31, 1999 and 1998, commitments to sell mortgage loans and securities totaled $1.6 billion and $6.2 billion, respectively, and commitments to purchase or originate mortgage loans totaled $4.8 billion and $5.2 billion, respectively. GMAC's exchange-traded futures and option contracts, which are used to hedge mortgage loans held for sale, had notional values of $6.3 billion and $5.0 billion at December 31, 1999 and 1998, respectively. Gains and losses on derivatives, including exchange-traded futures and option contracts, used to hedge interest rate risk associated with rate-locked funding commitments and mortgage loans held for sale, are deferred and considered in the reporting of the underlying mortgages on a lower of cost or market basis. The notional values of derivatives used to hedge price and interest rate risk associated with mortgage-related securities totaled $7.5 billion and $9.7 billion at December 31, 1999 and 1998, respectively. Gains and losses associated with these instruments are recognized in income in the current period on a marked to market basis. Derivatives used to hedge mortgage servicing rights had notional values of $17.2 billion and $65.1 billion at December 31, 1999 and 1998, respectively. Gains and losses on such contracts are recorded as an adjustment to amortization expense. GMAC has also entered into interest rate swaps in an effort to stabilize short-term borrowing costs and to maintain a minimum return on certain mortgage loans held for investment. Amounts received or paid under such interest rate swaps are recorded as an adjustment to interest expense. At December 31, 1999 and 1998, the notional values of such instruments totaled $100 million. Credit Risk The forward contracts, swaps, options, and lines of credit previously discussed contain an element of risk that the counterparties may be unable to meet the terms of the agreements. However, GM minimizes such risk exposure for forward contracts, swaps, and options by limiting the counterparties to major international banks and financial institutions that meet established credit guidelines and by limiting the amount of its risk exposure with any one bank or financial institution. Management also reduces its credit risk for unused lines of credit by applying the same credit policies in making commitments as it does for extending loans. Management does not expect to incur any losses as a result of counterparty default. GM generally does not require or place collateral for these financial instruments, except for the lines of credit it extends. GM has business activities with customers, dealers, and associates around the world. The Corporation's receivables from, and guarantees to, such parties are well diversified, and when warranted, are secured by collateral. Consequently, in management's opinion, no significant concentration of credit risk exists for GM. NOTE 22. 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 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. Fair value information presented herein is based on information available at December 31, 1999 and 1998. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been updated since those dates and, therefore, the current estimates of fair value at dates subsequent to December 31, 1999 and 1998 may differ significantly from these amounts. II-64 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 22. Fair Value of Financial Instruments (continued) Book and estimated fair values of financial instruments, for which it is practicable to estimate fair value, were as follows (in millions): December 31, ------------ 1999 1998 ---- ---- Book Fair Book Fair Value Value Value Value ----- ----- ----- ----- Automotive, Communications Services, and Other Operations - --------------------------------------------------------- Assets Cash and marketable securities $11,428 $11,428 $10,130 $10,130 Accounts and notes receivable (less allowances) $4,901 $4,901 $4,501 $4,501 Other assets $4,450 $4,431 $1,644 $1,659 Liabilities Accounts payable $17,254 $17,254 $13,542 $13,542 Long-term debt and loans payable Payable within one year $1,991 $1,991 $1,204 $1,204 Payable beyond one year $7,415 $7,139 $7,118 $7,531 Other liabilities $535 $559 $524 $585 Preferred securities of subsidiary trusts (Note 17) $218 $206 $220 $226 Financing and Insurance Operations - ---------------------------------- Assets Cash and investments in securities $9,822 $9,822 $8,894 $8,894 Finance receivables - net $80,287 $79,934 $70,258 $70,457 Accounts and notes receivable (less allowances) $3,218 $3,218 $3,797 $3,797 Other assets $10,484 $10,509 $11,784 $11,808 Liabilities Accounts payable $4,262 $4,262 $4,148 $4,148 Debt Payable within one year $66,952 $66,943 $62,396 $62,442 Payable beyond one year $55,330 $53,936 $45,357 $46,600 The prior tables exclude the book values and estimated fair values of financial instrument derivatives which were as follows (in millions): Fair Value of Open Contracts at December 31, ------------ 1999 1998 ---- ---- Asset Liability Asset Liability Position Position Position Position -------- -------- -------- -------- Automotive, Communications Services, and Other Operations (1) - --------------------------------------------------------- Foreign exchange forward contracts (2) $13 $83 $126 $107 Foreign exchange options $17 $2 $71 $10 Interest rate swaps $2 $16 $34 $38 Interest rate options $- $2 $- $1 Financing and Insurance Operations (3) - ---------------------------------- Foreign exchange forward contracts (4) $386 $862 $499 $161 Interest rate swaps $81 $586 $180 $93 Interest rate options $1 $- $- $- Mortgage contracts $105 $102 $344 $55 See Notes on next page. II-65 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 22. Fair Value of Financial Instruments (continued) (1)The related (liability) asset recorded on the balance sheet for foreign exchange forward contracts, foreign exchange options, interest rate swaps, and interest rate options totaled $(32) million, $17 million, $(10) million, and $(2) million, respectively, at December 31, 1999 and $22 million, $62 million, $(7) million, and $(1) million, respectively, at December 31, 1998. (2)Foreign exchange forward contracts included certain derivatives with both foreign exchange and interest rate exposures which had a fair value of $0 and $54 million at December 31, 1999 and 1998, respectively. (3)The related (liability) asset recorded on the balance sheet for foreign exchange forward contracts and interest rate swaps totaled $(374) million and $33 million, respectively, at December 31, 1999. The related asset recorded on the balance sheet for foreign exchange forward contracts and interest rate swaps totaled $233 million and $14 million, respectively, at December 31, 1998. The related asset recorded on the balance sheet for mortgage contracts was $23 million and $284 million at December 31, 1999 and 1998, respectively. (4)Foreign exchange forward contracts included certain derivatives with both foreign exchange and interest rate exposures which had a fair value of $(368) million and $154 million at December 31, 1999 and 1998, respectively. The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Marketable Securities The fair value of cash equivalents and marketable securities was determined principally based on quoted market prices. Finance Receivables 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. The carrying value of wholesale receivables and other receivables whose interest rates adjust on a short-term basis with applicable market indices (generally the prime rate) were assumed to approximate fair value either due to their short maturities or due to the interest rate adjustment feature. Accounts and Notes Receivable and Accounts Payable For receivables and payables with short maturities the book values approximate fair values. Other Assets and Other Liabilities Other assets reported at December 31, 1999 and 1998 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. Debt and Loans Payable The fair value of the debt payable within one year was determined by using quoted market prices, if available, or by calculating the estimated value of each bank loan, note, or debenture in the portfolio at the applicable rate in effect. Commercial paper, master notes, and demand notes have an original term of less than 90 days and; therefore, the carrying amounts of these liabilities were considered their fair values. Debt payable beyond one year 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. Foreign Exchange Forward Contracts and Options The fair value of foreign exchange forward contracts was determined by using current exchange rates. The fair value of foreign exchange options was estimated using pricing models with indicative quotes obtained for the market variables. Preferred Securities of Subsidiary Trusts The fair value of the GM-obligated mandatorily redeemable preferred securities of subsidiary trusts (see Note 17 to the GM consolidated financial statements) was determined based on quoted market prices. II-66 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 22. Fair Value of Financial Instruments (concluded) Interest Rate Swaps and Options The fair value of interest rate swaps, including contracts with optionality, was estimated using pricing models based upon current market interest rates. Exchange traded options are valued at quoted market prices. Mortgage Contracts The fair value of mortgage contracts was estimated based upon the amount that would be received or paid to terminate the contracts based on market prices of similar financial instruments and current rates for mortgage loans. Unused Lines of Credit Because loans extended under these commitments are at market interest rates, there is no significant fair value position related to the outstanding commitments. NOTE 23. Acquisitions and Investments On April 28, 1999, Hughes completed the acquisition of PRIMESTAR's 2.3 million subscriber medium-power direct-to-home satellite business. The purchase price consisted of $1.1 billion in cash and 4.9 million shares of GM Class H common stock, for a total purchase price of $1.3 billion. As part of the agreement to acquire PRIMESTAR, Hughes agreed to purchase the high-power satellite assets and related orbital frequencies of Tempo Satellite Inc., a wholly-owned subsidiary of TCI Satellite Entertainment Inc. In December 1998, Hughes agreed to acquire by merger all of the outstanding capital stock of United States Satellite Broadcasting Company, Inc. (USSB). USSB provided direct-to-home premium satellite programming in conjunction with DIRECTV's basic programming service. The USSB acquisition was closed on May 20, 1999. On July 6, 1999, based upon elections made by the former USSB shareholders, Hughes paid approximately $360 million in cash and issued approximately 22.6 million shares of GM Class H common stock, for a total purchase price of approximately $1.6 billion. On July 22, 1999, GMAC completed the acquisition of the asset-based lending and factoring business unit of The Bank of New York (BNYFC) for consideration of approximately $1.8 billion. This purchase expands GMAC's existing asset-based lending internationally and enables them to enter the factoring business in a substantial way. GMAC also completed the acquisition of the full-service leasing business of Arriva Automotive Solutions Limited (Arriva) on July 30, 1999, which was valued at (pound)484 million (approximately $775 million at the July 30, 1999 exchange rate), which included debt refinancing. The financial information presented as of and for the periods ended December 31, 1999 reflects the effects of the PRIMESTAR, Tempo Satellite, USSB, BNYFC, and Arriva transactions, discussed above, from their respective dates of acquisition. These transactions have been accounted for using the purchase method of accounting; however, the adjustments made in the December 31, 1999 financial statements reflect a preliminary allocation of the PRIMESTAR purchase price for the transactions based upon information currently available. Adjustments relating to the tangible assets, including equipment located on customer premises; intangible assets, including customer lists and dealer network; and accrued liabilities for programming contracts and leases with above-market rates are estimates pending the completion of independent appraisals currently in process. Additionally, the adjustment to recognize the benefit of net operating loss carryforwards of USSB represents a preliminary estimate pending further review and analysis by the management of Hughes. These foregoing appraisals, review, and analysis are expected to be completed by March 31, 2000. Accordingly, the final purchase price allocations may be different from the amounts reflected herein. As the GM 1999 financial statements include only USSB's, PRIMESTAR's, BNYFC's, and Arriva's results of operations since their dates of acquisition, the following selected unaudited pro forma information is provided to present a summary of the combined results of GM, USSB, PRIMESTAR, BNYFC, and Arriva as if the acquisitions had occurred as of the beginning of the respective periods, giving effect to purchase accounting adjustments. The pro forma data is presented for informational purposes only and may not necessarily reflect the results of operations of GM had USSB, PRIMESTAR, BNYFC, II-67 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 23. Acquisitions and Investments (concluded) and Arriva operated as part of GM for the entire years ended December 31, 1999 and December 31, 1998, nor are they necessarily indicative of the results of future operations. The pro forma information excludes the effect of non-recurring charges. The pro forma information is as follows (in millions except per share amounts): Year Ended Year Ended December 31, 1999 December 31, 1998 ----------------- ------------------ Total net sales and revenues $178,070 $158,037 Net income from continuing operations $5,589 $2,951 Net income (loss) from discontinued operations 426 (93) ------ ------ Net income $6,015 $2,858 ===== ===== Basic earnings (losses) per share attributable to common stocks $1-2/3 par value Continuing operations $8.73 $4.28 Discontinued operations 0.66 (0.14) ---- ---- Earnings per share attributable to $1-2/3 par value $9.39 $4.14 ==== ==== (Losses) earnings per share attributable to Class H $(0.76) $0.40 ==== ==== Diluted earnings (losses) per share attributable to common stocks $1-2/3 par value Continuing operations $8.56 $4.20 Discontinued operations 0.65 (0.14) ---- ---- Earnings per share attributable to $1-2/3 par value $9.21 $4.06 ==== ==== (Losses) earnings per share attributable to Class H $(0.76) $0.40 ==== ==== Separately, on March 2, 1999, GM invested an additional $440 million in Isuzu Motors Ltd. (Isuzu), taking its common ownership interest in Isuzu to 49%. GM has arranged for appraisals, valuations, and other studies to be performed to aid in the allocation of the $440 million investment to its interest in Isuzu. This allocation is expected to be completed in the first quarter of 2000. On March 9, 1999, GMAC completed the acquisition of the majority interest in On:Line Finance Holdings and its subsidiaries. On:Line Finance is one of the largest independent retail used car finance providers in the United Kingdom. The acquisition expanded GMAC's range of finance products available through dealers to automotive customers. On July 28, 1999, Galaxy Latin America, LLC (GLA), a subsidiary of Hughes, acquired Galaxy Brasil, Ltda., the exclusive distributor of DIRECTV services in Brazil, from Tevecap S.A. for approximately $114 million plus the assumption of debt. In connection with the transaction, Tevecap sold its 10% equity interest in GLA to Hughes and The Cisneros Group of Companies, the remaining GLA partners which increased Hughes' ownership interest in GLA to 77.8%. As part of the transaction, Hughes also increased its ownership interest in SurFin from 59.1% to 75.0%. The total consideration paid in the transactions amounted to approximately $101 million. In September and November of 1999, DIRECTV Japan raised approximately $281 million in total through the issuance of bonds, convertible into common stock, to five of its major shareholders, including approximately $245 million issued to Hughes (see Note 27 to the GM consolidated financial statements). II-68 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 24. Stock Incentive Plans Stock-Based Compensation GM accounts for stock-based compensation consistent with SFAS No. 123, Accounting for Stock-Based Compensation, and, as permitted by this standard, will continue to apply the recognition and measurement principles of Accounting Principles Board Opinion No. 25 to its stock options and other stock-based employee compensation awards. If compensation cost for stock options 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, GM's pro forma net income, earnings attributable to common stocks, and basic and diluted earnings per share attributable to common stocks would have been as follows (in millions except per share amounts): 1999 1998 1997 ---- ---- ---- Net income - as reported $6,002 $2,956 $6,698 - pro forma $5,791 $2,763 $6,558 Earnings (losses) attributable to common stocks $1-2/3 - as reported $6,018 $2,821 $6,276 - pro forma $5,826 $2,648 $6,147 Class H (prior to recapitalization) - as reported $ - $ - $322 - pro forma $ - $ - $315 Class H (subsequent to recapitalization) - as reported $(96) $72 $2 - pro forma $(115) $52 $(2) Basic earnings (losses) per share attributable to common stocks $1-2/3 - as reported $9.36 $4.26 $8.70 - pro forma $9.06 $4.00 $8.52 Class H (prior to recapitalization) - as reported $ - $ - $3.17 - pro forma $ - $ - $3.10 Class H (subsequent to recapitalization) - as reported $(0.77) $0.68 $0.02 - pro forma $(0.92) $0.49 $(0.02) Diluted earnings (losses) per share attributable to common stocks $1-2/3 - as reported $9.18 $4.18 $8.62 - pro forma $8.89 $3.92 $8.44 Class H (prior to recapitalization) - as reported $ - $ - $3.17 - pro forma $ - $ - $3.10 Class H (subsequent to recapitalization) - as reported $(0.77) $0.68 $0.02 - pro forma $(0.92) $0.49 $(0.02) 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: 1999 1998 1997 ---- ---- ---- Hughes Hughes Hughes GMSIP Plan GMSSOP GMSIP Plan GMSSOP GMSIP Plan ----- ---- ------ ----- ---- ------ ----- ---- Interest rate 4.8% 5.2% 4.8% 5.2% 5.6% 5.2% 6.2% 6.8% Expected life (years) 5.0 7.0 5.0 5.0 6.2 5.0 5.0 7.0 Expected volatility 27.9% 38.0% 27.9% 6.2% 32.8% 26.2% 26.3% 20.7% Dividend yield 2.3% - 2.3% 3.6% - 3.6% 3.4% 2.1% II-69 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 24. Stock Incentive Plans (continued) The effects of the Hughes Transactions and Delphi spin-off adjustments 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 1997 Stock Incentive Plan, formerly the 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 and GMSSOP are administered by the Executive Compensation Committee of the GM Board. The Hughes Plan is administered by the Executive Compensation Committee of the Board of Directors of Hughes. Under the GMSIP, 60 million shares of $1-2/3 par value and 2.5 million shares of GM Class H common stocks may be granted from June 1, 1997 through May 31, 2002, of which approximately 38.2 million and 2.4 million were available for grants at December 31, 1999. 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 following the grant date. 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 77.6 million shares of GM Class H common stock through December 31, 1999, of which 43.1 million were available for grants at December 31, 1999. Option prices are 100% of fair market value on the dates of grant and the options generally vest over two to four years and expire 10 years from the dates of grant, subject to earlier termination under certain conditions. Under the GMSSOP, 50 million shares of $1-2/3 par value may be granted from January 1, 1998 through December 31, 2007, of which approximately 42.5 million were available for grants at December 31, 1999. Stock options are exercisable two years from the date of grant and vest one year following the date of grant, subject to earlier termination under certain conditions. 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. In connection with the Delphi spin-off and the Hughes Transactions, the number of options and related exercise prices for outstanding options under the affected plans were adjusted to reflect the change in the fair market value of $1-2/3 par value and GM Class H common stocks that resulted from these transactions. The number of shares under option and the exercise price were adjusted such that the aggregate intrinsic value of the options immediately before and immediately after the transactions remained unchanged. II-70 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 24. Stock Incentive Plans (concluded) Changes in the status of outstanding options were as follows: GMSIP and GMSIP Hughes Plan $1-2/3 Class H GMSSOP Par Value Common Common $1-2/3 Par Value Common ----------------- ---------------- -------------------- Weighted- Weighted- Weighted Shares Average Shares Average Shares Average under Exercise under Exercise under Exercise Option Price Option Price Option Price - ------------------------------------------------------------------------------- Options outstanding at January 1, 1997 29,957,947 $46.94 8,699,803 $35.51 - $ - Granted 8,989,460 $58.81 5,750,600 $54.90 - $ - Exercised 9,273,674 $42.95 2,158,728 $30.21 - $ - Terminated 330,727 $57.05 2,694,982 $42.56 - $ - Hughes Transactions adjustment 3,023,651 $ - 5,897,936 $ - - $ - - ------------------------------------------------------------------------------- Options outstanding at December 31, 1997 32,366,657 $51.40 15,494,629 $28.70 - $ - - ------------------------------------------------------------------------------- Granted 9,854,805 $56.14 4,234,620 $50.78 4,332,305 $56.00 Exercised 8,242,624 $44.08 2,055,168 $22.71 - $ - Terminated 454,558 $54.45 980,464 $31.95 328,630 $56.00 - ------------------------------------------------------------------------------- Options outstanding at December 31, 1998 33,524,280 $50.72 16,693,617 $34.85 4,003,675 $56.00 - ------------------------------------------------------------------------------- Granted 9,811,209 $85.79 5,092,420 $48.14 4,473,610 $85.97 Exercised 7,902,380 $46.04 3,599,373 $29.50 - $ - Terminated 3,198,739 $55.25 1,431,582 $40.46 2,271,557 $73.53 Delphi Spin-Off adjustment 6,774,777 $ - - $ - 1,288,914 $ - - ------------------------------------------------------------------------------- Options outstanding at December 31, 1999 39,009,147 $51.30 16,755,082 $39.29 7,494,642 $58.72 - ------------------------------------------------------------------------------- Options exercisable at December 31, 1999 18,933,705 $41.47 6,669,761 $32.94 - $ - - ------------------------------------------------------------------------------- The following table summarizes information about GM's stock option plans at December 31, 1999: Weighted- Average Weighted- Weighted- Range of Options Remaining Avgerage Options Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices Life (yrs.) Price Price ---------------------------------------------------------------------------- GMSIP $1-2/3 Par Value Common $13.00 to 3,802,169 3.9 $31.24 3,802,169 $31.24 $39.99 40.00 to 23,686,915 6.9 $44.74 15,094,567 $44.01 49.99 50.00 to 11,520,063 9.0 $71.42 36,969 $55.51 77.50 ---------------------------------------------------------------------------- $13.00 to 39,009,147 7.2 $51.30 18,933,705 $41.47 $77.50 ---------------------------------------------------------------------------- GMSIP and Hughes Plan Class H Common $9.86 to 420,990 2.9 $15.18 420,990 $15.18 $20.00 20.01 to 952,192 5.0 $22.30 952,192 $22.30 30.00 30.01 to 7,083,140 7.1 $31.94 4,247,148 $32.30 40.00 40.01 to 5,661,920 9.0 $46.32 17,712 $47.63 50.00 50.01 to 2,636,840 8.5 $55.78 1,031,719 $54.79 85.72 ---------------------------------------------------------------------------- $9.86 to 16,755,082 7.7 $39.29 6,669,761 $32.94 $85.72 ---------------------------------------------------------------------------- GMSSOP $1-2/3 Par Value Common $46.59 3,848,682 8.0 $46.59 - $ - $71.53 3,645,960 9.0 $71.53 - $ - ---------------------------------------------------------------------------- $46.59 to 7,494,642 8.5 $58.72 - $ - $71.53 ---------------------------------------------------------------------------- II-71 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 25. Other Income and Other Expenses Other income and other expenses consisted of the following (in millions): Years Ended December 31, ---------------------------- 1999 1998 1997 ---- ---- ---- Other income Interest income $2,248 $2,105 $2,127 Insurance premiums 1,339 1,426 1,161 Rental car lease revenue 1,765 1,229 1,137 Mortgage operations investment income and servicing fees 2,742 1,836 1,525 Gain on Hughes Defense spin-off - - 4,269 Other 1,095 988 1,456 ----- ------ ------ Total other income $9,189 $7,584 $11,675 ===== ===== ====== Other expenses Provision for financing losses $404 $463 $523 Insurance losses and loss adjustment expenses 882 1,013 747 Other 503 792 210 ----- ----- ----- Total other expenses $1,789 $2,268 $1,480 ===== ===== ===== NOTE 26: 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 chief operating decision maker is the Chairman and 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 Automotive, Communications Services, and Other Operations business consist of General Motors Automotive (GMA), which is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin America/Africa/Mid-East (GMLAAM), Hughes, and Other. GMNA designs, manufactures, and markets vehicles primarily in North America under the following nameplates: Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac, and Saturn. GME, GMAP, and GMLAAM meet the demands of customers outside North America with vehicles designed, manufactured, and marketed under the following nameplates: Opel, Vauxhall, Holden, Isuzu, 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, and certain non-segment specific revenues and expenditures, as well as former Hughes' defense business prior to the Hughes Transactions. GM's reportable operating segments within its Financing and Insurance Operations 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, vehicle and homeowners' insurance, and asset-based lending. The Financing and Insurance Operations' Other segment includes financing entities operating in Canada, Germany, and Brazil 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. II-72 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 26. Segment Reporting (continued)
Elimin- Total Other Total GMNA GME GMLAAM GMAP ations GMA Hughes Other Automotive GMAC Financing Financing ---- --- ------ ---- ------ --- ------ ----- ---------- ---- --------- --------- (in millions) 1999 Manufactured products sales and revenues: External customers $110,388 $24,646 $4,445 $2,706 $ - $142,185 $7,325 $3,125 $152,635 $ - $ - $ - Intersegment 1,602 1,025 234 336 (3,197) - 16 (16) - - - - ------- ------ ----- ----- ----- ------- ----- ----- ------- -- -- -- Total manufactured products 111,990 25,671 4,679 3,042 (3,197 142,185 7,341 3,109 152,635 - - - Financing revenue - - - - - - - - - 13,778 956 14,734 Other income 3,142 554 30 145 - 3,871 253 (652) 3,472 6,440 (723) 5,717 ------- ------ ----- ----- ----- ------- ----- ----- ------- ------ --- ------ Total net sales and revenues $115,132 $26,225 $4,709 $3,187 $(3,197) $146,056 $7,594 $2,457 $156,107 $20,218 $233 $20,451 ======= ====== ===== ===== ===== ======= ===== ===== ======= ====== === ====== Depreciation and amortization $4,457 $1,086 $228 $154 $ - $5,925 $706(c) $242 $6,873 $5,136 $309 $5,445 Interest income $929 $433 $45 $8 $ - $1,415 $27 $(673) $769 $1,744 $(265) $1,479 Interest expense $1,224 $337 $95 $11 $(1) $1,666 $123 $(961) $828 $6,526 $396 $6,922 Income tax expense (benefit) $2,339 $220 $(156) $(7) $22 $2,418 $(194) $(57) $2,167 $960 $(9) $951 (Losses) earnings of nonconsolidated associates $(31) $1 $45 $(149) $1 $(133) $(189) $(3) $(325) $(1) $1 $ - Net income (loss) $4,822 $423 $(81) $(218) $35 $4,981 $(270)(c) $(243)(b) $4,468 $1,527 $7 $1,534 Investments in nonconsolidated affiliates $746 $52 $332 $926 $(207) $1,849 $(11) $(127) $1,711 $2,257 $(2,257) $- Segment assets $84,046 $18,156 $4,102 $1,343 $(1,195) $106,452$18,841 $268 $125,561$148,789 $380 $149,169 Expenditures for property $4,604 $1,228 $358 $150 $ - $6,340 $472(d) $249 $7,061 $321 $2 $323 1998 Manufactured products sales and revenues: External customers $91,771 $23,948 $7,150 $2,814 $ - $125,683 $5,924 $2,669 $134,276 $ - $ - $ - Intersegment 2,430 1,088 253 109 (3,880) - 40 (40) - - - - ------ ------- ----- ----- ----- ------- ----- ----- ------- --- --- --- Total manufactured products 94,201 25,036 7,403 2,923 (3,880) 125,683 5,964 2,629 134,276 - - - Financing revenue - - - - - - - - - 12,731 854 13,585 Other income 2,296 804 150 121 - 3,371 131 (617) 2,885 5,183 (484) 4,699 ------ ------ ----- ----- ----- ------- ----- ----- ------- ------ --- ------- Total net sales and revenues $96,497 $25,840 $7,553 $3,044 $(3,880) $129,054 $6,095 $2,012 $137,161 $17,914 $370 $18,284 ====== ====== ===== ===== ===== ======= ===== ===== ======= ====== === ====== Depreciation and amortization $4,138 $1,102 $366 $95 $ - $5,701 $434(c) $92 $6,227 $4,812 $108 $4,920 Interest income $537 $544 $116 $9 $ - $1,206 $112 $(592) $726 $1,524 $(145) $1,379 Interest expense $939 $433 $92 $7 $ - $1,471 $18 $(703) $786 $5,787 $56 $5,843 Income tax expense (benefit) $787 $319 $(213) $9 $ - $902 $(45) $161 $1,018 $612 $6 $618 Earnings (losses) of nonconsolidated associates $14 $(14) $102 $(152) $ - $(50) $(128) $(61) $(239) $ - $ - $ - Net income (loss) $1,635 $419 $(175) $(243) $(2) $1,634 $272(c) $(372)(b) $1,534 $1,325 $97 $1,422 Investments in nonconsolidated affiliates $675 $262 $445 $395 $(261) $1,516 $41 $(607) $950 $557 $(557) $ - Segment assets $68,026 $18,440 $5,548 $1,557 $(2,261) $91,310$13,008 $10,276 $114,594$131,760 $334 $132,094 Expenditures for property $5,464 $1,205 $534 $197 $ - $7,400 $344(d) $208 $7,952 $279 $ - $279
See notes on next page II-73 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 26. Segment Reporting (continued)
Elimin- Total Other Total GMNA GME GMLAAM GMAP ations GMA Hughes Other Automotive GMAC Financing Financing ---- --- ------ ---- ------ --- ------ ----- ---------- ---- --------- --------- (in millions) 1997(a) Manufactured products sales and revenues: External customers $99,435 $23,269 $8,437 $2,980 $ - $134,121 $5,083 $8,939 $148,143 $ - $ - $ - Intersegment 821 837 135 - (1,793) - 45 (45) - - - - ------ ------ ----- ----- ----- ------- ----- ----- ------- ------ --- ------- Total manufactured products 100,256 24,106 8,572 2,980 (1,793) 134,121 5,128 8,894 148,143 - - - Financing revenue - - - - - - - - - 12,577 185 12,762 Other income 2,372 812 212 158 - 3,554 496 3,902 7,952 4,018 (295) 3,723 ------ ------ ----- ----- ----- ------- ----- ----- ------- ------ --- ------- Total net sales and revenues $102,628 $24,918 $8,784 $3,138 $(1,793 $137,675 $5,624 $12,796 $156,095 $16,595 $(110) $16,485 ======= ====== ===== ===== ===== ======= ===== ====== ======= ====== === ====== Depreciation and amortization $7,116 $1,563 $248 $294 $ - $9,221 $296(c) $316 $9,833 $4,746 $67 $4,813 Interest income $839 $549 $167 $10 $ - $1,565 $33 $(489) $1,109 $1,127 $(109) $1,018 Interest expense $643 $395 $118 $23 $(1) $1,178 $91 $(636) $633 $5,256 $(6) $5,250 Income tax (benefit) expense $(272) $121 $43 $(29) $(12) $(149) $237 $23 $111 $913 $1 $914 (Losses) earnings of nonconsolidated associates $(35) $(171) $173 $11 $ - $(22) $(72) $(11) $(105) $ - $ - $ - Net (loss) income $(12) $(17) $667 $(172) $(17) $449 $471(c) $4,460(b) $5,380 $1,301 $17 $1,318 Investments in nonconsolidated affiliates $552 $229 $414 $427 $1 $1,623 $75 $(638) $1,060 $213 $(213) $ - Segment assets $68,361 $17,582 $5,651 $1,567 $(874) $92,287$12,283 $8,746 $113,316$109,686 $(1,235) $108,451 Expenditures for property $5,387 $1,687 $435 $327 $ - $7,836 $251(d) $322 $8,409 $238 $ - $238
(a)The operating results for 1997 are presented to reflect the changes to GM's organizational structure resulting from the Hughes Transactions which occurred in December 1997. As such, Hughes excludes Hughes Defense and Other includes Hughes Defense. (b)Other includes the $4.3 billion gain resulting from the Hughes Transactions for the year ended December 31, 1997, and income (loss) from discontinued operations related to Delphi of $426 million, $(93) million, and $215 million for the years ended December 31, 1999, 1998, and 1997, respectively. (c)The amount reported for Hughes excludes amortization of GM purchase accounting adjustments of approximately $21 million for 1999, 1998, and 1997 related to GM's acquisition of Hughes Aircraft Company. Such amortization was allocated to GM's Other segment which is consistent with the basis upon which the segments are evaluated. (d)Excludes expenditures related to Satellite Services and Direct-To-Home Broadcast totaling $669 million, $797 million, and $606 million in 1999, 1998, and 1997, respectively. Also excludes expenditures related to the early buy-out of satellite sale-leasebacks totaling $370 million and $156 million in 1999 and 1998, respectively. II-74 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued NOTE 26. Segment Reporting (concluded) Information concerning principal geographic areas was as follows (in millions): 1999 1998 1997 --------------- --------------- ----------------- Net Sales Net Sales Net Sales & Net & Net & Net Revenues Property Revenues Property Revenues Property -------- -------- -------- -------- -------- -------- North America United States $130,073 $20,634 $105,672 $19,454 $131,076 $17,592 Canada and Mexico 12,661 3,760 11,009 2,358 7,953 2,506 -------- ------- ------- ------ -------- ------ Total North America 142,734 24,394 116,681 21,812 139,029 20,098 Europe France 2,130 151 2,042 186 1,327 157 Germany 8,968 2,912 10,567 3,349 9,358 2,902 Spain 2,001 542 1,966 422 1,185 480 United Kingdom 5,390 1,070 5,379 1,192 5,085 1,176 Other 9,407 1,635 9,679 1,748 7,854 1,566 ------- ----- ------- ----- ------- ----- Total Europe 27,896 6,310 29,633 6,897 24,809 6,281 Latin America Brazil 2,830 1,409 4,773 1,879 4,719 1,873 Other Latin America 1,686 403 2,909 409 2,914 440 ----- ----- ----- ----- ----- ------ Total Latin America 4,516 1,812 7,682 2,288 7,633 2,313 All Other 1,412 759 1,449 1,611 1,109 888 ------- ------ ------- ------ ------- ------ Total $176,558 $33,275 $155,445 $32,608 $172,580 $29,580 ======= ====== ======= ====== ======= ====== NOTE 27. Subsequent Events On January 10, 2000, GM announced that it intends to exercise the option to buy the remaining 50% of Saab Automobile AB (Saab) from Investor A.B. by the end of January 2000. On January 28, 2000, the acquisition of the remaining 50% of Saab was completed for $125 million and has been accounted for using the purchase method of accounting. On January 13, 2000, Hughes announced that it had reached an agreement to sell its satellite systems manufacturing businesses to The Boeing Company (Boeing) for $3.8 billion in cash. The transaction, which is subject to regulatory approval, is expected to close in the second or third quarter of 2000. In addition, if Hughes were to enter into a settlement of the China investigation (see Note 16 to the GM consolidated financial statements) prior to the closing of the Boeing transaction that involves a debarment from sales to the U.S. government or a material suspension of Hughes' export licenses or other material limitation on projected business activities of the satellite systems manufacturing businesses, Boeing would not be obligated to complete the purchase of Hughes' satellite systems manufacturing businesses. Also, on January 13, 2000, Hughes announced the discontinuation of its mobile cellular and narrowband local loop product lines at Hughes Network Systems. As a result of this decision, Hughes recorded a fourth quarter 1999 pre-tax charge to continuing operations of $272 million. The charge represents the write-off of receivables and inventories, licenses, software, and equipment with no alternative use. Echostar Communications Corporation and others commenced an action in the United States District Court in Colorado on February 1, 2000 against DIRECTV, Hughes Network Systems, and Thomson Consumer Electronic, Inc. seeking, among other things, injunctive relief and unspecified damages, including treble damages, in connection with allegations that the defendants have entered into agreements with retailers and program providers and engage in other conduct that violates the antitrust laws and constitutes unfair competition. DIRECTV believes that the complaint is without merit and intends to vigorously defend against the allegations raised. Although an amount of loss, if any, cannot be estimated at this time, an unfavorable outcome could be reached that could be material to Hughes' results of operations or financial position. On February 1, 2000, GM announced it will offer to repurchase $1-2/3 par value common stock in exchange for $8.0 billion of GM Class H common stock, and contribute up to $7.0 billion in GM Class H common stock to its U.S. Hourly-Rate Employee Pension Plan and VEBA trust. In connection with these transactions, GM will issue approximately $15.0 billion of GM Class H common stock. GM expects to complete this proposed transaction during the second quarter of 2000. On March 1, 2000, Hughes announced that DIRECTV Japan's operations will be discontinued and that its subscribers would migrate to SkyPerfecTV, a Japanese company providing direct-to-home satellite broadcasting. As a result of this transaction, Hughes will acquire a 6.8% interest in SkyPerfecTV, which is expected to complete an IPO during its fiscal year ending March 31, 2001. Hughes will be required to fund a substantial portion of the costs to be incurred over the next six to nine months to exit the DIRECTV Japan business. Hughes will accrue such exit costs during the first quarter of fiscal 2000. The first quarter charge will be offset by the fair value of the SkyPerfecTV interest received; however, the amounts are not yet estimable. In addition, Hughes will continue to record its share of DIRECTV Japan's operating losses during fiscal 2000. II-75 GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - concluded NOTE 27. Subsequent Events (concluded) On March 6, 2000, GM announced that it will seek stockholder approval to increase the number of authorized shares of GM Class H common stock from 600 million to 3.6 billion shares. If approved, GM expects to declare a stock split of the GM Class H common stock in the form of a stock dividend shortly after the annual stockholders' meeting held in June 2000. On March 7, 2000, GM announced that it intends to redeem approximately 3 million outstanding Series-D 7.92% Depositary Shares and approximately 3.1 million outstanding Series-D 8.67% TOPrSsm on May 2, 2000. The securities together have a total face value of approximately $150 million. The Series-D 7.92% Depositary Shares will be redeemed at a price of $25 per share, plus accrued and unpaid dividends of $0.18 per share. The Series-D 8.67% TOPrSsm will be redeemed at a price of $25 per security, plus an accrued and unpaid distribution of $0.01 per share (see Note 17 to the GM consolidated financial statements). * * * * * * * * II-76 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION Selected Quarterly Data (Unaudited) 1999 Quarters ------------------------------------------ 1st 2nd 3rd 4th (1) --- --- --- --- (Dollars in Millions Except Per Share Amounts) Total net sales and revenues $42,435 $45,067 $42,794 $46,262 ------ ------ ------ ------ Income from continuing operations before income taxes and minority interests $2,940 $2,784 $1,518 $1,805 Income tax expense 1,029 956 553 580 Minority interests (14) (7) (7) - Losses of nonconsolidated associates (77) (87) (81) (80) ------ ------ ---- ------ Income from continuing operations 1,820 1,734 877 1,145 Income from discontinued operations 242 184 - - ----- ----- ----- -------- Net income 2,062 1,918 877 1,145 Dividends on preference stocks (16) (7) (28) (29) ----- ------- ---- ------ Earnings attributable to common stocks $2,046 $1,911 $849 $1,116 ===== ===== === ===== Earnings (losses) attributable to common stocks $1-2/3 par value Continuing operations $1,783 $1,754 $866 $1,196 Discontinued operations 242 184 - - ----- ----- ------ -------- Earnings attributable to $1-2/3 par value $2,025 $1,938 $866 $1,196 ===== ===== === ===== Earnings (losses) attributable to Class H $21 $(27) $(17) $(80) == == == == Basic earnings (losses) per share attributable to common stocks $1-2/3 par value Continuing operations $2.73 $2.71 $1.35 $1.90 Discontinued operations 0.37 0.28 - - ---- ---- ------ ------ Earnings per share attributable to $1-2/3 par value $3.10 $2.99 $1.35 $1.90 ==== ==== ==== ==== Earnings (losses) per share attributable to Class H $0.20 $(0.23) $(0.13) $(0.58) ==== ==== ==== ==== Average number of shares of common stocks outstanding - basic (in millions) $1-2/3 par value 654 648 641 630 Class H 106 121 135 136 Diluted earnings (losses) per share attributable to common stocks $1-2/3 par value Continuing operations $2.68 $2.66 $1.33 $1.86 Discontinued operations 0.36 0.28 - - ---- ---- ---- ----- Earnings per share attributable to $1-2/3 par value $3.04 $2.94 $1.33 $1.86 ==== ==== ==== ==== Earnings (losses) per share attributable to Class H $0.19 $(0.23) $(0.13) $(0.58) ==== ==== ==== ==== Average number of shares of common stocks outstanding - diluted (in millions) $1-2/3 par value 667 660 652 643 Class H 112 121 135 136 II-77 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION - continued Selected Quarterly Data (Unaudited) - continued (1) Fourth quarter 1999 results were impacted by net charges against income from continuing operations of $110 million or $0.09 per share of $1-2/3 par value common stock which consisted of the following special items: An increase to income of $892 million ($553 million after-tax, or $0.86 earnings per share of $1-2/3 par value common stock) related to the reversal of a liability for benefits payable to excess U.S. hourly employees (see Note 4 to the GM consolidated financial statements); A charge of $658 million ($408 million after-tax, or $0.63 loss per share of $1-2/3 par value common stock) related to the benefit increase granted to hourly retirees in connection with the UAW agreement (GM expenses this benefit in the period that the contract with the UAW is ratified); A charge of $147 million ($90 million after-tax, or $0.14 loss per share of $1-2/3 par value common stock) related to a U.S. salaried early retirement program (approximately 1,700 people elected participation in this program); and A charge of $272 million ($165 million after-tax, or $0.18 loss per share of $1-2/3 par value common stock and $0.38 loss per share of GM Class H common stock) related to Hughes' decision to discontinue certain of its wireless manufacturing operations at Hughes Network Systems. II-78 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION - continued Selected Quarterly Data (Unaudited) - continued 1998 Quarters ----------------------------------------- 1st 2nd(1) 3rd 4th (2) --- --- --- --- (Dollars in Millions Except Per Share Amounts) Total net sales and revenues $40,024 $37,272 $33,525 $44,624 ------ ------ ------ ------ Income (loss) from continuing operations before income taxes and minority interests $2,083 $511 $(419) $2,769 Income tax expense (benefit) 695 159 (144) 926 Minority interests (10) - (1) (9) Losses of nonconsolidated associates (10) (46) (33) (150) ------ ---- ---- ----- Income (loss) from continuing operations 1,368 306 (309) 1,684 Income (loss) from discontinued operations 236 83 (500) 88 ----- ----- --- ------ Net income (loss) 1,604 389 (809) 1,772 Dividends on preference stocks (16) (16) (16) (15) ------ ---- ---- ------ Earnings (losses) attributable to common stocks $1,588 $373 $(825) $1,757 ===== === === ===== Earnings (losses) attributable to common stocks $1-2/3 par value Continuing operations $1,338 $275 $(336) $1,637 Discontinued operations 236 83 (500) 88 ----- ----- --- ------ Earnings (losses) attributable to $1-2/3 par value $1,574 $358 $(836) $1,725 ===== === === ===== Earnings attributable to Class H $14 $15 $11 $32 == == == == Basic earnings (losses) per share attributable to common stocks $1-2/3 par value Continuing operations $1.96 $0.41 $(0.52) $2.51 Discontinued operations 0.35 0.13 (0.76) 0.13 ---- ---- ---- ---- Earnings (losses) per share attributable to $1-2/3 par value $2.31 $0.54 $(1.28) $2.64 ==== ==== ==== ==== Earnings per share attributable to Class H $0.13 $0.14 $0.11 $0.30 ==== ==== ==== ==== Average number of shares of common stocks outstanding - basic (in millions) $1-2/3 par value 682 661 654 654 Class H 104 105 106 106 Diluted earnings (losses) per share attributable to common stocks $1-2/3 par value Continuing operations $1.93 $0.40 $(0.52) $2.48 Discontinued operations 0.34 0.12 (0.76) 0.13 ---- ---- ---- ---- Earnings (losses) per share attributable to $1-2/3 par value $2.27 $0.52 $(1.28) $2.61 ==== ==== ==== ==== Earnings per share attributable to Class H $0.13 $0.14 $0.11 $0.30 ==== ==== ==== ==== Average number of shares of common stocks outstanding - diluted (in millions) $1-2/3 par value 693 672 654 665 Class H 109 111 110 109 II-79 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION - concluded Selected Quarterly Data (Unaudited) - (concluded) - -------------------- (1)Second quarter 1998 results included a charge against income from continuing operations of $74 million ($44 million after-tax, or $0.06 loss per share of $1-2/3 par value common stock), related to work schedule modifications at Opel Belgium. (2)Fourth quarter 1998 results included charges against income from continuing operations totaling $224 million ($228 million after-tax, or $0.34 loss per share of $1-2/3 par value common stock), resulting from GM's competitiveness studies. II-80 GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 9. Changes in and disagreements with accountants on accounting and financial disclosure None II-81 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 2000 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. III-1 PART IV ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K Page Number ------ (a) 1. All Financial Statements See Part II 2. Financial Statement Schedule II - Allowances for the Years Ended December 31, 1999, 1998, and 1997 IV-3 3. Exhibits (Including Those Incorporated by Reference) Exhibit Number - ------- (3)(a) Restated Certificate of Incorporation, as amended, filed as Exhibit 3(i) to the Current Report on Form 8-K of General Motors Corporation dated June 24, 1999, and Amendment to Article Fourth 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 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, as amended, filed as Exhibit 3(ii) to the Current Report on Form 8-K of General Motors Corporation dated August 2, 1999. N/A (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 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)(b) Form of Indenture relating to the $700,000,000 9-5/8% Notes Due December 1, 2000 and the $1,400,000,000 Medium-Term Note Program dated as of November 15,1990 between General Motors Corporation and Citibank, N.A., Trustee, incorporated by reference to Exhibit 4(a) to Form S-3 Registration Statement No. 33-37737. N/A IV-1 GENERAL MOTORS CORPORATION AND SUBSIDIARIES PART IV - continued ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (continued) Exhibit Page Number Number - ------- ------ (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)(e)(i) Amended and Restated Declaration of Trust of General Motors Capital Trust D, incorporated by reference to Exhibit 4(c)(i) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (4)(e)(ii)Amended and Restated Declaration of Trust of General Motors Capital Trust G, incorporated by reference to Exhibit 4(c)(ii) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. 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 between General Motors Corporation and Wilmington Trust Company With Respect To The Series D Junior Subordinated Debentures, incorporated by reference to Exhibit 4(d)(ii) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (4)(f)(iii)Second Supplemental Indenture between General Motors Corporation and Wilmington Trust Company With Respect To The Series G Junior Subordinated Debentures, incorporated by reference to Exhibit 4(d)(iii) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (4)(g)(i) Series D Preferred Securities Guarantee Agreement, General Motors Capital Trust D, incorporated by reference to Exhibit 4(g)(i) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (4)(g)(ii)Series G Preferred Securities Guarantee Agreement, General Motors Capital Trust G, incorporated by reference to Exhibit 4(g)(ii) to the Current Report on Form 8-K of General Motors Corporation dated July 1, 1997. N/A (10)(a)** General Motors Amended 1987 Stock Incentive Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 13,1992 N/A (10)(b)** General Motors Performance Achievement Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 16, 1982. N/A (10)(c)** General Motors 1987 Performance Achievement Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 17,1987 N/A (10)(d)** General Motors 1992 Performance Achievement Plan, incorporated by reference to Exhibit A to the Proxy Statement of General Motors Corporation dated April 13,1992 N/A (12) Computation of Ratios of Earnings to Fixed Charges for the Years Ended December 31, 1999, 1998, and 1997. IV-6 (21) Subsidiaries of the Registrant as of December 31, 1999 IV-7 (23) Consent of Independent Auditors IV-13 (99) Hughes Electronics Corporation Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations IV-14 (27) Financial Data Schedule (for SEC information only) N/A * 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. (b) Reports on Form 8-K Three reports on Form 8-K, dated October 4, 1999, October 13, 1999, and December 10, 1999 were filed during the quarter ended December 31, 1999 reporting matters under Item 5, Other Events. Subsequently, one report on Form 8-K, dated August 2, 1999 was filed on January 14, 2000 reporting matters under Item 5, Other Events. IV-2 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SCHEDULE II - ALLOWANCES
Additions Additions Balance at charged to charged to beginning costs and other Balance at Description of year expenses accounts Deductions end of year - ----------- ------- -------- -------- ---------- ----------- (Dollars in Millions) For the Year Ended December 31, 1999 Allowances Deducted from Assets Finance receivables (unearned income) $4,027 $ - $3,411 $3,285 $4,153 Allowance for credit losses 1,021 404 109(a) 420(b) 1,114 Accounts and notes receivable (for doubtful receivables) 309 75 29(a) 112(b) 301 Inventories (principally for obsolescence of service parts) 257 107(c) - - 364 Other investments and miscellaneous assets (receivables and other) 14 9 5 Miscellaneous allowances (mortgage and other) 252 54 1 82 225 ------ ---- ----- ----- ----- Total Allowances Deducted from Assets $5,880 $640 $3,550 $3,908 $6,162 ===== === ===== ===== ===== For the Year Ended December 31, 1998 Allowances Deducted from Assets Finance receivables (unearned income) $3,516 $ - $3,288 $2,777 $4,027 Allowance for credit losses 903 463 96(a) 441(b) 1,021 Accounts and notes receivable (for doubtful receivables) 161 208 19(a) 79(b) 309 Inventories (principally for obsolescence of service parts) 258 - - 1(c) 257 Other investments and miscellaneous assets (receivables and other) 13 - 1 - 14 Miscellaneous allowances (mortgage and other) 202 52 113 115 252 ----- ---- ----- ----- ----- Total Allowances Deducted from Assets $5,053 $723 $3,517 $3,413 $5,880 ===== === ===== ===== ===== For the Year Ended December 31, 1997 Allowances Deducted from Assets Finance receivables (unearned income) $3,642 $ - $3,161 $3,287 $3,516 Allowance for credit losses 922 523 62(a) 604(b) 903 Accounts and notes receivable (for doubtful receivables) 127 41 41(a) 48(b) 161 Inventories (principally for obsolescence of service parts) 302 - - 44(c) 258 Other investments and miscellaneous assets (receivables and other) 12 - 1 - 13 Miscellaneous allowances (mortgage) 138 106 6 48 202 ----- --- ----- ------ ------ Total Allowances Deducted from Assets $5,143 $670 $3,271 $4,031 $5,053 ===== === ===== ===== =====
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 consolidated financial statements. IV-3 GENERAL MOTORS CORPORATION AND SUBSIDIARIES 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 6, 2000 By /s/JOHN F. SMITH, JR. --------------------------------------- (John F. Smith, Jr. Chairman of the Board of Directors and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 6th day of March 2000 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 - --------------------- and Chief Executive Officer (John F. Smith, Jr.) /s/HARRY J. PEARCE Vice Chairman of the Board of - ------------------ Directors (Harry J. Pearce) /s/G. RICHARD WAGONER, JR. President and Chief Operating Officer - ------------------------- (G. Richard Wagoner, Jr.) /s/J. MICHAEL LOSH Executive Vice President ) - ------------------ and Chief Financial Officer) (J. Michael Losh) ) )Principal )Financial /s/ERIC A. FELDSTEIN Vice President and )Officers - -------------------- Treasurer ) (Eric A. Feldstein) ) /s/WALLACE W. CREEK Comptroller ) - ------------------- ) (Wallace W. Creek) )Principal )Accounting /s/PETER R. BIBLE Chief Accounting Officer )Officers - ----------------- ) (Peter R. Bible) ) IV-4 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SIGNATURES - concluded Signature Title ----------- ------- /s/PERCY BARNEVIK Director - ----------------- (Percy Barnevik) /s/JOHN H. BRYAN Director - ---------------- (John H. Bryan) /s/THOMAS E. EVERHART Director - --------------------- (Thomas E. Everhart) /s/CHARLES T. FISHER, III Director - ------------------------- (Charles T. Fisher, III) /s/GEORGE M. C. FISHER Director - ---------------------- (George M. C. Fisher) /s/NOBUYUKI IDEI Director - ---------------- (Nobuyuki Idei) /s/KAREN KATEN Director - -------------- (Karen Katen) /s/J. WILLARD MARRIOTT, JR. Director - --------------------------- (J. Willard Marriott, Jr.) /s/ANN D. MCLAUGHLIN Director - -------------------- (Ann D. McLaughlin) /s/ECKHARD PFIEFFER Director - ------------------- (Eckhard Pfeiffer) /s/JOHN G. SMALE Director - ---------------- (John G. Smale) /s/LOUIS W. SULLIVAN Director - -------------------- (Louis W. Sullivan) /s/DENNIS WEATHERSTONE Director - ---------------------- (Dennis Weatherstone) IV-5 EX-12 2 RATIOS OF EARNINGS TO FIXED ASSETS EXHIBIT 12 GENERAL MOTORS CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Years Ended December 31, 1999 1998 1997 ---------- ---------- ---------- (Dollars in Millions) Income from continuing operations $5,576 $3,049 $6,483 Income taxes 3,118 1,636 1,025 Losses of nonconsolidated associates 325 239 105 Minority interests 28 20 (44) Amortization of capitalized interest 66 68 56 ------- ------- ------ Income from continuing operations before income taxes, undistributed income of associates, and capitalized interest 9,113 5,012 7,625 ----- ----- ----- Fixed charges included in income from continuing operations Interest and related charges on debt 7,642 6,441 5,742 Portion of rentals deemed to be interest 284 251 264 ------ ------ ------ Total fixed charges included in income from continuing operations 7,926 6,692 6,006 ----- ----- ----- Earnings available for fixed charges $17,039 $11,704 $13,631 ====== ====== ====== Fixed charges Fixed charges included in income from continuing operations $7,926 $6,692 $6,006 Interest capitalized in the period 95 110 126 ------- ------ ------ Total fixed charges $8,021 $6,802 $6,132 ===== ===== ===== Ratios of earnings to fixed charges 2.12 1.72 2.22 ==== ==== ==== IV-6 EX-21 3 SUBSIDIARY LIST EXHIBIT 21 GENERAL MOTORS CORPORATION AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 1999 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 Alpha Trans Grundbesitz - und Vermogensverwaltungs 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 Edmund Becker und Co. AG..................................Germany GM Europe GmbH............................................Germany General Motors CIS........................................Russia General Motors GmbH & Co. OHG.............................Germany General Motors Poland Spolka, zo.o........................Poland Opel-Automobilwerk Eisenach-PKW GmbH......................Germany Opel China GmbH...........................................France OPEL Guangzhou Precision Machining Co. Ltd................China Opel Hungary Consullting Service Limited Liability Company.................................................Hungary Opel Performance Center GmbH..............................Germany Opel Polen GmbH...........................................Germany Opel Polska Sp. z oo......................................Poland Opel Restrukturierungsgesellschaft mbH....................Germany Opel Southeast Europe Automotive Distribution Limited Liability Company.......................................Hungary 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 Chevrolet Sociedad Anonima de Ahorro para Fines Determinados..............................................Argentina Convesco Vehicle Sales GmbH.................................Germany Controladora General Motors, S.A. de C.V. ..................Mexico Electro-Motive de Mexico, S.A. de C. V. ..................Mexico General Motors de Mexico, S. de R.L. de C.V. .............Mexico Sistemas Para Automotores de Mexico, S.A. de C.V. ........Mexico Dealership Liquidations, Inc................................Delaware Electro-Motive Maintenance Operations Pty Ltd. .............Australia El-Mo-Mex, Inc..............................................Delaware GM Automotive Services Belgium..............................Belgium GM Auto Receivables Co. ....................................Delaware GMC Truck Motors Development Corporation....................Delaware GM-DI Leasing Corporation...................................Delaware GM Ovonic L.L.C.............................................Michigan Ovonic Energy Products, Inc...............................Michigan General Motors Acceptance Corporation.......................Delaware AccuTel, Inc..............................................Delaware Autofinanciamiento GMAC, S.A. de C.V......................Mexico Banque Opel...............................................France Opel Bank Hungary Reszrenytarsasag......................Hungary Basic Credit Holding Company, L.L.C.......................Delaware Nuvell Credit Corporation...............................Delaware Nuvell Financial Services Corp..........................Delaware Capital Auto Receivables, Inc. ...........................Delaware Commercial Credit Land One LLC............................New York General Acceptance (Thailand) Ltd.*...................... Thailand * Joint Venture Partnership IV-7 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- GMAC - 20th Century Finance Corporation Ltd.*.............India GMAC, a.s. ...............................................Czechoslovakia GMAC Arrendamiento S.A. de C.V............................Mexico GMAC, Australia (Finance) Limited.........................Australia GMAC Business Credit, L.L.C...............................Delaware GMAC Comercial Automotriz Chile S.A. .....................Chile GMAC Automotriz Limitada................................Chile GMAC Commercial Corporation...............................Delaware GMAC Commercial Credit LLC................................New York GMAC Commercial Credit Corporation-Canada/Societe De Credit Commercial GMAC-Canada..................................Canada GMAC Commercial Credit (Holdings) Limited.................England GMAC Commercial Credit Limited..........................England GMAC Commercial Credit (UK) Limited.....................England GMAC Commercial Credit Development Limited..............England G.M.A.C. Comercio e Aluguer de Veiculos, Lta..............Portugal GMAC de Argentina S.A.....................................Argentina GMAC del Ecuador S.A......................................Ecuador G.M.A.C. Financiera de Colombia S.A. Compania de Financiamiento Comercial................................Colombia GMAC Holding S.A. de C. V.................................Mexico GMAC Insurance Holdings, Inc..............................Delaware CoverageOne, Inc........................................Delaware 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 MRP Service Agreement Corporation.......................Michigan Trinity General Agency, Inc.............................Texas GMAC International Finance B.V............................Netherlands GMAC International Corporation............................Delaware GMAC Italia Leasing S.p.A. ...............................Italy GMAC Lease B.V............................................Netherlands GMAC Leasing Corporation .................................Delaware Patlan Corporation .....................................Delaware GMAC Mortgage Group, Inc..................................Michigan GMAC Commercial Holding Corp............................Nevada GMAC Mortgage Holdings, Inc. ...........................Delaware GMAC Residential Holding Corp...........................Nevada GMAC RF, INC. ..........................................Michigan Residential Money Centers, Inc..........................Delaware GMAC Sverige AB...........................................Sweden General Motors Acceptance Corporation, Australia..........Delaware Holden National Leasing Limited.........................Australia General Motors Acceptance Corporation of Canada, Limited..Canada Canadian Securitized Auto Receivables Corporation.......Canada GMAC Leaseco Limited....................................Canada General Motors Acceptance Corporation, Colombia S.A. .....Delaware 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 * Joint Venture Partnership IV-8 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- 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 del Ecuador S.A. GMAC-Management (Holding).............................Ecuador General Motors Acceptance Corporation de Venezuela, C.A.Venezuela General Motors Acceptance Corporation Suisse S.A. ........Switzerland General Motors Austria Beteiligungsgesellschaft m.b.H. ...Austria OPEL Bankgesellschaft m.b.H.............................Austria OPEL Leasinggesellschaft, m.b.H.........................Austria Interleasing Limited......................................England Interleasing (UK) Limited.................................England Interleasing (UK1) Limited................................England Interleasing (UK2) Limited................................England Interleasing (UK3) Limited................................England Interleasing (UK12) Limited...............................England Lease Auto Receivables, Inc...............................Delaware ON:Line Finance Holdings Limited..........................England Opel Bank GmbH............................................Germany Opel Leasing GmbH & Co. OHG*............................Germany Opel Leasing Verwaltungs GmbH...........................Germany Opel Bank, S.A.*..........................................Poland P.T. GMAC Lippo Finance*..................................Indonesia Wholesale Auto Receivables Corporation....................Delaware General Motors de Argentina S.A.............................Argentina General Motors Asia, Inc. ..................................Delaware General Motors Asia Pacific (Pte) Ltd.......................Singapore General Motors Automobiles Philippines, Inc.................Philippines General Motors do Brasil Ltda. .............................Brazil Brazauto Industria e Comercio Ltda........................Cayman Islands Brazauto Trading (Cayman) Limited.........................Cayman Islands Compass Investimentos e Participacoes Ltda................Brazil GM Factoring Sociedade de Fomento Comercial Ltda. ........Brazil General Motors of Canada Limited............................Canada MOWG Motorwagenfabrik AG..................................Switzerland General Motors Chile S.A., Industria Automotriz.............Chile General Motors China, Inc. .................................Delaware GM Warehousing and Trading (Shanghai) Co. Ltd. ...........China General Motors Colmotores, S.A..............................Colombia General Motors Commercial Corporation.......................Delaware General Motors del Ecuador S.A..............................Ecuador General Motors (Europe) AG..................................Switzerland General Motors Export Corporation...........................Delaware General Motors Foreign Sales Corporation....................Virgin Islands General Motors Finance (Barbados) Ltd.....................Barbados General Motors-Holden's Sales Pty Limited...................Australia General Motors Holding Espana, S.A..........................Spain Opel Espana de Automoviles, S.A.........................Spain General Motors Holdings (U.K.)..............................England General International (UK) Limited........................England General Motors Acceptance Corporation (U.K.) Public Limited Company.........................................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 IBC Vehicles Limited......................................England Millbrook Land and Co. Ltd. ..............................England Millbrook Pension Management Ltd..........................England Millbrook Proving Ground Ltd. ............................England * Joint Venture Partnership IV-9 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- VHC Sub-Holdings (UK).....................................England Vauxhall Motors (Finance) Plc...........................England Vauxhall Motors Limited.................................England General Motors India Limited................................India General Motors Indonesia, Inc. .............................Delaware General Motors Interamerica Corporation.....................Delaware General Motors International Operations, Inc. ..............Delaware General Motors Investment Management Corporation............Delaware General Motors Japan Ltd. ..................................Japan General Motors Kenya Limited................................Kenya General Motors Korea, Inc...................................Delaware GM Korea Co., Ltd.........................................Korea General Motors Locomotive Group India Private Limited.......India General Motors Nederland B.V. ..............................Netherlands Allison Transmission Europe B.V. .........................Netherlands General Motors Yugoslavia, d.o.o. ........................Yugoslavia Opel C&S spol. s.r.o. ....................................Czechoslovakia Opel Nederland B.V. ......................................Netherlands General Motors Nordiska AB..................................Sweden General Motors Overseas Corporation.........................Delaware GMOC Administrative Services Corporation..................Delaware GMOC Australia Pty. Ltd. .................................Australia General Motors Overseas Commercial Vehicle Corporation....Delaware General Motors Venezolana, C.A. ..........................Venezuela Holden 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 Investment Services Company N.V. ..........Belgium General Motors Peru S.A. ...................................Peru General Motors Receivables Corporation......................Delaware General Motors Retail Holdings, Inc.........................Delaware GMRH Kansas City, Inc.....................................Delaware GMRH New York, Inc........................................Delaware GMRH Philadelphia, Inc....................................Delaware GMRH Pittsburgh, Inc......................................Delaware GMRH Seattle, Inc.........................................Delaware GMRH St. Louis, Inc.......................................Delaware GMRHLA, Inc...............................................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 Enterprises, Inc..................................Delaware DIRECTV Customer Services, Inc..........................Delaware DIRECTV, Inc............................................California DIRECTV Merchandising, Inc..............................Delaware DIRECTV Operations, Inc.................................California USSB II, Inc............................................Minnesota First HNS Mauritius , Ltd.................................Mauritius Hughes Ispat Limited....................................India Kellerton Corporation...................................Virgin Islands HNS-Clairtel CP, Inc......................................Delaware HNS-India, Inc............................................Delaware HNS-Mauritius Holdings..................................Mauritius HNS India Private Limited (India).........................India HNS-India VSAT, Inc.......................................Delaware Hughes Escorts Communications Limited...................India IV-10 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- HNS-Shanghai, Inc.........................................Delaware Shanghai Hughes Network Systems.........................China Hughes Aircraft Holdings Canada Ltd.......................England Hughes do Brasil - Electronica e Comunicacoes Ltda........Brazil Hughes Electronics Foreign Sales Corporation..............Barbados Hughes Electronics International Corporation..............Delaware Hughes Electronics Realty, Inc............................Delaware Hughes Electronics Systems International..................California Hughes Foreign Sales Corporation..........................Virgin Islands Hughes International Sales Corporation....................California Hughes International Sales Corporation No. 2..............California Hughes Investment Management Company......................California Hughes Network Systems Europe S.r.L.......................Italy Hughes Network Systems France.............................France Hughes Network Systems International Service Company......Delaware Hughes Network Systems Limited............................England HOT Telecommunications, N.V.............................Netherlands Hughes Telecommunications & Space Company.................Delaware Hughes Communications, Inc..............................California Hughes Space and Communications Company.................Delaware Spectrolab, Inc.........................................California Hughes International de Mexico, S.A. de C.V. .............Mexico HNS de Mexico, S.A. de C.V..............................Mexico Hughes-Avicom International, Inc..........................California Interactive Distance Learning, Inc........................Delaware One Touch Systems, Inc..................................California Lower St. Croix Marketing Co., Inc........................Minnesota MDP, Ltd. ................................................California XMC Holdings, Ltd.......................................California Primestar, Inc............................................Delaware P.T. Hughes Network Systems Co., Ltd......................Indonesia Holden New Zealand Limited..................................New Zealand General Motors New Zealand Pensions Limited...............New Zealand IBC Pension Trustees Limited................................England IBC Vehicles (Distribution) Limited.........................England Jennings Motors, Inc........................................Delaware Motors Holding San Fernando Valley, Inc.....................Delaware Omnibus BB Transportes, S. A................................Ecuador ONSTAR Corporation..........................................Delaware Opel Austria GmbH...........................................Austria Opel Belgium N.V. ..........................................Belgium Opel Ireland Limited........................................Ireland Opel Italia S.p.A...........................................Italy Opel Norge AS...............................................Norway Opel Oy.....................................................Finland Opel Suisse S.A. ...........................................Switzerland GM-Saab Communication GmbH................................Switzerland Premier Investment Group, Inc...............................Delaware PT General Motors Indonesia.................................Indonesia Radiadores Richard, S.A.....................................Argentina Renaissance Center Management Company.......................Michigan Riverfront Holdings, Inc....................................Delaware Saturn Corporation..........................................Delaware Saturn County Bond Corporation..............................Delaware WRE, Inc....................................................Michigan Grand Pointe Holdings, Inc. ..............................Michigan IV-11 GENERAL MOTORS CORPORATION AND SUBSIDIARIES State or Sovereign Power Name of Subsidiary of Incorporation ------------------ ---------------- 284 directly or indirectly owned subsidiaries Companies not included in the Registrant's consolidated financial statements, for which no financial statements are submitted: 34 other directly or indirectly owned domestic and foreign subsidiaries 13 active subsidiaries 21 inactive subsidiaries 21 fifty-percent owned companies and 39 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: 302 dealerships, including certain dealerships operating under dealership assistance plans, engaged in retail distribution of General Motors products 217 dealerships operating in the United States 85 dealerships operating in foreign countries The number of dealerships operating under dealership assistance plans decreased by a net of 29 during 1999. Companies not shown by name, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. During 1999, there were changes in the number of subsidiaries and companies of the Registrant, as follows: 5 directly and 45 indirectly owned domestic subsidiaries, and 61 indirectly owned foreign subsidiaries were organized or acquired. 29 indirectly owned domestic subsidiaries, and 101 indirectly owned foreign subsidiaries were dissolved, sold, or spun-off. A less than fifty-percent interest was acquired in 14 companies, while interests in 15 fifty-percent owned and 30 less than fifty-percent owned companies were terminated. 3 indirectly owned foreign subsidiaries went from fifty percent owned to greater than fifty percent owned. 2 indirectly owned foreign subsidiaries went from 100% owned to 50% owned. 2 indirectly owned domestic and 2 indirectly owned foreign subsidiaries went from active to inactive. 2 indirectly owned foreign subsidiaries went from less than 50% owned to 50% owned. 1 indirectly owned foreign subsidiary went from less than 50% owned to inactive. * * * * * * * IV-12 EX-23 4 AUDITORS CONSENT EXHIBIT 23 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-24 dated January 20, 2000 (March 7, 2000 as to Note 27)and of our report on page IV-15 dated January 19, 2000 (March 1, 2000 as to Note 21) appearing in this Annual Report on Form 10-K of General Motors Corporation for the year ended December 31, 1999, in the following Registration Statements: Registration Form Statement No. Description - ---- ------------- ----------- S-3 333-13797 General Motors Corporation Debt Securities S-3 333-61613 General Motors Corporation Debt Securities S-3 33-47343 General Motors Corporation $1-2/3 Par Value Common (Post-Effective Stock Amendment No. 1) S-3 33-49035 General Motors Corporation $1-2/3 Par Value Common (Amendment No. 1) 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-8 333-90089 General Motors Personal Savings Plan for Hourly-Rate Employees in the United States S-8 333-90097 General Motors Stock Incentive Plan S-8 333-90095 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-8 333-76433 GMAC Mortgage Corporation Savings Incentive Plan S-8 333-90087 Hughes Electronics Corporation Incentive Plan S-8 333-21029 Saturn Individual Savings Plan for Represented Members 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/DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Detroit, Michigan March 10, 2000 IV-13 EX-99 5 HUGHES INFORMATION EXHIBIT 99 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONDENSED STATEMENT OF OPERATIONS
Years Ended December 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (Dollars in Millions) Statement of Operations Data: Total revenues $5,560.3 $3,480.6 $2,838.3 Total operating costs and expenses 5,988.3 3,526.8 2,794.8 -------- -------- -------- Operating profit (loss) (428.0) (46.2) 43.5 Other income (expense), net (232.0) (57.0) 330.6 Income tax provision (benefit) (236.9) (142.3) 162.0 Minority interests in net losses of subsidiaries 32.0 24.4 24.8 -------- -------- -------- Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change (391.1) 63.5 236.9 Income from discontinued operations, net of taxes 99.8 196.4 170.6 Gain on sale of discontinued operations, net of taxes - - 62.8 Extraordinary item, net of taxes - - (20.6) Cumulative effect of account change, net of taxes - (9.2) - -------- -------- -------- Net income (loss) (291.3) 250.7 449.7 Adjustments to exclude the effect of GM purchase accounting adjustments 21.0 21.0 21.0 Preferred stock dividends (50.9) - - -------- -------- -------- Earnings (Loss) Used for Computation of Available Separate Consolidated Net Income (Loss) $ (321.2) $ 271.7 $ 470.7 ======== ======== ========
IV-14 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued SELECTED SEGMENT DATA Years Ended December 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- (Dollars in Millions) Direct-To-Home Broadcast Total Revenues $ 3,785.0 $ 1,816.1 $ 1,276.9 Operating Loss (292.1) (228.1) (254.6) EBITDA (1) 19.9 (125.8) (168.5) EBITDA Margin (1) 0.5% N/A N/A Depreciation and Amortization $ 312.0 $ 102.3 $ 86.1 Segment Assets 9,056.6 2,190.4 1,408.7 Capital Expenditures (2) 516.9 230.8 105.6 Satellite Services Total Revenues $ 810.6 $ 767.3 $ 629.9 Operating Profit 338.3 318.3 292.9 Operating Profit Margin 41.7% 41.5% 46.5% EBITDA (1) $ 618.8 $ 553.3 $ 438.1 EBITDA Margin (1) 76.3% 72.1% 69.6% Depreciation and Amortization $ 280.5 $ 235.0 $ 145.2 Segment Assets 5,984.7 5,890.5 5,682.4 Capital Expenditures (3) 956.4 921.7 625.7 Network Systems Total Revenues $ 1,384.7 $ 1,076.7 $ 1,011.3 Operating Profit (Loss) (227.3) 10.9 74.1 Operating Profit Margin N/A 1.0% 7.3% EBITDA (1) $ (178.1) $ 52.6 $ 106.1 EBITDA Margin (1) N/A 4.9% 10.5% Depreciation and Amortization $ 49.2 $ 41.7 $ 32.0 Segment Assets 1,167.3 1,299.0 1,215.6 Capital Expenditures 35.0 40.0 43.1 Eliminations and Other Total Revenues $ (420.0) $ (179.5) $ (79.8) Operating Loss (246.9) (147.3) (68.9) EBITDA (1) (237.9) (138.4) (71.9) Depreciation and Amortization 9.0 8.9 (3.0) Segment Assets 2,388.4 3,237.5 3,834.8 Capital Expenditures 157.0 136.3 (61.7) Total Total Revenues $ 5,560.3 $ 3,480.6 $ 2,838.3 Operating Profit (Loss) (428.0) (46.2) 43.5 EBITDA (1) 222.7 341.7 303.8 EBITDA Margin (1) 4.0% 9.8% 10.7% Depreciation and Amortization $ 650.7 $ 387.9 $ 260.3 Total Assets 18,597.0 12,617.4 12,141.5 Capital Expenditures 1,665.3 1,328.8 712.7 Certain prior period amounts have been reclassified to conform with the 1999 classifications. (1) EBITDA (Earnings (Loss) Before Interest, Taxes, Depreciation and Amortization) is the sum of operating profit (loss) and depreciation and amortization. EBITDA margin is calculated by dividing EBITDA by total revenues. (2) Includes expenditures related to satellites amounting to $136.0 million in 1999 and $70.2 million in 1998. (3) Includes expenditures related to satellites amounting to $532.8 million, $726.3 million and $606.1 million, respectively. Also included in the 1999 and 1998 amounts are $369.5 million and $155.5 million, respectively, related to the early buy-out of satellite sale-leasebacks. IV-15 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued The following discussion excludes purchase accounting adjustments related to General Motors' acquisition of Hughes. This Annual Report may contain certain statements that Hughes believes are, or may be considered to be, "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as we "believe," "expect," "anticipate," "intend," "plan," "foresee" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statement. The principal important risk factors which could cause actual performance and future actions to differ materially from forward-looking statements made herein include economic conditions, product demand and market acceptance, government action, local political or economic developments in or affecting countries where Hughes has operations, ability to obtain export licenses, competition, ability to achieve cost reductions, technological risk, limitations on access to distribution channels, the success and timeliness of satellite launches, in-orbit performance of satellites, ability of customers to obtain financing and Hughes' ability to access capital to maintain its financial flexibility. Additionally, Hughes and its 81% owned subsidiary, PanAmSat Corporation ("PanAmSat"), have experienced satellite anomalies in the past and may experience satellite anomalies in the future that could lead to the loss or reduced capacity of such satellites that could materially affect Hughes' operations. Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Annual Report are made only as of the date of this Annual Report and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances. General Business Overview The continuing operations of Hughes are comprised of the following segments: Direct-To-Home Broadcast, Satellite Services and Network Systems. The discontinued operations of Hughes consist of its satellite systems manufacturing businesses, which in January 2000, Hughes agreed to sell to The Boeing Company. Also included in discontinued operations for 1997 is the Avicom in-flight entertainment business, which was sold to Rockwell Collins, Inc. in December 1997. These transactions are discussed more fully below in "Liquidity and Capital Resources - Acquisitions, Investments and Divestitures." Hughes' financial information does not include the business of Delco Electronics Corporation ("Delco") or Hughes' defense electronics business. These businesses were divested as part of Hughes' recapitalization in December 1997, as more fully discussed in Note 1 to the financial statements. The Direct-To-Home Broadcast segment consists primarily of the United States and Latin America DIRECTV businesses, which provide digital multi-channel entertainment. The DIRECTV U.S. operations grew significantly during 1999 with Hughes' acquisition of the 2.3 million subscriber direct broadcast satellite medium-power business of PRIMESTAR in April 1999 and Hughes' acquisition of United States Satellite Broadcasting ("USSB"), a provider of premium subscription programming services, in May 1999. DIRECTV intends to continue to operate the medium-power PRIMESTAR business, PRIMESTAR by DIRECTV, through the end of 2000. During such time, the medium-power subscribers will continue to be offered the opportunity to transition to the high-power DIRECTV service. The USSB acquisition provided DIRECTV with 25 channels of video programming, including premium networks such as HBO, Showtime, Cinemax and The Movie Channel, which are now being offered to DIRECTV's subscribers. The results of operations for PRIMESTAR and USSB have been included in Hughes' financial information since their dates of acquisition. See Note 17 to the financial statements and "Liquidity and Capital Resources - Acquisitions, Investments and Divestitures," below, for further discussion of these transactions. In addition, DIRECTV U.S. launched local broadcast network services in the fourth quarter of 1999. Currently, DIRECTV is providing major local broadcast networks to 23 U.S. markets and plans to increase these markets to at least 25 in the first half of 2000. DIRECTV U.S. also launched foreign language programming in seven U.S. cities through its DIRECTV Para Todos /TM/ service, which currently provides programming packages with up to 21 Spanish special interest channels combined with up to 77 English channels. DIRECTV expects to expand the DIRECTV Para Todos service nationwide in the first half of 2000 and to expand its programming in other languages. The launch of these services did not materially affect revenues in 1999, but is expected to result in increased revenues in 2000 and thereafter. The Latin America DIRECTV businesses are comprised of Galaxy Latin America,LLC ("GLA"), Hughes' 78% owned subsidiary that provides DIRECTV services to 27 countries in Latin America and the Caribbean Basin; SurFin Ltd. ("SurFin"), a company 75% owned by Hughes, that provides financing of subscriber receiver equipment to certain GLA operating companies; Grupo Galaxy Mexicana, S.R.L. de C.V. ("GGM"), the exclusive distributor of DIRECTV in Mexico which was acquired in February 1999; and Galaxy Brasil, Ltda. ("GLB"), the exclusive distributor of DIRECTV in Brazil, which was acquired in July 1999. The results of operations IV-16 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued for SurFin, GGM, and GLB have been included in Hughes' financial information since their dates of acquisition. See Note 17 to the financial statements and "Liquidity and Capital Resources - Acquisitions, Investments and Divestitures," below, for further discussion of these transactions. Also included as part of the non-operating results of the Direct-To-Home Broadcast segment is DIRECTV Japan, a company 42.2% owned by Hughes that provides DIRECTV services in Japan. On March 1, 2000, Hughes announced that DIRECTV Japan's operations would be discontinued and that its subscribers would migrate to SkyPerfecTV, a company in Japan providing direct-to-home satellite broadcasting. In connection with this transaction, Hughes will receive an ownership interest in SkyPerfecTV. See "Liquidity and Capital Resources-Acquisitions, Investments and Divestitures," below, for further discussion. In June 1999, Hughes announced a new strategic alliance with AOL to develop and market digital entertainment and Internet services nationwide. This alliance is expected to accelerate subscriber growth and revenue per subscriber for DIRECTV, DirecPC(R) and eventually the new broadband services to be delivered via Spaceway(TM). As part of this alliance, Hughes and AOL plan to introduce two new enhanced TV and Internet-based interactive services in 2000. The first is a combination television receiver that will allow the consumer not only to receive DIRECTV's extensive programming, but also to access "AOL TV," a new service that will bring AOL's extensive interactive and Internet content to the consumer's television. The second is a high-speed Internet service called "AOL Plus via DirecPC" that will be delivered using Hughes Network Systems' DirecPC satellite network. Additionally, Hughes and AOL also plan to jointly develop new services and content for DIRECTV. The Satellite Services segment consists of PanAmSat, Hughes' 81% owned subsidiary. PanAmSat provides satellite services to its customers primarily through long-term operating lease contracts for the full or partial use of satellite transponder capacity. In May 1997, Hughes and PanAmSat Corporation merged their respective satellite service operations into a new publicly-held company, which retained the name PanAmSat Corporation. As a result of this merger, Hughes obtained a 71.5% ownership interest in PanAmSat. Since the date of the merger, Hughes has included PanAmSat's results of operations in its financial information. In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat, increasing Hughes' ownership to 81%. See Note 17 to the financial statements and the "Liquidity and Capital Resources - Acquisitions, Investments and Divestitures" section, below, for further discussion of these transactions. The Network Systems segment consists of Hughes Network Systems ("HNS"), a manufacturer of DIRECTV receiver equipment and provider of satellite and wireless communications ground equipment and business communications services. In December 1999, HNS recorded a pre-tax non-operating gain of approximately $39.4 million resulting from the sale of securities of its 56.1% owned subsidiary, Hughes Software Systems Private Limited ("HSS"), in conjunction with HSS' initial public offering in India. In January 2000, Hughes announced the discontinuation of its mobile cellular and narrowband local loop product lines at HNS. As a result of this decision, HNS recorded a fourth quarter 1999 pre-tax charge to continuing operations of $272.1 million. The charge represents the write-off of receivables and inventories, licenses, software and equipment with no alternative use. The Network Systems segment was also affected in February 1999 by a notification received by Hughes from the Department of Commerce that it intended to deny a U.S. government export license that Hughes was required to obtain in connection with its contract with Asia-Pacific Mobile Telecommunications Satellite Pte. Ltd. ("APMT") for the provision of a satellite-based mobile telecommunications system. As a result, APMT and Hughes terminated the contract on April 9, 1999, resulting in a pre-tax charge to Hughes' earnings of $92.0 million in the first quarter of 1999. Of the $92.0 million charge, $11.0 million was attributable to the Network Systems segment and the remainder to Hughes Space and Communications which is included in discontinued operations. The charge represented the write-off of receivables and inventory, with no alternative use, related to the contract. Satellite Fleet At December 31, 1999, Hughes had a fleet of 25 satellites, five owned by DIRECTV and 20 owned and operated by PanAmSat. The satellite fleet was expanded in the fourth quarter of 1999 with the launch of DTV-1R and Galaxy-XI. DTV-1R was placed into service at DIRECTV's 101 degree west longitude orbital slot and an existing satellite, DBS-1, was moved to DIRECTV's 110 degree west longitude orbital slot. The DTV-1R satellite adds additional capacity for DIRECTV U.S.' basic programming and local network channels. Galaxy-XI will become an integral component of PanAmSat's Galaxy cable neighborhood and is expected to be operational in the first half of 2000. PanAmSat expects to add additional satellites as part of its comprehensive satellite expansion and restoration plan adopted in 1998. The additional satellites are intended to meet the expected demand for additional satellite capacity, replace capacity affected by satellite anomalies, and provide added backup to existing capacity. In connection with this plan, two satellites were successfully launched, Galaxy-XI in 1999 and Galaxy-XR in January 2000. In addition, five satellites are now under construction for PanAmSat by Hughes Space and Communications. PanAmSat expects to launch four of these satellites in 2000 and one in 2001. In the third quarter of 2000, DIRECTV U.S. expects to launch DIRECTV 5, which will replace the DIRECTV 4 satellite located at 119 degree west longitude. DIRECTV U.S. has also contracted with Hughes IV-17 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Space and Communications to build DIRECTV 4S, a high-powered spot-beam satellite that will provide additional capacity for new local channel service or other new services beginning in 2002. On March 17, 1999, Hughes announced its intention to make an initial investment of $1.4 billion in the Spaceway satellite system. The Spaceway system, when completed, will provide high-speed, two-way communications of video, voice and data directly to companies and individual consumers. Hughes expects that this initial investment will allow it to construct three high- powered satellites to provide broadband network services ``on demand'' for video-conferencing, data transfer and other purposes in North America by 2003. Hughes is currently assessing the possibility of providing Spaceway services to most of the world using high-orbit satellites as well as complementary services from a low-orbit system. These subsequent phases would require significant additional investment. Hughes' in-orbit satellites 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. With respect to both in-orbit and launch problems, insurance carried by PanAmSat and Hughes does not compensate for business interruption or loss of future revenues or customers. Hughes has, in the past, experienced technical anomalies on some of its satellites. Service interruptions caused by these anomalies, depending on their severity, could result in claims by affected customers for termination of their transponder agreements, cancellation of other service contracts or the loss of other customers. Results of Operations 1999 compared to 1998 Overall Revenues. Revenues increased 59.8% to $5,560.3 million in 1999 from $3,480.6 million in 1998. The Direct-To-Home Broadcast segment was the primary contributor to the growth in revenues resulting from record subscriber growth in both the U.S. and Latin America DIRECTV businesses and from additional revenues for the U.S. DIRECTV businesses from the PRIMESTAR and USSB acquisitions. Also contributing to the growth in revenues were increased sales of DIRECTV receiver equipment at the Network Systems segment. Operating Costs and Expenses. Operating costs and expenses grew to $5,988.3 million in 1999 from $3,526.8 million in 1998. Broadcast programming and other costs increased $863.7 million during 1999 due primarily to the added costs for the PRIMESTAR by DIRECTV and premium channel services. Cost of products sold increased $348.0 million in 1999 from 1998 due to the increased sales of DIRECTV receiver equipment discussed above and the write-off of $91.5 million of inventory associated with the discontinued wireless product lines at the Network Systems segment. Selling, general and administrative expenses increased by $987.0 million due primarily to increased costs at the Direct-To-Home Broadcast segment for subscriber acquisition costs and added costs for the PRIMESTAR by DIRECTV business and a charge of $180.6 million at the Network Systems segment resulting from the write-off of receivables, licenses and equipment associated with the discontinued wireless product lines. Depreciation and amortization increased $262.8 million in 1999 over 1998 due primarily to added goodwill, intangibles and property, plant and equipment resulting from the acquisitions discussed above, and additions to PanAmSat's satellite fleet. EBITDA. Earnings Before Interest, Taxes, Depreciation and Amortization ("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 generally accepted accounting principles. However, Hughes believes EBITDA is a meaningful measure of Hughes' performance and that of its business units. EBITDA is a performance measurement commonly used by other communications, entertainment and media service providers and therefore can be used to analyze and compare Hughes' financial performance to that of its competitors. EBITDA is also a measurement used for certain of Hughes' debt covenants and is used by rating agencies in determining credit ratings. 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 declined to $222.7 million in 1999 from $341.7 million in 1998. The decline was attributable to charges incurred at the Network Systems segment which included the $272.1 million charge related to the discontinued wireless product lines and the $11.0 million write-off related to the termination of the APMT contract. These declines were offset by an increase in EBITDA of $145.7 million at the Direct-To-Home Broadcast segment and $65.5 million at the Satellite Services segment. Operating Loss. Hughes' operating loss was $428.0 million in 1999, compared to $46.2 million in 1998. The increased operating loss resulted from the decrease in EBITDA, discussed above, and higher depreciation and amortization IV-18 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued at the Direct-To-Home Broadcast segment resulting primarily from goodwill from recent acquisitions. Interest Income and Expense. Interest income declined to $27.0 million in 1999 compared to $112.3 million in 1998. This change resulted from a decline in cash and cash equivalents. Interest expense increased to $122.7 million in 1999 from $17.5 million in 1998. The increase in interest expense resulted from an increase in debt and interest associated with liabilities for above-market programming contracts assumed in the acquisitions of PRIMESTAR and USSB. The changes in cash and cash equivalents and debt are discussed in more detail below under "Liquidity and Capital Resources." Other, Net. Other, net declined to a net expense of $136.3 million in 1999 from a net expense of $151.8 million in 1998. Other, net for 1999 included losses from equity method investments of $189.2 million of which $134.9 million related to DIRECTV Japan, offset by the gain of $39.4 million from the sale of securities in the HSS initial public offering and other miscellaneous items. Other, net for 1998 included losses from equity method investments of $128.3 million, of which $83.2 million related to DIRECTV Japan, and a provision of $34.5 million for estimated losses associated with the bankruptcy filings of two Network Systems segment customers. These losses were offset by the gains on the sale of property and investments of about $15.0 million. Income Taxes. Hughes recognized an income tax benefit of $236.9 million in 1999 compared to $142.3 million in 1998. The higher tax benefit in 1999 resulted primarily from higher losses from continuing operations. The income tax benefit in 1998 included a favorable adjustment relating to an agreement with the Internal Revenue Service regarding the treatment of research and experimentation credits for the years 1983 through 1995. Income (Loss) From Continuing Operations. Hughes reported a loss from continuing operations in 1999 of $391.1 million compared with 1998 income from continuing operations of $63.5 million. Discontinued Operations. Revenues for the satellite systems manufacturing businesses decreased to $2,240.7 million for 1999 from revenues of $2,820.4 million for 1998. Revenues, excluding intercompany transactions, were $1,780.4 million for 1999 and $2,483.3 million for 1998. The decrease in revenues was principally due to contract revenue adjustments and delayed revenue recognition that resulted from increased development costs and schedule delays on several new product lines and decreased activity associated with the contract with ICO Global Communications (Operations) Ltd. The satellite systems manufacturing businesses reported an operating loss of $0.6 million for 1999 compared to operating profit of $286.3 million for 1998. The reported operating loss, excluding intercompany transactions, amounted to $10.4 million for 1999 compared to operating profit of $295.3 million for 1998. The 1999 operating loss included a pre-tax charge of $125.0 million that resulted from increased development costs and schedule delays on several new product lines, a one-time pre-tax charge of $81.0 million resulting from the termination of the APMT contract and decreased activity associated with a contract with ICO Global Communications (Operations) Ltd. Hughes had maintained a lawsuit against the U.S. government since September 1973 regarding the U.S. government's infringement and use of a Hughes patent covering `` Velocity Control and Orientation of a Spin Stabilized Body,'' principally satellites (the `` Williams patent''). On April 7, 1998, the U.S. Court of Appeals for the Federal Circuit reaffirmed earlier decisions in the Williams patent case, including an award of $114.0 million in damages, plus interest. In March 1999, Hughes received a payment from the U.S. government as a final settlement of the suit and as a result, recognized as income from discontinued operations a pre-tax gain of $154.6 million. Accounting Changes. In 1998, Hughes adopted American Institute of Certified Public Accountants Statement of Position 98-5, Reporting on the Costs of Start- Up Activities. Statement of Position 98-5 requires that all start-up costs previously capitalized be written off and recognized as a cumulative effect of accounting change, net of taxes, as of the beginning of the year of adoption. On a prospective basis, these types of costs are required to be expensed as incurred. The unfavorable cumulative effect of this accounting change at January 1, 1998 was $9.2 million after-tax. Direct-To-Home Broadcast Segment Revenues for the Direct-To-Home Broadcast segment more than doubled to $3,785.0 million in 1999 from $1,816.1 million in 1998. Operating losses grew to $292.1 million in 1999 from $228.1 million in 1998 while EBITDA increased to $19.9 million in 1999 from negative $125.8 million in 1998. United States. The DIRECTV U.S. businesses reported revenues of $3,404.6 million in 1999, more than twice the reported revenues of $1,604.1 million in 1998. The increase in revenues resulted from an increase in subscribers for the high-power business and added revenues from PRIMESTAR by DIRECTV and premium channel services. Subscribers for the high-power DIRECTV business increased by 2.2 million subscribers (1.6 million excluding PRIMESTAR conversions and incremental subscribers from USSB) during 1999 to 6.7 million subscribers at the end of 1999. Including PRIMESTAR by DIRECTV subscribers there were over 8 million subscribers at the end of 1999. Average monthly revenue per subscriber for the high-power business increased to $58 for 1999 from $46 for 1998. This increase resulted primarily from the addition of the premium channel services in April of 1999. IV-19 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued EBITDA for 1999 was $151.2 million in 1999 compared to negative $17.9 million in 1998. The change in EBITDA resulted from the increased revenues that were partially offset by increased subscriber acquisition costs and added operating costs from the PRIMESTAR by DIRECTV and premium channel services. The DIRECTV U.S. businesses reported an operating loss of $97.9 million in 1999 compared to $100.0 million in 1998. The decreased operating loss resulted from increased EBITDA which was generally offset by increased depreciation and amortization that resulted from the PRIMESTAR and USSB acquisitions. Latin America. Revenues for the Latin America DIRECTV businesses increased 82.3% to $315.3 million in 1999 from $173.0 million in 1998. The increase in revenues reflects an increase in subscribers and the consolidation of the GGM, GLB and SurFin businesses. Subscribers grew to 804,000 at the end of 1999 from 484,000 at the end of 1998. Average revenue per subscriber decreased to $36 in 1999 from $41 in 1998. The decline in average revenue per subscriber resulted from currency devaluations in Brazil. EBITDA was negative $105.6 million in 1999 compared to negative $93.0 million in 1998. The change in EBITDA resulted primarily from additional losses from the consolidation of GGM and GLB. The Latin America DIRECTV businesses incurred an operating loss of $168.4 million in 1999 compared to $113.2 million in 1998. The increased operating loss resulted from the decline in EBITDA and higher depreciation and amortization that resulted from the GGM, GLB and SurFin transactions. Satellite Services Segment Revenues increased for the Satellite Services segment by $43.3 million to $810.6 million in 1999 from $767.3 million in 1998. This increase was primarily due to increased operating lease revenues, partially offset by a decrease in sales and sales-type lease revenues. Operating lease revenues, which reflect long-term satellite service agreements from which PanAmSat derives revenues over the duration of the contract, were 97% of total 1999 revenues and increased by 6.9% to $787.5 million from $736.7 million in 1998. Total sales and sales-type lease revenues were $23.1 million for 1999 compared to $30.6 million for 1998. EBITDA was $618.8 million compared to $553.3 million in 1998. The increase was principally due to higher revenue that resulted from the commencement of new service agreements on additional satellites placed into service in 1999 and lower leaseback expense resulting from the exercise of certain early buy-out opportunities under sale-leaseback agreements during 1999. Operating profit was $338.3 million in 1999, an increase of $20.0 million over 1998. The increase resulted from the higher EBITDA in 1999 offset by increased depreciation expense resulting from increased capital from additions to the satellite fleet. Backlog for the Satellite Services segment, which consists primarily of operating leases on satellite transponders, was $4,856.3 million in 1999 compared to $4,461.9 million in 1998. Network Systems Segment Revenues for the Network Systems segment increased 28.6% to $1,384.7 million in 1999 from $1,076.7 million in 1998. The higher revenues resulted from greater shipments of DIRECTV receiver equipment. Shipments of DIRECTV receiver equipment totaled about 2.1 million units in 1999 compared to about 0.7 million units in 1998. The Network Systems segment reported negative EBITDA of $178.1 million in 1999 compared to EBITDA of $52.6 million in 1998. The Network Systems segment incurred an operating loss of $227.3 million in 1999 compared to operating profit of $10.9 million in 1998. The decline in EBITDA and operating profit resulted from the $272.1 million charge related to the discontinuation of the wireless product lines, offset in part by the increased sales of DIRECTV receiver equipment. Backlog for the Network Systems segment, which consists primarily of private business networks and satellite-based mobile telephony equipment orders, was $996.0 million in 1999 compared to $1,333.4 million in 1998. Eliminations and Other The elimination of revenues increased to $420.0 million in 1999 from $179.5 million in 1998 due primarily to increased manufacturing subsidies received by the Network Systems segment from the DIRECTV businesses which resulted from the increased DIRECTV receiver equipment shipments. Operating losses for "elimination and other" increased to $246.9 million in 1999 from $147.3 million in 1998. The increase was primarily due to increases in eliminations of intercompany profit and corporate expenditures. The increased intercompany profit elimination resulted from the increased intercompany sales noted above and increased corporate expenditures resulted primarily from higher pension and other employee costs. 1998 compared to 1997 IV-20 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Overall Revenues. Revenues in 1998 increased 22.6% to $3,480.6 million compared with $2,838.3 million in 1997. Each of Hughes' business segments contributed to the growth in revenue, which included continued strong subscriber growth in the Direct-to-Home Broadcast segment, the effect of the PanAmSat merger and increased operating lease revenues for video, data and Internet-related services in the Satellite Services segment and increased sales of DIRECTV receiver equipment in the Network Systems segment. Operating Costs and Expenses. Operating costs and expenses increased to $3,526.8 million in 1998 from $2,794.8 million in 1997. Broadcast programming and other costs increased $299.1 million during 1998 due to increased programming costs at the Direct-To-Home Broadcast segment and the effects of a full year of costs from PanAmSat. The increase in costs of products sold of $68.2 million during 1998 resulted primarily from the costs related to the increased shipments of DIRECTV receiver equipment. Selling, general and administrative expenses increased $237.1 million in 1998 due primarily to increased marketing and subscriber acquisition costs in the Direct-to-Home Broadcast segment and increased expenditures to support the growth in the remaining business segments. The increase in depreciation and amortization expense of $127.6 million in 1998 resulted from increased goodwill amortization related to the PanAmSat transactions and increased capital expenditures in the Direct-to-Home Broadcast and Satellite Services segments. EBITDA increased slightly during 1998 to $341.7 million from $303.8 million in 1997. The increase in EBITDA resulted from the full year effects of PanAmSat and improved EBITDA at DIRECTV U.S. These EBITDA improvements were offset by higher corporate expenses, primarily related to pension and other employee costs, and a decline in EBITDA in 1998 at the Network Systems segment due principally to lower sales of wireless telephone systems and private business networks in the Asia-Pacific region and provisions for estimated losses associated with uncollectible amounts due from certain wireless customers. Operating Profit (Loss). Hughes incurred an operating loss of $46.2 million in 1998 compared with operating profit of $43.5 million in 1997. This decline resulted from increased goodwill amortization, resulting primarily from the PanAmSat transactions, which more than offset the improvement in EBITDA. Interest Income and Expense. Interest income increased to $112.3 million in 1998 compared to $33.0 million in 1997, due primarily to higher cash balances resulting from the recapitalization of Hughes. Interest expense decreased $73.5 million to $17.5 million in 1998 versus $91.0 million in 1997 resulting from the repayment of debt, arising from the PanAmSat merger, at the end of 1997. Other, net. Other, net for 1998 relates primarily to losses from unconsolidated subsidiaries of $128.3 million, attributable principally to equity investments, including American Mobile Satellite Corporation and DIRECTV Japan, and a provision for estimated losses associated with bankruptcy filings by two customers of the Network Systems segment. Other, net for 1997 includes a $489.7 million pre-tax gain recognized in connection with the May 1997 PanAmSat merger offset by losses from unconsolidated subsidiaries of $72.2 million. Income Taxes. Hughes recorded a tax benefit of $142.3 million in 1998 compared to a tax provision of $162.0 million in 1997. Income taxes in 1998 benefited from the favorable adjustment relating to a fourth quarter 1998 agreement with the Internal Revenue Service regarding the treatment of research and experimentation costs for the years 1983 through 1995 and also reflect the tax benefit recorded for the losses incurred from continuing operations. Income (Loss) From Continuing Operations. Income from continuing operations was $63.5 million in 1998 compared with $236.9 million in 1997. Discontinued Operations and Extraordinary Item. On December 15, 1997, Hughes Avicom International, Inc. was sold to Rockwell Collins, Inc., resulting in an after-tax gain of $62.8 million. Hughes recorded an extraordinary after-tax charge of $20.6 million in 1997 related to the refinancing of PanAmSat's debt. For additional information see Note 8 to the financial statements. Also included in discontinued operations are the results of the satellite systems manufacturing businesses. Revenues for the satellite systems manufacturing businesses increased 13.2% in 1998 to $2,820.4 million from $2,491.9 million in 1997. Revenues, excluding intercompany sales, were $2,483.3 million in 1998 compared to $2,290.0 million in 1997. The increase in revenues resulted primarily from higher commercial satellite sales to customers such as Thuraya Satellite Telecommunications Company, PanAmSat, ICO Global Communications and Orion Asia Pacific Corporation. Operating profit for the satellite systems manufacturing businesses in 1998 was $286.3 million, an increase of 52.9% over $187.2 million in 1997. Operating profit, excluding intercompany transactions, was $295.3 million in 1998 compared to $241.9 million in 1997. The increase was primarily due to the higher commercial satellite sales noted above. Accounting Changes. In 1998, Hughes adopted American Institute of Certified Public Accountants Statement of Position 98-5, Reporting on the Costs of Start- Up Activities. Statement of Position 98-5 requires that all start-up costs previously capitalized be written off and recognized as a cumulative effect of accounting change, net of taxes, as of the beginning of the year of adoption. On a prospective basis, these types of costs are required to be expensed as incurred. The unfavorable cumulative effect of this accounting change at January 1, 1998 was $9.2 million after-tax. IV-21 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Direct-To-Home Broadcast Segment The Direct-to-Home Broadcast segment's revenues for 1998 increased 42.2% to $1,816.1 million from $1,276.9 million in 1997. EBITDA for the segment improved in 1998 to negative $125.8 million compared to negative $168.5 million in 1997. The operating loss for the segment declined to $228.1 million in 1998 from $254.6 million in 1997. United States. The DIRECTV U.S. business was the biggest contributor to the segment's revenue growth with revenues of $1,604.1 million for 1998, a 45.4% increase over prior year's revenues of $1,103.3 million. The large increase in revenues resulted primarily from an increase in subscribers. Subscribers grew to about 4.5 million at the end of 1998 compared to 3.3 million at the end of 1997. Average monthly revenue per subscriber also increased during 1998 to $46, compared to $44 for 1997. DIRECTV U.S. reported negative EBITDA of $17.9 million in 1998 compared to negative EBITDA of $68.0 million in 1997. The full-year 1998 operating loss for DIRECTV U.S. was $100.0 million compared with $137.0 million in 1997. The improvement in EBITDA and lower operating loss was principally due to increased subscriber revenues which more than offset increased sales and marketing expenditures. Latin America. Revenues for the Latin America DIRECTV businesses increased to 173.0 million in 1998 from $70.0 million in 1997. The increase in revenues resulted from an increase in subscribers to 484,000 at the end of 1998 from 300,000 at the end of 1997. EBITDA was negative $93.0 million in 1998 compared to negative $96.5 million in 1997. The operating loss was $113.2 million in 1998 compared with $111.8 million in 1997. The increased operating loss resulted from higher sales and marketing expenditures and subscriber acquisition costs. Satellite Services Segment Revenues for the Satellite Services segment in 1998 increased 21.8% to $767.3 million from $629.9 million in 1997. The increase in revenues was due to the May 1997 PanAmSat merger and increased operating lease revenues from the commencement of service agreements for full-time video distribution, as well as short-term special events and an increase in data and Internet-related service agreements. The increase was partially offset by a decrease in sales and sales- type lease revenues. As a result of the increased revenues described above, the Satellite Services segment's EBITDA and operating profit improved. EBITDA increased to $553.3 million in 1998 from $438.1 million in 1997. Operating profit increased 8.7% to $318.3 million in 1998, compared with the prior year's operating profit of $292.9 million. Operating profit margin in 1998 declined to 41.5% from 46.5% in the prior year principally due to goodwill amortization associated with the PanAmSat merger, a provision for losses relating to the May 1998 failure of PanAmSat's Galaxy IV satellite and increased depreciation expense resulting from increased capital expenditures by PanAmSat. Backlog for the Satellite Services segment, which consists primarily of operating leases on satellite transponders, was $4,461.9 million in 1998 compared to $5,772.5 million in 1997. Network Systems Segment Revenues for the Network Systems segment in 1998 were $1,076.7 million compared with $1,011.3 million in 1997. The increase in revenues resulted from the growth in sales of DIRECTV receiver equipment and increased sales of private business networks and satellite-based mobile telephony equipment offset by lower international sales of wireless telephony systems and private business networks, primarily in the Asia-Pacific region. EBITDA was $52.6 million in 1998, a decrease of $53.5 million from 1997. Operating profit in 1998 was $10.9 million compared with $74.1 million in 1997 and operating profit margin declined to 1.0% from 7.3%. These decreases were primarily due to a $26.0 million provision for estimated losses associated with the bankruptcy filing by a customer, provision for uncollectible amounts due from certain wireless customers and lower international sales of wireless telephony systems and private business networks, primarily in the Asia Pacific region. Backlog for the Network Systems segment, which consists primarily of private business networks and satellite-based mobile telephony equipment orders, was $1,333.4 million in 1998 compared to $1,101.4 million in 1997. Eliminations and Other The elimination of revenues increased $99.7 million in 1998 to $179.5 million due primarily to increased intercompany activity resulting from the PanAmSat merger and increased manufacturing subsidies received by the Network Systems segment from DIRECTV that resulted from the increased shipment of DIRECTV receiver equipment. Operating losses for "eliminations and other" increased to $147.3 million in 1998 from $68.9 million in 1997. The increase was primarily due to increases in eliminations of intercompany profit and corporate expenditures. The increased intercompany profit elimination resulted from the increased intercompany sales noted above and increased corporate expenditures resulted primarily from higher pension and other employee costs. IV-22 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Liquidity and Capital Resources Cash and cash equivalents were $238.2 million at December 31, 1999 compared to $1,342.0 million at December 31, 1998. The decrease in cash resulted primarily from increased investing activities, offset in part by increased borrowings and the issuance of preferred stock. Cash provided by operating activities was $379.5 million in 1999, compared to $612.1 million in 1998 and $90.6 million in 1997. The change in 1999 from 1998 resulted primarily from increased cash requirements for working capital offset by increased income from continuing operations excluding non-cash adjustments such as depreciation and amortization, the loss resulting from the discontinuation of the wireless product lines and deferred taxes. The change in 1998 from 1997 resulted primarily from increased income from continuing operations excluding non-cash adjustments and decreased working capital requirements. Cash used by investing activities was $3,941.8 million in 1999, compared to $2,128.5 million in 1998 and $2,115.6 million in 1997. The increase in 1999 investing activities reflects the acquisitions of PRIMESTAR and the related Tempo Satellite assets, USSB, SurFin, GGM and GLB. The 1999 increase is also due to investments in DIRECTV Japan convertible bonds, the early buy-out of satellite sale-leasebacks at PanAmSat and an increase in expenditures for property, compared to 1998. The increase in 1998 investing activities reflects the purchase of an additional 9.5% interest in PanAmSat, the early buy-out of satellite sale-leasebacks at PanAmSat and an increase in expenditures for satellites, compared to 1997, offset in part by proceeds from insurance claims for the full or partial loss of certain PanAmSat satellites. Cash provided by (used in) financing activities was $2,577.5 million in 1999, compared to $(63.6) million in 1998 and $5,014.0 million in 1997. 1999 financing activities reflect increased borrowings and proceeds from the issuance of preferred stock. 1998 financing activities include the payment to General Motors for the Delco post-closing price adjustment stemming from the Hughes Transactions, offset in part by net long-term borrowings. 1997 financing activities reflect the impact of the PanAmSat merger, the Hughes Transactions and cash contributions from the Parent Company. Cash provided by (used in) discontinued operations was $(119.0) million in 1999, compared to $138.3 million in 1998 and $(211.5) million in 1997. The decrease in 1999 was due to increased working capital requirements, increased development costs, the termination of the APMT contract and decreased activity associated with the ICO contract. The increase in 1998 compared to 1997 was due to a decrease in working capital requirements. Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) at December 31, 1999 and 1998 was 1.46 and 3.03, respectively. Working capital decreased by $1,513.3 million to $1,215.9 million at December 31, 1999 from $2,729.2 million at December 31, 1998. The change in working capital resulted principally from the decrease in cash and cash equivalents discussed above. Property and Satellites. Property, net of accumulated depreciation, increased $540.0 million to $1,223.0 million in 1999 from $683.0 million in 1998. The increase in property resulted primarily from capital expenditures of about $506.4 million, additions resulting from acquisitions of about $281.6 million, offset by depreciation of $227.0 million. The increase in capital expenditures of $262.5 million in 1999 over 1998 was primarily due to an increase in subscriber leased DIRECTV receiver equipment used in the conversion of PRIMESTAR subscribers. Satellites, net of accumulated depreciation, increased $709.8 million to $3,907.3 million in 1999 from the $3,197.5 million reported in 1998. Capital expenditures, including expenditures related to satellites, increased to $1,665.3 million in 1999 from $1,328.8 million in 1998. 1999 capital expenditures include $789.4 million for the construction of satellites and $369.5 million for the early buy-out of satellite sale-leasebacks. Common Stock Dividend Policy and Use of Cash. As discussed in Note 15 to the financial statements, since the completion of the recapitalization of Hughes in late 1997, 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, since such time, Hughes has not paid dividends on its common stock to GM and does not currently intend to do so in the foreseeable future. Future Hughes earnings, if any, are expected to be retained for the development of the businesses of Hughes. Hughes expects to have significant cash requirements in 2000 primarily due to capital expenditures of approximately $1.5 to $2.0 billion for satellites and property. In addition, Hughes expects to increase its investment in affiliated companies, primarily related to its international DIRECTV businesses. These cash requirements are expected to be funded from a combination of cash provided from operations, cash to be received upon completion of the Boeing transaction, amounts available under credit facilities and debt and equity offerings, as needed. Debt and Credit Facilities. Short-Term Borrowings. In October 1999, Hughes issued $500.0 million ($498.9 million net of unamortized discount) of floating rate notes to a group of institutional investors in a private placement. The notes bear interest at a variable rate which was 7.45% at December 31, 1999 . Interest is payable quarterly and the notes are due and payable on October 23, 2000. Notes Payable. PanAmSat issued five, seven, ten and thirty-year notes totaling $750.0 million in January 1998. The outstanding principal balances and interest rates for the five, seven, ten and thirty-year notes as of December 31, 1999 were $200 million at 6.0%, $275 million at 6.125%, $150 million at 6.375% and $125 million at $6.875%, respectively. Principal on the notes is payable at maturity, while interest is payable semi-annually. IV-23 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued In July 1999, in connection with the early buy-out of satellite sale- leasebacks, PanAmSat assumed $124.1 million of variable rate notes, all of which were outstanding at December 31, 1999. The notes bear interest at various rates. The weighted average interest rate on the notes at December 31, 1999 was 6.75%. The notes mature on various dates through January 2, 2002. Revolving Credit Facilities. Hughes has three unsecured revolving credit facilities totaling $1.6 billion, consisting of a $750.0 million multi-year facility, a $350.0 million 364-day facility, and a $500.0 million bridge facility. The multi-year credit facility provides for a commitment of $750.0 million through December 5, 2002 and borrowings bear interest at various rates, of which the weighted average rate at December 31, 1999 was 7.09%. The 364-day facility provides for a commitment of $350.0 million through November 22, 2000. These facilities also provide backup capacity for Hughes' commercial paper program. The bridge facility provides for a commitment of $500.0 million through the earlier of November 22, 2000 or the receipt of proceeds from the issuance of any debt securities of Hughes in a public offering. $500.0 million was outstanding under the multi-year facility at December 31, 1999. No amounts were outstanding under the commercial paper program, 364-day, or bridge facilities at December 31, 1999. PanAmSat maintains a $500.0 million multi-year revolving credit facility that provides for short-term and long-term borrowings and a $500.0 million commercial paper program that provides for short-term borrowings. The multi-year revolving credit facility provides for a commitment through December 24, 2002 . Borrowings under the credit facility and commercial paper program are limited to $500.0 million in the aggregate. No amounts were outstanding under either the multi- year revolving credit facility or the commercial paper program at December 31, 1999. At December 31, 1999, Hughes' 75% owned subsidiary, SurFin, had a total of $227.9 million outstanding under a $400.0 million unsecured revolving credit facility expiring on June 2002. Borrowings under the credit facility bear interest at various rates of interest. The weighted average interest rate on these borrowings at December 31, 1999 was 6.84%. Other. At December 31, 1999, GLB had a total of $24.3 million outstanding under variable rate notes bearing interest at various rates. The weighted average interest rate of the notes was 11.9% at December 31, 1999. Principal is payable in varying amounts at maturity in April and May 2002, and interest is payable monthly. Other long-term debt totaling $16.2 million and $28.9 million at December 31, 1999 and 1998, respectively, consisted primarily of notes bearing fixed rates of interest of 9.61% to 11.11%. Principal is payable at maturity in April 2007, while interest is payable semi-annually. As part of a debt refinancing program undertaken by PanAmSat in 1997, an extraordinary charge of $20.6 million ($34.4 million before taxes) was recorded that resulted from the excess of the price paid for the debt over its carrying value, net of deferred financing costs. Hughes has filed a shelf registration statement with the Securities and Exchange Commission with respect to an issuance of up to $2.0 billion of debt securities from time to time. No amounts have been issued as of December 31, 1999. Acquisitions, Investments and Divestitures. On March 1, 2000, Hughes announced that DIRECTV Japan's operations will be discontinued and that its subscribers would migrate to SkyPerfecTV. As a result of this transaction, Hughes will acquire a 6.8% interest in SkyPerfecTV, which is expected to complete an IPO during its fiscal year ending March 31, 2001. Hughes will be required to fund a substantial portion of the costs to be incurred over the next six to nine months to exit the DIRECTV Japan business. Hughes will accrue such exit costs during the first quarter of fiscal 2000. The first quarter charge will be offset by the fair value of the SkyPerfecTV interest received; however the amounts are not yet estimable. In addition, Hughes will continue to record its share of DIRECTV Japan's operating losses during 2000. On January 13, 2000, Hughes announced that it had reached an agreement to sell its satellite systems manufacturing businesses to Boeing for $3.75 billion in cash. The final transaction, which is subject to regulatory approval, is expected to close in the second or third quarter of 2000 and result in an after- tax gain in excess of $1 billion. The financial results for the satellite systems manufacturing businesses are treated as discontinued operations for all periods presented herein. Also on January 13, 2000, Hughes announced the discontinuation of its mobile cellular and narrowband local loop product lines at Hughes Network Systems. As a result of this decision, Hughes recorded a fourth quarter 1999 pre-tax charge to continuing operations of $272.1 million. The charge represents the write-off of receivables and inventories, licenses, software and equipment with no alternative use. In September and November of 1999, DIRECTV Japan, Hughes' 42.2% owned affiliate, raised a total of approximately $281 million through the issuance of bonds, convertible into common stock, to five of its major shareholders, including $244.7 million issued to Hughes. On July 28, 1999, GLA acquired GLB, the exclusive distributor of DIRECTV in Brazil, from Tevecap S.A. for approximately $114.0 million plus the assumption of debt. In connection with the transaction, Tevecap also sold its 10% equity interest in GLA to Hughes and The Cisneros Group of Companies, the IV-24 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued remaining GLA partners, which increased Hughes' ownership interest in GLA to 77.8%. As part of the transaction, Hughes also increased its ownership interest in SurFin from 59.1% to 75.0%. The total consideration paid in the transactions amounted to approximately $101.1 million. On May 20, 1999, Hughes acquired by merger all of the outstanding capital stock of USSB, a provider of premium subscription television programming via the digital broadcasting system that it shares with DIRECTV. The total consideration of about $1.6 billion paid in July 1999, consisted of about $0.4 billion in cash and 22.6 million shares of Class H common stock. On April 28, 1999, Hughes completed the acquisition of PRIMESTAR's 2.3 million subscriber medium-power direct-to-home satellite business. The purchase price consisted of $1.1 billion in cash and 4.9 million shares of Class H common stock, for a total purchase price of $1.3 billion. As part of the agreement to acquire PRIMESTAR, Hughes agreed to purchase the high-power satellite assets and related orbital frequencies of Tempo Satellite Inc., a wholly-owned subsidiary of TCI Satellite Entertainment Inc. The purchase price for the Tempo Satellite assets consisted of $500 million in cash. Of this purchase price, $150 million was paid on March 10, 1999 for a satellite that has not yet been launched and the remaining $350 million was paid on June 4, 1999 for an in-orbit satellite and 11 related satellite orbital frequencies. In February 1999, Hughes acquired an additional ownership interest in GGM, a Latin America local operating company which is the exclusive distributor of DIRECTV in Mexico, from Grupo MVS, S.R.L. de C.V. Hughes' equity ownership represents 49.0% of the voting equity and all of the non-voting equity of GGM. In October 1998, Hughes acquired from Grupo MVS an additional 10.0% interest in GLA, increasing Hughes' ownership interest to 70.0%. Hughes also acquired an additional 19.8% interest in SurFin, a company providing financing of subscriber receiver equipment for certain local operating companies located in Latin America and Mexico, increasing Hughes' ownership percentage from 39.3% to 59.1%. The aggregate purchase price for these transactions was $197.0 million in cash. In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for $851.4 million in cash, increasing its ownership interest in PanAmSat to 81.0%. PanAmSat was originally acquired in May 1997, when Hughes and PanAmSat completed the merger of their respective satellite service operations into a new publicly- held company, which retained the name PanAmSat Corporation. Hughes contributed its Galaxy satellite services business in exchange for a 71.5% interest in the new company. Existing PanAmSat stockholders received a 28.5% interest in the new company and $1.5 billion in cash. Such cash consideration and other funds required to consummate the merger were funded by new debt financing totaling $1,725.0 million borrowed from GM, which was subsequently repaid in December 1997. The PanAmSat merger was treated as a partial sale of the Galaxy business by Hughes and resulted in a one-time pre-tax gain of $489.7 million ($318.3 million after-tax). The financial information included herein, reflect the acquisitions discussed above from their respective dates of acquisition. The acquisitions were accounted for by the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on the estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair values of the net assets acquired has been recorded as goodwill, resulting in goodwill additions of $3,612.4 million and $702.9 million for the years ended December 31, 1999 and 1998, respectively. The December 31, 1999 financial statements for the PRIMESTAR transaction reflect a preliminary allocation of the purchase price for the transaction based upon information currently available. Adjustments relating to the tangible assets, including equipment located on customer premises; intangible assets, including customer lists and dealer network; and accrued liabilities for programming contracts and leases with above-market rates are estimates pending the completion of independent appraisals currently in process. Additionally, the adjustment to recognize the benefit of net operating loss carryforwards of USSB represents a preliminary estimate pending further review and analysis by Hughes management. The foregoing appraisals, review and analysis are expected to be completed by March 31, 2000. Accordingly, the final purchase price allocations may be different from the amounts reflected herein. As a result of the acquisitions of GGM, SurFin and GLB, foreign currency risk, as more fully described in ``Market Risk Disclosure,'' has increased for Hughes and may increase in the future. On December 15, 1997, Hughes sold substantially all of the assets and liabilities of the Hughes Avicom business to Rockwell Collins, Inc. for cash, which resulted in an after-tax gain of $62.8 million. Hughes Avicom is treated as a discontinued operation for all periods prior to its disposition. Also, in December 1997, Hughes repurchased from AT&T for $161.8 million, a 2.5% equity interest in DIRECTV, ending AT&T's marketing agreement to distribute the DIRECTV direct broadcast satellite television service and DIRECTV(TM) receiver equipment. New Accounting Standards. In September 1999, the Financial Accounting Standards Board ("FASB") issued Emerging Issues Task Force Issue 99-10 ("EITF 99-10"), Percentage Used to Determine the Amount of Equity Method Losses. EITF 99-10 addresses the percentage of ownership that should be used to compute equity method losses when the investment has been reduced to zero and the investor holds other securities of the investee. EITF 99-10 requires that equity method losses should not be recognized solely on the percentage of common stock owned; rather, an entity-wide approach should be IV-25 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued adopted. Under such an approach, equity method losses must be recognized based on the ownership level that includes other equity securities (e.g., preferred stock) and loans/advances to the investee or based on the change in the investor's claim on the investee's book value. Hughes adopted EITF 99-10 during the third quarter of 1999 which resulted in Hughes recording a higher percentage of DIRECTV Japan's losses subsequent to the effective date of September 23, 1999. The unfavorable impact of adopting EITF 99-10 was $39.0 million after-tax. In June 1998, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires all derivatives to be recorded as either assets or liabilities and the instruments to be measured at fair value. Gains or losses resulting from changes in the values of those derivatives are to be recognized immediately or deferred depending on the use of the derivative and whether or not it qualifies as a hedge. Hughes plans to adopt SFAS No. 133, as amended, by January 1, 2001, as required. Hughes does not expect that the adoption of SFAS No. 133 will have a material impact on Hughes' results of operations and financial position. IV-26 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Commitments and Contingencies Hughes may be required to make a cash payment to, or receive a cash payment from, Raytheon in connection with the merger of the defense electronics business of Hughes with Raytheon in 1997. The amount of any such cash payment to or from Raytheon, if any, is not determinable at this time. There is a pending grand jury investigation into whether Hughes should be accused of criminal violations of the export control laws arising out of the participation of two of its employees on a committee formed to review the findings of Chinese engineers regarding the failure of a Long March rocket in China in 1996. Hughes is also subject to the authority of the State Department to impose sanctions for non-criminal violations of the Arms Export Control Act. The possible criminal and/or civil sanctions could include fines as well as debarment from various export privileges and participating in government contracts. If Hughes were to enter into a settlement of this matter prior to the closing of the Boeing transaction that involves a debarment from sales to the U.S. government or a material suspension of Hughes' export licenses or other material limitation on projected business activities of the satellite systems manufacturing businesses, Boeing would not be obligated to complete the purchase of Hughes' satellite systems manufacturing businesses. Hughes does not expect the grand jury investigation or State Department review to result in a material adverse effect upon its business. However, there can be no assurance as to those conclusions. Hughes has contracts with ICO Global Communications (Operations), Ltd. to build the satellites and related components for ICO's global wireless communications system. ICO's parent company recently filed for bankruptcy protection under Chapter 11. If ICO's parent company is unable to confirm a plan of reorganization that provides for full payment to Hughes under these contracts, ICO may be unable to pay these amounts and the most likely outcome would be a liquidation proceeding. In the event that a liquidation becomes probable, Hughes would expect to record a pre-tax charge to income of up to approximately $350 million, of which $100 million would be attributable to continuing operations and $250 million would be attributable to discontinued operations. A portion of the purchase price to be paid by Boeing will be placed in escrow under certain circumstances if prior to completing this sale to Boeing, Hughes' contracts with ICO are not assumed by ICO with bankruptcy court approval or new similar contracts are not entered into with bankruptcy court approval. At December 31, 1999, minimum future commitments under noncancelable operating leases having lease terms in excess of one year are primarily for real property and aggregated $250.8 million, payable as follows: $102.8 million in 2000, $52.3 million in 2001, $24.2 million in 2002, $17.8 million in 2003, $12.5 million in 2004 and $41.2 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 $58.5 million in 1999, $82.7 million in 1998 and $89.1 million in 1997. Hughes is contingently liable under standby letters of credit and bonds in the amount of $222.0 million at December 31, 1999. In Hughes' past experience, no material claims have been made against these financial instruments. In addition, at December 31, 1999, Hughes has guaranteed up to $209.1 million of bank debt, including $105.0 million related to American Mobile Satellite Corporation. Of the bank debt guaranteed, $105.0 million matures in March 2003; $55.4 million matures in September 2007; the remaining $48.7 million is due in variable amounts over the next five years. In connection with the direct-to-home broadcast businesses, Hughes has commitments related to certain programming agreements which are variable based upon the number of underlying subscribers and market penetration rates. Minimum payments over the terms of applicable contracts are anticipated to be about $1,000.0 million to $1,150.0 million. As part of a marketing agreement entered into with AOL on June 21, 1999, Hughes committed to increase its sales and marketing expenditures over the next three years by about $1.5 billion relating to DirecPC/AOL-Plus, DIRECTV, DIRECTV/AOL TV and DirecDuo. See Note 20 to the financial statements for further discussion of the above matters and various legal proceedings and claims that could be material, individually or in the aggregate, to Hughes' continuing operations or financial position. IV-27 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Year 2000 A comprehensive, company-wide, Year 2000 program was initiated in 1996 to identify and remediate potential Year 2000 problems. The Year 2000 program was implemented in seven phases which included awareness, inventory, assessment, remediation, testing, implementation and contingency planning. Hughes incurred and expensed approximately $10.0 million during 1999, approximately $4.0 million during 1998 and approximately $1.0 million through 1997, related to the assessment of, and ongoing efforts in connection with, its Year 2000 program. Future spending for remaining system remediation and testing is currently estimated to be from $0.6 million to $1.0 million. As of the date of this report, Hughes has experienced no significant problems related to the Year 2000 conversion either domestically or in foreign locations. After extensive system verification and testing, all computerized information and process control systems are operating normally. The performance of critical customers and suppliers continues without notable change. Production and business activities are normal at all locations. Hughes also has not received any material complaints regarding any Year 2000 issues related to its products. However, Hughes cannot provide assurance that problems will not arise. Hughes continues to monitor the status of its operations, suppliers and distribution channels to ensure no significant business interruptions. In addition to the above, the satellite systems manufacturing businesses incurred expenditures related to the Year 2000 conversion of about $11.0 million and $5.0 million during 1999 and 1998, respectively. Future spending for the satellite systems manufacturing businesses is estimated at about $1.0 million. As of the date of this report, the satellite systems manufacturing businesses have experienced no significant problems related to the Year 2000 conversions, however, Hughes cannot provide assurance that problems will not arise. Each Hughes operating company is funding its respective Year 2000 efforts with current and future operating cash flows. IV-28 HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - Continued Security Ratings On January 14, 2000, subsequent to the announced sale of Hughes' satellite systems manufacturing businesses to Boeing, Standard and Poor's Rating Services ("S&P") and Moody's Investors Service ("Moody's") each affirmed its respective debt ratings for Hughes. S&P maintained its BBB - minus credit rating, which indicates the issuer has adequate capacity to pay interest and repay principal. S&P maintained the short-term corporate credit and commercial paper ratings at A-3. S&P revised its outlook to positive from negative. Moody's confirmed Hughes' Baa2 long-term credit and P-2 commercial paper ratings. While the outlook remains negative, Moody's ended its review for possible downgrade. The Baa2 rating for senior debt indicates adequate likelihood of interest and principal payment and principal security. The P-2 commercial paper rating is the second highest rating available and indicates that the issuer has a strong ability for repayment relative to other issuers. 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. Lower ratings generally 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. Each rating should be evaluated independently of any other rating. Market Risk Disclosure The following discussion and the estimated amounts generated from the sensitivity analyses referred to below include forward-looking statements of market risk which assume for analytical purposes that certain adverse market conditions may occur. Actual future market conditions may differ materially from such assumptions because the amounts noted below are the result of analyses used for the purpose of assessing possible risks and the mitigation thereof. Accordingly, the forward-looking statements should not be considered projections by Hughes of future events or losses. General Hughes' cash flows and earnings are subject to fluctuations resulting from changes in foreign currency exchange rates, interest rates and changes in the market value of its equity investments. Hughes manages its exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Hughes' policy is to not enter into speculative derivative instruments for profit or execute derivative instrument contracts for which there are no underlying exposures. Hughes does not use financial instruments for trading purposes and is not a party to any leveraged derivatives. Foreign Currency Risk Hughes generally conducts its business in U.S. dollars with a small amount of business conducted in a variety of foreign currencies and therefore is exposed to fluctuations in foreign currency exchange rates. Hughes' objective in managing the 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-forward contracts to mitigate risks associated with future foreign currency firm commitments. Foreign exchange-forward contracts are legal agreements between two parties to purchase and sell a foreign currency, for a price specified at the contract date, with delivery and settlement in the future. At December 31, 1999, the impact of a hypothetical 10% adverse change in exchange rates on the fair values of foreign exchange-forward contracts and foreign currency denominated assets and liabilities would not be significant. Investments Hughes maintains investments in publicly-traded common stock of unaffiliated companies and is therefore subject to equity price risk. These investments are classified as available-for-sale and, consequently, are reflected in the balance sheets at fair value with unrealized gains or losses, net of taxes, recorded as part of accumulated other comprehensive income (loss), a separate component of stockholder's equity. At December 31, 1999, the fair values of the investments in such common stock were $1,025.2 million. The investments were valued at the market closing prices at December 31, 1999. No actions have been taken by Hughes to hedge this market risk exposure. A 10% decline in the market price of these investments would cause the fair value of the investments in common stock to decrease by $102.5 million as of December 31, 1999. Interest Rate Risk Hughes is subject to interest rate risk related to its $2.1 billion of debt outstanding at December 31, 1999. As of December 31, 1999, debt consisted of Hughes' $500.0 million floating rate line of credit and a $498.9 million floating rate note, PanAmSat's fixed-rate borrowings of $750.0 million, and various other floating and fixed rate borrowings. Hughes is subject to fluctuating interest rates which may adversely impact its results of operations and cash flows for its variable rate bank borrowings. Fluctuations in interest rates may also adversely effect the market value of Hughes' fixed-rate borrowings. At December 31, 1999, outstanding borrowings bore interest at rates ranging from 6.00% to 11.11%. The potential fair value loss resulting from a hypothetical 10% decrease in interest rates related to Hughes' outstanding debt would be approximately $29.0 million as of December 31, 1999. Credit Risk Hughes is exposed to credit risk in the event of non-performance by the counterparties to its foreign exchange-forward contracts. While Hughes believes this risk is remote, credit risk is managed through the periodic monitoring and approval of financially sound counterparties. IV-29 HUGHES ELECTRONICS CORPORATION RESPONSIBILITIES FOR FINANCIAL STATEMENTS The following financial statements of Hughes Electronics Corporation (as more fully described in Note 1 to the financial statements) were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on judgments of management. Management is further responsible for maintaining internal control designed to provide reasonable assurance that the books and records reflect the transactions of the company and that established policies and procedures are carefully followed. Perhaps the most important feature in internal control is that it is continually reviewed for effectiveness and is augmented by written policies and guidelines, the careful selection and training of qualified personnel and a strong program of internal audit. Deloitte & Touche LLP, an independent auditing firm, is engaged to audit the financial statements of Hughes Electronics Corporation and issue reports thereon. The audit is conducted in accordance with generally accepted auditing standards that comprehend the consideration of internal control and tests of transactions to the extent necessary to form an independent opinion on the financial statements prepared by management. The Independent Auditors' Report appears on the next page. The Board of Directors, through its Audit Committee, is responsible for assuring that management fulfills its responsibilities in the preparation of the financial statements and engaging the independent auditors. The Audit Committee reviews the scope of the audits and the accounting principles being applied in financial reporting. The independent auditors, representatives of management, and the internal auditors meet regularly (separately and jointly) with the Audit Committee to review the activities of each, to ensure that each is properly discharging its responsibilities and to assess the effectiveness of internal control. It is management's conclusion that internal control at December 31, 1999 provides reasonable assurance that the books and records reflect the transactions of the company and that established policies and procedures are complied with. To ensure complete independence, Deloitte & Touche LLP has full and free access to meet with the Audit Committee, without management representatives present, to discuss the results of the audit, the adequacy of internal control, and the quality of financial reporting. /s/MICHAEL T. SMITH /s/ROXANNE S. AUSTIN Michael T. Smith Roxanne S. Austin Chairman of the Board and Senior Vice President and Chief Executive Officer Chief Financial Officer IV-30 HUGHES ELECTRONICS CORPORATION INDEPENDENT AUDITORS' REPORT To the Board of Directors of Hughes Electronics Corporation: We have audited the accompanying Balance Sheets of Hughes Electronics Corporation (as more fully described in Note 1 to the financial statements) as of December 31, 1999 and 1998 and the related Statements of Operations and Available Separate Consolidated Net Income (Loss), Statements of Changes in Stockholder's Equity and Statements of Cash Flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of Hughes Electronics Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 financial statements present fairly, in all material respects, the financial position of Hughes Electronics Corporation at December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. As discussed in Note 2 to the accompanying financial statements, effective January 1, 1998, Hughes Electronics Corporation changed its method of accounting for costs of start-up activities by adopting American Institute of Certified Public Accountants Statement of Position 98-5, Reporting on the Costs of Start- Up Activities. /s/DELOITTE & TOUCHE LLP - ------------------------ DELOITTE & TOUCHE LLP Los Angeles, California January 19, 2000 (March 1, 2000 as to Note 21) IV-31 HUGHES ELECTRONICS CORPORATION FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA STATEMENTS OF OPERATIONS AND AVAILABLE SEPARATE CONSOLIDATED NET INCOME (LOSS)
Years Ended December 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (Dollars in Millions) Revenues Direct broadcast, leasing and other services $4,550.1 $2,640.2 $1,984.7 Product sales 1,010.2 840.4 853.6 -------- -------- -------- Total Revenues 5,560.3 3,480.6 2,838.3 -------- -------- -------- Operating Costs and Expenses Broadcast programming and other costs 2,075.1 1,211.4 912.3 Cost of products sold 954.6 606.6 538.4 Selling, general and administrative expenses 2,307.9 1,320.9 1,083.8 Depreciation and amortization 647.4 384.6 257.0 Amortization of GM purchase accounting adjustments 3.3 3.3 3.3 -------- -------- -------- Total Operating Costs and Expenses 5,988.3 3,526.8 2,794.8 -------- -------- -------- Operating Profit (Loss) (428.0) (46.2) 43.5 Interest income 27.0 112.3 33.0 Interest expense (122.7) (17.5) (91.0) Other, net (136.3) (151.8) 388.6 -------- -------- -------- Income (Loss) From Continuing Operations Before Income Taxes, Minority Interests, Extraordinary Item and Cumulative Effect of Accounting Change (660.0) (103.2) 374.1 Income tax provision (benefit) (236.9) (142.3) 162.0 Minority interests in net losses of subsidiaries 32.0 24.4 24.8 -------- -------- -------- Income (Loss) from continuing operations before extraordinary item and cumulative effect of accounting change (391.1) 63.5 236.9 Income from discontinued operations, net of taxes 99.8 196.4 170.6 Gain on sale of discontinued operations, net of taxes - - 62.8 -------- -------- -------- Income (Loss) before extraordinary item and cumulative effect of accounting change (291.3) 259.9 470.3 Extraordinary item, net of taxes - - (20.6) Cumulative effect of accounting change, net of taxes - (9.2) - -------- -------- -------- Net Income (Loss) (291.3) 250.7 449.7 Adjustments to exclude the effect of GM purchase accounting adjustments 21.0 21.0 21.0 -------- -------- -------- Earnings (Loss) excluding the effect of GM purchase accounting adjustments (270.3) 271.7 470.7 Preferred stock dividends (50.9) - - -------- -------- -------- Earnings (Loss) Used for Computation of Available Separate Consolidated Net Income (Loss) $ (321.2) $ 271.7 $ 470.7 ======== ======== ======== Available Separate Consolidated Net Income (Loss) Average number of shares of General Motors Class H Common Stock outstanding (in millions) (Numerator) 124.7 105.3 101.5 Average Class H dividend base (in millions) (Denominator) 418.5 399.9 399.9 Available Separate Consolidated Net Income (Loss) $ (95.7) $ 71.5 $ 119.4 ======== ======== ========
____________ Reference should be made to the Notes to Financial Statements. IV-32 HUGHES ELECTRONICS CORPORATION BALANCE SHEETS
December 31, ----------------------- ASSETS 1999 1998 ---------- ---------- (Dollars in Millions) Current Assets Cash and cash equivalents $ 238.2 $ 1,342.0 Accounts and notes receivable, net of allowances of $92.9 and $23.9 960.9 764.6 Contracts in process 155.8 179.0 Inventories 236.1 286.6 Net assets of discontinued operations 1,224.6 1,005.8 Deferred income taxes 254.3 209.7 Prepaid expenses and other 788.1 287.5 --------- --------- Total Current Assets 3,858.0 4,075.2 Satellites, net 3,907.3 3,197.5 Property, net 1,223.0 683.0 Net Investment in Sales-type Leases 146.1 173.4 Intangible Assets, net 7,406.0 3,185.9 Investments and Other Assets 2,056.6 1,302.4 --------- --------- Total Assets $18,597.0 $12,617.4 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts payable $ 1,062.2 $ 691.8 Deferred revenues 130.5 43.8 Short-term borrowings and current portion of long-term debt 555.4 156.1 Accrued liabilities and other 894.0 454.3 --------- --------- Total Current Liabilities 2,642.1 1,346.0 --------- --------- Long-Term Debt 1,586.0 778.7 Other Liabilities and Deferred Credits 1,454.2 957.7 Deferred Income Taxes 689.1 641.1 Commitments and Contingencies Minority Interests 544.3 481.7 Stockholder's Equity Capital stock and additional paid-in capital 9,809.5 8,146.1 Preferred stock 1,487.5 - Retained earnings (deficit) (84.4) 257.8 --------- --------- Subtotal Stockholder's Equity 11,212.6 8,403.9 --------- --------- Accumulated Other Comprehensive Income (Loss) Minimum pension liability adjustment (7.3) (6.8) Accumulated unrealized gains on securities 466.0 16.1 Accumulated foreign currency translation adjustments 10.0 (1.0) --------- --------- Accumulated other comprehensive income 468.7 8.3 --------- --------- Total Stockholder's Equity 11,681.3 8,412.2 --------- --------- Total Liabilities and Stockholder's Equity $18,597.0 $12,617.4 ========= =========
____________ Reference should be made to the Notes to Financial Statements. IV-33 HUGHES ELCTRONICS CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (Dollars in Millions)
Capital Stock Parent and Accumulated Company's Additional Retained Other Total Net Paid-In Preferred Earnings Comprehensive Stockholder's Comprehensive Investment Capital Stock (Deficit) Income (Loss) Equity Income ---------- ------- ----- --------- ------------- ------ ------ Net contribution from Parent Company 1,124.2 1,124.2 Transfer of capital from Parent Company's net investment (4,063.8) $4,063.8 - Capital contribution resulting from the Hughes Transactions 4,259.0 4,259.0 Minimum pension liability adjustment resulting from the Hughes Transactions (6.3) (6.3) Unrealized gains on securities resulting from the Hughes Transactions 21.4 21.4 Net income 442.6 $ 7.1 449.7 $ 449.7 Foreign currency translation adjustments 0.6 0.6 0.6 ------- Comprehensive income $ 450.3 --------- -------- -------- ------- ------ --------- ======= Balance at December 31, 1997 - 8,322.8 - 7.1 10.3 8,340.2 Net Income 250.7 250.7 $ 250.7 Delco post-closing price adjustment (199.7) (199.7) Tax benefit from exercise of GM Class H common stock options 23.0 23.0 Minimum pension liability adjustment (0.5) (0.5) (0.5) Foreign currency translation adjustments 3.8 3.8 3.8 Unrealized gains on securities: Unrealized holding gains 1.8 1.8 1.8 Less: reclassification adjustment for gains included in net income (7.1) (7.1) (7.1) ------- Comprehensive income $ 248.7 --------- -------- -------- ------- ------ --------- ======= Balance at December 31, 1998 - 8,146.1 - 257.8 8.3 8,412.2 Net Loss (291.3) (291.3) $(291.3) Preferred stock $1,487.5 1,487.5 Preferred stock dividends (50.9) (50.9) Shares reacquired (11.1) (11.1) Stock options exercised 114.4 114.4 Shares issued in connection with acquisitions 1,506.7 1,506.7 Tax benefit from exercise of GM Class H common stock options 53.4 53.4 Minimum pension liability adjustment (0.5) (0.5) (0.5) Foreign currency translation adjustments 11.0 11.0 11.0 Unrealized gains on securities 449.9 449.9 449.9 ------- Comprehensive income $ 169.1 --------- -------- -------- ------- ------ --------- ======= Balance at December 31, 1999 $ - $9,809.5 $1,487.5 $ (84.4) $468.7 $11,681.3 ========= ======== ======== ======= ====== =========
- -------------------------- Reference should be made to the Notes to Financial Statements. * * * * * * * * * * * IV-34 HUGHES ELECTRONICS CORPORATION STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Cash Flows from Operating Activities (Dollars in Millions) Income (Loss) from continuing operations before extraordinary item and cumulative effect of accounting change $ (391.1) $ 63.5 $ 236.9 Adjustments to reconcile income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change to net cash provided by operating activities Depreciation and amortization 650.7 387.9 260.3 Equity losses from unconsolidated affiliates 189.2 128.3 72.2 Amortization of gains on sale-leasebacks (10.8) (36.2) (42.9) Net gain on sale of investments and businesses sold (30.0) (13.7) (489.7) Gross profit on sales-type leases - - (33.6) Net loss on discontinuation of wireless product lines 272.1 - - Net loss on disposal of assets 2.7 - - Deferred income taxes and other 271.1 99.6 220.5 Change in other operating assets and liabilities Accounts and notes receivable 35.0 (49.4) (246.2) Contracts in process 23.2 1.7 (19.5) Inventories (38.7) 12.9 (39.9) Prepaid expenses and other (494.0) (91.6) (138.0) Collections of principal on net investment in sales-type leases 22.2 40.6 22.0 Accounts payable 101.4 224.0 (183.9) Deferred revenues (50.3) (34.0) (21.2) Accrued liabilities and other 59.6 (19.0) 207.3 Other (232.8) (102.5) 286.3 --------- --------- --------- Net Cash Provided by Operating Activities 379.5 612.1 90.6 --------- --------- --------- Cash Flows from Investing Activities Investment in companies, net of cash acquired (2,443.7) (1,231.0) (1,796.8) Investment in convertible bonds (244.7) - - Expenditures for property (506.4) (243.9) (137.4) Increase in satellites (789.4) (929.4) (633.5) Early buy-out of satellites under sale and leaseback (245.4) (155.5) - Proceeds from sale of discontinued operations - - 155.0 Proceeds from disposal of property 15.8 20.0 55.1 Proceeds from sale of investments - 12.4 242.0 Proceeds from insurance claims 272.0 398.9 - --------- --------- --------- Net Cash Used in Investing Activities (3,941.8) (2,128.5) (2,115.6) --------- --------- --------- Cash Flows from Financing Activities Net increase in notes and loans payable 343.0 - - Long-term debt borrowings 8,165.6 1,165.2 2,383.3 Repayment of long-term debt (7,494.4) (1,024.1) (2,851.9) Net proceeds from issuance of preferred stock 1,485.0 - - Stock options exercised 114.4 - - Purchase and retirement of GM Class H common stock (11.1) - - Preferred stock dividends paid to General Motors (25.0) - - Premium paid to retire debt - - (34.4) Contributions from Parent Company - - 1,124.2 Payment to General Motors for Delco post-closing price adjustment - (204.7) - Capital contribution resulting from Hughes Transactions - - 4,392.8 --------- --------- --------- Net Cash Provided by (Used in) Financing Activities 2,577.5 (63.6) 5,014.0 --------- --------- --------- Net cash provided by (used in) continuing operations (984.8) (1,580.0) 2,989.0 Net cash provided by (used in) discontinued operations (119.0) 138.3 (211.5) --------- --------- --------- Net increase (decrease) in cash and cash equivalents (1,103.8) (1,441.7) 2,777.5 Cash and cash equivalents at beginning of the year 1,342.0 2,783.7 6.2 --------- --------- --------- Cash and cash equivalents at end of the year $ 238.2 $ 1,342.0 $ 2,783.7 ========= ========= =========
- -------------------------- Reference should be made to the Notes to Financial Statements. IV-35 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS Note 1: Basis of Presentation and Description of Business On December 17, 1997, Hughes Electronics Corporation ("Hughes Electronics") and General Motors Corporation ("GM"), the parent of Hughes Electronics, completed a series of transactions (the "Hughes Transactions") designed to address strategic challenges facing the three principal businesses of Hughes Electronics and unlock stockholder value in GM. The Hughes Transactions included the tax-free spin-off of the defense electronics business ("Hughes Defense") to holders of GM $1-2/3 par value and Class H common stocks, the transfer of Delco Electronics Corporation ("Delco"), the automotive electronics business, to GM's Delphi Automotive Systems unit and the recapitalization of GM Class H common stock into a new tracking stock, GM Class H common stock, that is linked to the remaining telecommunications and space business. The Hughes Transactions were followed immediately by the merger of Hughes Defense with Raytheon Company ("Raytheon"). For the periods prior to the consummation of the Hughes Transactions on December 17, 1997, Hughes Electronics, consisting of its defense electronics, automotive electronics and telecommunications and space businesses, is hereinafter referred to as former Hughes or Parent Company. In connection with the recapitalization of Hughes Electronics on December 17, 1997, the telecommunications and space business of former Hughes, consisting principally of its direct-to-home broadcast, satellite services, satellite systems and network systems businesses, was contributed to the recapitalized Hughes Electronics. Such telecommunications and space business, both before and after the recapitalization, is hereinafter referred to as Hughes. The accompanying financial statements and footnotes pertain only to Hughes and do not include balances of former Hughes related to Hughes Defense or Delco. Prior to the Hughes Transactions, the Hughes businesses were effectively operated as divisions of former Hughes. For the period prior to December 18, 1997, these financial statements include allocations of corporate expenses from former Hughes, including research and development, general management, human resources, financial, legal, tax, quality, communications, marketing, international, employee benefits and other miscellaneous services. These costs and expenses have been charged to Hughes based either on usage or using allocation methodologies primarily based upon total revenues, certain tangible assets and payroll expenses. Management believes the allocations were made on a reasonable basis; however, they may not necessarily reflect the financial position, results of operations or cash flows of Hughes on a stand-alone basis in the future. Also, prior to December 18, 1997, interest expense in the Statements of Operations and Available Separate Consolidated Net Income (Loss) included an allocated share of total former Hughes' interest expense. Revenues, operating costs and expenses, and other non-operating results for discontinued operations are excluded from Hughes' results from continuing operations for all periods presented herein. The financial results of these businesses are presented in Hughes' Statements of Operations and Available Separate Consolidated Net Income (Loss) in a single line item entitled "income from discontinued operations, net of taxes," the related assets and liabilities are presented in the balance sheets on a single line item entitled "net assets of discontinued operations" and the net cash flows as "net cash provided by (used in) discontinued operations. See further discussion in Note 17. The accompanying 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 systems manufacturing businesses. 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 with its programming distribution service known as DIRECTV, which was introduced in the U.S. in 1994 and was the first high-powered, all digital, direct-to-home ("DTH") television distribution service in North America. DIRECTV began service in Latin America in 1996. Hughes is also the owner and operator of the largest commercial satellite fleet in the world through its 81% owned subsidiary, PanAmSat. Hughes is also a leading provider of satellite wireless communications ground equipment and business communications services. Its 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 DTH satellite broadcast distribution of television programming. IV-36 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 2: Summary of Significant Accounting Policies Principles of Combination and Consolidation Prior to December 18, 1997, the financial statements present, on a combined basis, the financial position, results of operations and cash flows of the telecommunications and space business owned and operated by former Hughes. Subsequent to the Hughes Transactions, the accompanying financial statements are presented on a consolidated basis. The financial statements include the accounts of Hughes and its domestic and foreign subsidiaries that are more than 50% owned or controlled by Hughes, with investments in associated companies in which Hughes owns at least 20% of the voting securities or has significant influence accounted for under the equity method of accounting. Use of Estimates in the Preparation of the Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Revenue Recognition Revenues are generated from sales of DTH broadcast subscriptions, and the sale of transponder capacity and related services through outright sales, sales-type leases and operating lease contracts, and sales of communications equipment and services. Sales are generally recognized as products are shipped or services are rendered. DTH subscription revenues are recognized when programming is viewed by subscribers. Programming payments received from subscribers in advance of viewing are recorded as deferred revenue until earned. Satellite transponder lease contracts qualifying for capital lease treatment (typically based on the term of the lease) are accounted for as sales-type leases, with revenues recognized equal to the net present value of the future minimum lease payments. Upon entering into a sales-type lease, the cost basis of the transponder is charged to cost of products sold. The portion of each periodic lease payment deemed to be attributable to interest income is recognized in each respective period. Contracts for sales of transponders typically include telemetry, tracking and control ("TT&C") service agreements. Revenues related to TT&C service agreements are recognized as the services are performed. Transponder and other lease contracts that do not qualify as sales-type leases are accounted for as operating leases. Operating lease revenues are 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 or investments and other assets. A small percentage of revenues are derived from long-term contracts for the sale of large 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. Hughes has from time to time entered into agreements for the sale and leaseback of certain of its satellite transponders. However, as a result of early buy-out transactions described in Note 4, no obligations under sale- leaseback agreements remain at December 31, 1999. Prior to the completion of the early buy-out transactions, the leasebacks were classified as operating leases and, therefore, the capitalized cost and associated depreciation related to satellite transponders sold were not included in the accompanying financial statements. Gains resulting from the sale and leaseback transactions were deferred and amortized over the leaseback period. Leaseback expense was recorded using the straight-line method over the term of the lease, net of amortization of the deferred gains. Differences between operating leaseback payments made and expense recognized were deferred and included in other liabilities and deferred credits. Cash Flows Cash equivalents consist of highly liquid investments purchased with original maturities of 90 days or less. Net cash from operating activities includes cash payments made for interest of $174.6 million, $53.2 million and $156.8 million in 1999, 1998 and 1997, respectively. Net cash refunds received by Hughes for prior year income taxes amounted to $197.2 million and $59.9 million in 1999 and 1998, respectively. Cash payments for income taxes amounted to $24.0 million in 1997. Certain non-cash transactions occurred in connection with the consummation of the Hughes Transactions on December 17, 1997, resulting in a contribution of a net liability of $133.8 million. IV-37 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 2: Summary of Significant Accounting Policies - Continued In 1997, in a separate non-cash transaction, Hughes' subsidiary, PanAmSat Corporation ("PanAmSat"), converted its outstanding preferred stock into debt amounting to $438.5 million. 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. Amounts billed under retainage provisions of contracts are not significant, and substantially all amounts are collectible within one year. Advances offset against contract related receivables amounted to $114.5 million and $112.0 million at December 31, 1999 and 1998, respectively. Inventories Inventories are stated at the lower of cost or market principally using the average cost method. Major Classes of Inventories (Dollars in Millions) 1999 1998 ------ ------ Productive material and supplies $ 59.1 $ 55.0 Work in process 67.0 118.6 Finished goods 110.0 113.0 ------ ------ Total $236.1 $286.6 ====== ====== Property, Satellites and Depreciation Property and satellites are carried at cost. Satellite costs include construction costs, launch costs, launch insurance and capitalized interest. Capitalized satellite costs represent the costs of successful satellite launches. The proportionate cost of a satellite, net of depreciation and insurance proceeds, is written off in the period a full or partial loss of the satellite occurs. 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 Goodwill, which represents the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses, and intangible assets are amortized using the straight-line method over periods not exceeding 40 years. Software Development Costs Other assets include certain software development costs capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Capitalized software development costs at December 31, 1999 and 1998, net of accumulated amortization of $98.7 million and $70.6 million, respectively, totaled $70.4 million and $104.1 million. 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 appropriately written off. Valuation of Long-Lived Assets Hughes periodically evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal. IV-38 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 2: Summary of Significant Accounting Policies - Continued Foreign Currency Substantially all 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), a separate component of stockholder's equity. Gains and losses resulting from remeasurement into the functional currency of transactions denominated in non- functional currencies are recognized in earnings. Net foreign currency transaction gains and losses included in operations were not material for all years presented. Financial Instruments and Investments Hughes maintains investments in equity securities of unaffiliated companies. These investments are considered available-for-sale and carried at current fair value with unrealized gains or losses, net of taxes, reported as part of accumulated other comprehensive income (loss), a separate component of stockholder's equity. Fair value is determined by market quotes, when available, or by management estimate. Market values of financial instruments, other than debt and derivative instruments, are based upon management estimates. Market values of debt and derivative instruments are determined by quotes from financial institutions. The carrying value of cash and cash equivalents, accounts and notes receivable, investments and other assets, accounts payable, amounts included in accrued liabilities and other meeting the definition of a financial instrument and debt approximated fair value at December 31, 1999. Hughes' derivative contracts primarily consist of foreign exchange-forward contracts. Hughes enters into these contracts to reduce its exposure to fluctuations in foreign exchange rates. Foreign exchange-forward contracts are accounted for as hedges to the extent they are designated as, and are effective as, hedges of firm foreign currency commitments. Gains and losses on foreign exchange-forward contracts designated as hedges of firm foreign currency commitments are recognized in income in the same period as gains and losses on the underlying transactions are recognized. Stock Compensation Hughes issues 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. See Note 12 for 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, Accounting for Stock- Based Compensation. Compensation related to stock awards is recognized ratably over the vesting period and, where required, periodically adjusted to reflect changes in the stock price of the underlying security. Product and Service Related Expenses Advertising and research and development costs are expensed as incurred. Advertising expenses were $115.8 million in 1999, $130.0 million in 1998 and $74.2 million in 1997. Expenditures for research and development were $98.8 million in 1999, $92.6 million in 1998 and $81.9 million in 1997. 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 DTH consumers. Management monitors its exposure to credit losses and maintains allowances for anticipated losses. Accounting Change In 1998, Hughes adopted American Institute of Certified Public Accountants Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that all start-up costs previously capitalized be written off and recognized as a cumulative effect of accounting change, net of taxes, as of the beginning of the year of adoption. On a prospective basis, these types of costs are required to be expensed as incurred. The unfavorable cumulative effect of this accounting change at January 1, 1998 was $9.2 million after-tax. IV-39 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 2: Summary of Significant Accounting Policies - Concluded New Accounting Standards In September 1999, the Financial Accounting Standards Board ("FASB") issued Emerging Issues Task Force Issue 99-10 ("EITF 99-10"), Percentage Used to Determine the Amount of Equity Method Losses. EITF 99-10 addresses the percentage of ownership that should be used to compute equity method losses when the investment has been reduced to zero and the investor holds other securities of the investee. EITF 99-10 requires that equity method losses should not be recognized solely on the percentage of common stock owned; rather, an entity- wide approach should be adopted. Under such an approach, equity method losses must be recognized based on the ownership level that includes other equity securities (e.g., preferred stock) and loans/advances to the investee or based on the change in the investor's claim on the investee's book value. Hughes adopted EITF 99-10 during the third quarter of 1999 which resulted in Hughes recording a higher percentage of DIRECTV Japan's losses subsequent to the effective date of September 23, 1999. The unfavorable impact of adopting EITF 99-10 was $39.0 million after-tax. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 , as amended, requires all derivatives to be recorded as either assets or liabilities and the instruments to be measured at fair value. Gains or losses resulting from changes in the values of those derivatives are to be recognized immediately or deferred depending on the use of the derivative and whether or not it qualifies as a hedge. Hughes will adopt SFAS No. 133 by January 1, 2001, as required. Hughes does not expect that the adoption of SFAS No. 133 will have a material impact on Hughes' results of operations or financial position. Reclassifications Certain reclassifications have been made to the prior year balances to conform to the 1999 presentation. Note 3: Property and Satellites, Net Estimated Useful Lives (Dollars in Millions) (years) 1999 1998 ------------- -------- -------- Land and improvements 7 - 25 $ 51.4 $ 32.5 Buildings and leasehold improvements 2 - 30 197.0 136.3 Machinery and equipment 3 - 10 795.2 642.4 Equipment under operating lease 6 333.1 - Furniture, fixtures and office machines 3 - 13 92.3 67.7 Construction in progress - 363.4 206.6 -------- -------- Total 1,832.4 1,085.5 Less accumulated depreciation 609.4 402.5 -------- -------- Property, net $1,223.0 $ 683.0 ======== ======== Satellites 12 - 16 $4,683.1 $3,783.2 Less accumulated depreciation 775.8 585.7 -------- -------- Satellites, net $3,907.3 $3,197.5 ======== ======== Hughes capitalized interest of $65.1 million, $55.3 million and $64.5 million during 1999, 1998 and 1997, respectively, as part of the cost of its satellites under construction. Note 4: 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, 1999 are as follows: Sales-Type Leases -------------------- Minimum Service Lease Agreement (Dollars in Millions) Payments Payments Operating Leases - --------------------- -------- --------- ---------------- 2000 $ 42.0 $ 5.3 $ 702.0 2001 43.4 5.7 626.4 2002 43.4 5.7 575.0 2003 43.4 5.7 538.5 2004 39.7 5.2 503.1 Thereafter 37.1 5.2 1,911.3 ------ ----- -------- Total $249.0 $32.8 $4,856.3 ====== ===== ======== IV-40 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 4: Leasing Activities - Concluded The components of the net investment in sales-type leases are as follows: (Dollars in Millions) 1999 1998 ------ ------ Total minimum lease payments $249.0 $301.9 Less unearned interest income and allowance for doubtful accounts 81.1 106.0 ------ ------ Total net investment in sales-type leases 167.9 195.9 Less current portion 21.8 22.5 ------ ------ Total $146.1 $173.4 ====== ====== In 1996 and 1992, Hughes entered into sale-leaseback agreements for certain satellite transponders with other companies, including General Motors Acceptance Corporation ("GMAC"), a subsidiary of GM. Deferred gains from these sale- leaseback agreements are amortized over the expected term of the leaseback period. In 1998, PanAmSat exercised certain early buy-out options and repurchased a portion of the leased transponders for a total payment of $155.5 million. In 1999, PanAmSat exercised early buy-out options for the remaining transponders for $245.4 million in cash and $124.1 million of assumed debt. As a result of the above transactions, no deferred amounts remain outstanding at December 31, 1999. Note 5: Intangible Assets At December 31, 1999 and 1998, Hughes had $6,642.3 million and $3,184.6 million, respectively, of goodwill, net of accumulated amortization. Goodwill is amortized over 10 to 40 years. Hughes also had , net of accumulated amortization, $763.7 million and $1.3 million of intangible assets at December 31, 1999 and 1998, respectively, which are amortized over 2 to 40 years. Intangible assets consist mainly of FCC licenses, customer lists and dealer networks. Note 6: Investments Hughes has various investments that are accounted for under the equity method of accounting. Under the equity method of accounting, the investment is 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. Aggregate investments in affiliated companies, including advances and loans, accounted for under the equity method at December 31, 1999 and 1998, amounted to $317.4 million and $57.1 million, respectively. Of these amounts, approximately $232.1 million and $55.9 million at December 31, 1999 and 1998, respectively, represent the investment in DIRECTV Japan, net of accumulated losses of $237.6 million and $102.7 million as of December 31, 1999 and 1998, respectively. Hughes' pre-tax share of losses of investees is disclosed in Note 13, Other Income and Expenses. Investments in marketable equity securities stated at current fair value and classified as available-for-sale totaled $1,025.2 million and $486.0 million at December 31, 1999 and 1998, respectively. Accumulated unrealized holding gains, net of taxes, recorded as part of accumulated other comprehensive income (loss), a separate component of stockholder's equity, were $466.0 million and $16.1 million as of December 31, 1999 and 1998, respectively. Note 7: Accrued Liabilities and Other (Dollars in Millions) 1999 1998 ------ ------ Payroll and other compensation $157.2 $ 93.5 Contract-related provisions 82.3 38.5 Provision for consumer finance and rebate programs 107.3 93.0 Programming contract liabilities 82.6 - Other 464.6 229.3 ------ ------ Total $894.0 $454.3 ====== ====== Included in other liabilities and deferred credits are long-term programming contract liabilities which totaled $627.1 million at December 31, 1999. Note 8: Short-Term Borrowings and Long-Term Debt Short-Term Borrowings In October 1999, Hughes issued $500.0 million ($498.9 million net of unamortized discount) of floating rate notes in a private placement with a group of institutional investors. The notes bear interest at a variable rate which was 7.45% at December 31, 1999. Interest is payable quarterly and the notes are due and payable on October 23, 2000. IV-41 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 8: Short-Term Borrowings and Long-Term Debt - Concluded Long-Term Debt Interest Rates at (Dollars in Millions) December 31, 1999 1999 1998 ------------------ -------- ------ Notes payable 6.00% - 6.875% $ 874.1 $750.0 Revolving credit facilities 6.77% - 7.10% 727.9 155.9 Other debt 11.69% - 12.29% 40.5 28.9 -------- ------ Total debt 1,642.5 934.8 Less current portion 56.5 156.1 -------- ------ Total long-term debt $1,586.0 $778.7 ======== ====== Notes payable. PanAmSat issued five, seven, ten and thirty-year notes totaling $750.0 million in January 1998. The outstanding principal balances and interest rates for the five, seven, ten and thirty-year notes as of December 31, 1999 were $200 million, $275 million, $150 million and $125 million, respectively. Principal on the notes is payable at maturity, while interest is payable semi- annually. In July 1999, in connection with the early buy-out of satellite sale- leasebacks, PanAmSat assumed $124.1 million of variable rate notes, all of which were outstanding at December 31, 1999. The notes mature on various dates through January 2, 2002. Revolving credit facilities. Hughes has three unsecured revolving credit facilities totaling $1.6 billion, consisting of a $750.0 million multi-year facility, a $350.0 million 364-day facility, and a $500.0 million bridge facility. The multi-year credit facility provides for a commitment of $750.0 million through December 5, 2002. The 364-day facility provides for a commitment of $350.0 million through November 22, 2000. These facilities also provide backup capacity for Hughes' commercial paper program. The bridge facility provides for a commitment of $500.0 million through the earlier of November 22, 2000 or the receipt of proceeds from the issuance of any debt securities of Hughes in a public offering. $500.0 million was outstanding under the multi-year facility at December 31, 1999. No amounts were outstanding under the commercial paper program, 364-day, or bridge facilities at December 31, 1999. Each of Hughes' credit facilities contain covenants that Hughes must comply with. The covenants require Hughes to maintain a minimum level of consolidated net worth and not to exceed certain specified ratios. At December 31, 1999, Hughes was in compliance with all such covenants. PanAmSat maintains a $500.0 million multi-year revolving credit facility that provides for short-term and long-term borrowings and a $500.0 million commercial paper program that provides for short-term borrowings. The multi-year revolving credit facility provides for a commitment through December 24, 2002. Borrowings under the credit facility and commercial paper program are limited to $500.0 million in the aggregate. No amounts were outstanding under either the multi- year revolving credit facility or the commercial paper program at December 31, 1999. At December 31, 1999, Hughes' 75% owned subsidiary, SurFin Ltd. ("SurFin"), had a total of $227.9 million outstanding under a $400.0 million unsecured revolving credit facility expiring in June 2002. Other. At December 31, 1999, Galaxy Latin America, LLC's ("GLA") 100% owned subsidiary, Galaxy Brasil, Ltda. ("GLB"), had a total of $24.3 million outstanding under variable rate notes payable in varying amounts at maturity in April and May 2002. Other long-term debt at December 31, 1999 and 1998 consisted primarily of notes that are payable at maturity in April 2007. As part of a debt refinancing program undertaken by PanAmSat in 1997, an extraordinary charge of $20.6 million ($34.4 million before taxes) was recorded that resulted from the excess of the price paid for the debt over its carrying value, net of deferred financing costs. Hughes has filed a shelf registration statement with the Securities and Exchange Commission with respect to an issuance of up to $2.0 billion of debt securities from time to time. No amounts have been issued as of December 31, 1999. The aggregate maturities of long-term debt for the five years subsequent to December 31, 1999 are $56.5 million in 2000, $21.2 million in 2001, $798.8 million in 2002, $200.0 million in 2003 and $566.0 million in 2005 and thereafter. Note 9: Income Taxes The provision for income taxes is based on reported income from continuing operations before income taxes, minority interests, extraordinary item and cumulative effect of accounting change. 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 former Hughes (prior to December 18, 1997), and their domestic subsidiaries join with General Motors 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. Prior to December 18, 1997, income tax expense was allocated to Hughes as if Hughes filed a separate income tax return. IV-42 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 9: Income Taxes - Continued The income tax provision (benefit) consisted of the following: (Dollars in Millions) 1999 1998 1997 -------- -------- ------- Taxes currently payable (refundable): U.S. federal $(406.5) $(201.9) $(51.9) Foreign 30.1 15.9 9.5 State and local (24.2) (36.5) 7.7 ------- ------- ------ Total (400.6) (222.5) (34.7) ------- ------- ------ Deferred tax liabilities (assets): U.S. federal 185.0 50.8 181.9 State and local (21.3) 29.4 14.8 ------- ------- ------ Total 163.7 80.2 196.7 ------- ------- ------ Total income tax provision (benefit) $(236.9) $(142.3) $162.0 ======= ======= ====== Income (loss) from continuing operations before income taxes, minority interests, extraordinary item and cumulative effect of accounting change included the following components: (Dollars in Millions) 1999 1998 1997 -------- -------- ------- U.S. income (loss) $(519.0) $ (10.2) $415.3 Foreign loss (141.0) (93.0) (41.2) ------- ------- ------ Total $(660.0) $(103.2) $374.1 ======= ======= ====== The combined income tax provision (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:
(Dollars in Millions) 1999 1998 1997 -------- -------- ------- Expected tax (refund) at U.S. federal statutory income tax rate $(231.0) $ (36.1) $131.0 Research and experimentation tax benefits and resolution of tax contingencies (78.9) (172.9) (35.3) Foreign sales corporation tax benefit (13.6) (15.6) (13.0) U.S. state and local income taxes (29.5) (4.6) 14.6 Losses of equity method investees 60.3 36.7 25.3 Minority interests in losses of partnership 19.0 19.3 17.5 Non-deductible goodwill amortization 31.0 20.0 9.7 Other 5.8 10.9 12.2 ------- ------- ------ Total income tax provision (benefit) $(236.9) $(142.3) $162.0 ======= ======= ======
Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities at December 31 were as follows:
1999 1998 ----------------------- ----------------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax (Dollars in Millions) Assets Liabilities Assets Liabilities --------- ----------- --------- ----------- Accruals and advances $ 106.1 $143.6 Sales and leasebacks - 65.4 Customer deposits, rebates and commissions 44.1 $ 114.1 52.9 State taxes 27.9 - 38.8 Gain on PanAmSat merger - 186.3 - $191.1 Satellite launch insurance costs - 136.8 - 103.1 Depreciation and amortization - 545.0 - 437.5 Net operating loss and tax credit carryforwards 287.3 - 77.8 - Programming contract liabilities 285.0 - - - Unrealized gains on securities - 318.6 - 1.2 Write-off related to wireless product lines 95.9 - - - Other 204.4 100.7 70.9 83.7 -------- -------- ------ ------ Subtotal 1,050.7 1,401.5 449.4 816.6 Valuation allowance (84.0) - (64.2) - -------- -------- ------ ------ Total deferred taxes $ 966.7 $1,401.5 $385.2 $816.6 ======== ======== ====== ======
IV-43 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 9: Income Taxes - Concluded No income tax provision has been made for the portion of undistributed earnings of foreign subsidiaries deemed permanently reinvested that amounted to approximately $29.7 million and $18.5 million at December 31, 1999 and 1998, respectively. Repatriation of all accumulated earnings would have resulted in tax liabilities of $10.4 million in 1999 and $6.4 million in 1998. At December 31, 1999, Hughes has $84.0 million of deferred tax assets relating to foreign operating loss carryforwards expiring in varying amounts between 2000 and 2004. A valuation allowance was provided for all foreign operating loss carryforwards. At December 31, 1999, a Hughes subsidiary has $45.2 million of alternative minimum tax credits generated in separate filing years, which can be carried forward indefinitely. At December 31, 1999, Hughes' subsidiaries have $126.2 million of deferred tax assets relating to federal net operating loss carryforwards which will expire in varying amounts between 2009 and 2018. Hughes has $11.9 million of deferred tax assets relating to state net operating loss carryforwards which will expire in varying amounts between 2004 and 2018. Hughes also has $20 million of research and experimentation credits which will expire in 2019. Hughes has an agreement with Raytheon which governs Hughes' rights and obligations with respect to U.S. federal and state income taxes for all periods prior to the merger of Hughes Defense with Raytheon. 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. Hughes is entitled to any U.S. federal and state income tax refunds relating to those years. The U.S. federal income tax returns of former Hughes have been examined through 1994. All years prior to 1986 are closed. Issues relating to the years 1986 through 1994 are being contested through various stages of administrative appeal. The Internal Revenue Service ("IRS") is currently examining former Hughes' U.S. federal tax returns for years 1995 through 1997. Management believes that adequate provision has been made for any adjustment which might be assessed for open years. Hughes reached an agreement with the IRS regarding a claim for refund of U.S. federal income taxes related to the treatment of research and experimentation costs for the years 1983 through 1995. Hughes recorded a total of $172.9 million of research and experimentation tax benefits during 1998, a substantial portion of which related to the above noted agreement with the IRS and covered prior years. Hughes has taxes receivable from GM at December 31, 1999 and 1998, respectively, of approximately $610.6 million and $379.3 million of which $290.8 million and $45.1 million, respectively, are included in prepaid expenses and other in the balance sheets. Note 10: 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. Prior to December 18, 1997, the pension related assets and liabilities and the postretirement benefit plans were maintained by former Hughes for its non- automotive businesses and were not included in the Hughes balance sheet. A portion of former Hughes' net pension expense and postretirement benefit cost was allocated to Hughes and is included in the Statements of Operations and Available Separate Consolidated Net Income (Loss). For 1997, the pension expense and post retirement benefit cost components were not determined separately for the Hughes participants. The 1997 information presented below is based on pro rata allocations from former Hughes for each pension and postretirement benefit component. IV-44 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 10: Retirement Programs and Other Postretirement Benefits - Continued The components of the pension benefit obligation and the other postretirement benefit obligation, as well as the net benefit obligation recognized in the balance sheets, are shown below:
Other Postretirement Pension Benefits Benefits ------------------ ------------------- (Dollars in Millions) 1999 1998 1999 1998 -------- ------- ------- --------- Change in Benefit Obligation Net benefit obligation at beginning of year $341.8 $316.4 $ 24.7 $ 19.5 Service cost 14.5 13.6 0.6 0.5 Interest cost 23.9 22.5 1.5 1.2 Plan participants' contributions 3.0 3.0 - - Actuarial (gain) loss (31.3) 17.1 (2.7) 5.1 Benefits paid (34.2) (30.8) (1.3) (1.6) ------ ------ ------ ------ Net benefit obligation at end of year 317.7 341.8 22.8 24.7 ------ ------ ------ ------ Change in Plan Assets Fair value of plan assets at beginning of year 346.6 337.0 - - Actual return on plan assets 69.6 30.3 - - Employer contributions 3.0 4.3 (1.3) (1.6) Plan participants' contributions 3.0 3.0 - - Benefits paid (34.2) (30.8) 1.3 1.6 Transfers 2.1 2.8 - - ------ ------ ------ ------ Fair value of plan assets at end of year 390.1 346.6 - - ------ ------ ------ ------ Funded status at end of year 72.4 4.8 (22.8) (24.7) Unamortized amount resulting from changes in plan provisions (0.4) 1.9 - - Unamortized net amount resulting from changes in plan experience and actuarial assumptions (38.7) 26.7 (1.4) 0.7 ------ ------ ------ ------ Net amount recognized at end of year $ 33.3 $ 33.4 $(24.2) $(24.0) ====== ====== ====== ====== Amounts recognized in the balance sheet consist of: Prepaid benefit cost $ 43.0 $ 42.0 Accrued benefit cost (24.6) (23.2) $(24.2) $(24.0) Intangible asset 2.6 3.2 - - Deferred tax assets 5.0 4.6 - - Accumulated other comprehensive loss 7.3 6.8 - - ------ ------ ------ ------ Net amount recognized at end of year $ 33.3 $ 33.4 $(24.2) $(24.0) ====== ====== ====== ======
Included in the pension plan assets at December 31, 1999 and 1998 are GM Class H common stock of $0.6 million and $0.4 million, GM $1-2/3 common stock of $0.3 million and $1.3 million and GMAC bonds of $0.5 million and $0.6 million, respectively. IV-45 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 10: Retirement Programs and Other Postretirement Benefits - Concluded Other Postretirement Weighted-average assumptions as of Pension Benefits Benefits December 31 ---------------- ---------------- 1999 1998 1999 1998 ------ ------ ------ ------ Discount rate 7.75% 6.75% 7.50% 6.50% Expected return on plan assets 9.50% 9.50% N/A N/A Rate of compensation increase 5.00% 5.00% N/A N/A For measurement purposes, a 9.0% annual rate of increase per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually 0.5% per year to 6.0% in 2006.
Other Postretirement Pension Benefits Benefits --------------------------- ------------------------ (Dollars in Millions) 1999 1998 1997 1999 1998 1997 ------ ------ ------ ------ ------ ------ Components of net periodic benefit cost Benefits earned during the year $ 14.5 $ 13.6 $ 11.4 $0.6 $ 0.5 $ 0.5 Interest accrued on benefits earned in prior years 23.9 22.5 22.4 1.5 1.2 1.2 Expected return on assets (28.5) (26.3) (24.7) - - - Amortization components Asset at date of adoption - (2.7) (3.0) - - - Amount resulting from changes in plan provisions 0.4 0.4 0.4 - - - Net amount resulting from changes in plan experience and actuarial assumptions 4.7 2.7 2.0 - (0.1) (0.2) ------ ------ ------ ---- ----- ----- Net periodic benefit cost $ 15.0 $ 10.2 $ 8.5 $2.1 $ 1.6 $ 1.5 ====== ====== ====== ==== ===== =====
The projected benefit obligation and accumulated benefit obligation for the pension plans with accumulated benefit obligations in excess of plan assets were $52.9 million and $42.4 million, respectively, as of December 31, 1999 and $49.8 million and $38.9 million, respectively, as of December 31, 1998. The pension plans with accumulated benefit obligations in excess of plan assets do not have any underlying assets. A one-percentage point change in assumed health care cost trend rates would have the following effects:
1-Percentage 1-Percentage (Dollars in Millions) Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components $0.4 $(0.3) Effect on postretirement benefit obligation 3.2 (2.8)
Hughes maintains 401(k) plans for qualified employees. A portion of employee contributions are matched by Hughes and amounted to $12.5 million, $10.6 million and $9.6 million in 1999, 1998 and 1997, respectively. Hughes has disclosed certain amounts associated with estimated future postretirement benefits other than pensions and characterized such amounts as "other postretirement benefit obligation." Notwithstanding the recording of such amounts and the use of these terms, Hughes does not admit or otherwise acknowledge that such amounts or existing postretirement benefit plans of Hughes (other than pensions) represent legally enforceable liabilities of Hughes. Note 11: Stockholder's Equity In connection with the Hughes Transactions, Hughes was recapitalized on December 17, 1997 at which time 1,000 shares of $1.00 par value common stock, representing all of the authorized and outstanding common stock of Hughes, were issued to GM. Prior to December 17, 1997, the equity of Hughes was comprised of Parent Company's net investment in its telecommunications and space business. IV-46 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 11: Stockholder's Equity - Concluded The following represents changes in the components of accumulated other comprehensive income (loss), net of taxes, as of December 31:
1999 1998 1997 ----------------------------- ----------------------------- -------------------------- Tax Tax Pre-tax (Credit) Net Pre-tax (Credit) Net Pre-tax Tax Net (Dollars in Millions) Amount Expense Amount Amount Expense Amount Amount Expense Amount -------- -------- ------- -------- -------- ------- ------- ------- ------ Minimum pension liability adjustments $ (0.8) $ (0.3) $ (0.5) $ (0.8) $(0.3) $(0.5) - - - Foreign currency translation adjustments $ 11.0 - $ 11.0 $ 3.8 - $ 3.8 $0.6 - $0.6 Unrealized gains on securities $767.3 $317.4 $449.9 $ 3.0 $ 1.2 $ 1.8 - - - Reclassification adjustment for gains included in net income - - - $(11.8) $(4.7) $(7.1) - - -
Note 12: 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 77.6 million shares of GM Class H common stock on a cumulative basis were available for grant through December 31, 1999. 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 four years, expire ten years from date of grant and are subject to earlier termination under certain conditions. As part of the Hughes Transactions, the outstanding options of former Hughes employees who continued as Hughes employees were converted on December 18, 1997 into options to purchase recapitalized GM Class H common stock. Recognition of compensation expense was not required in connection with the conversion. Changes in the status of outstanding options were as follows: Shares Under Weighted-Average GM Class H Common Stock Option Exercise Price ------------ ---------------- Outstanding at December 31, 1997 13,961,615 $29.08 Granted 4,180,525 51.02 Exercised (1,506,241) 23.22 Terminated (937,179) 31.79 ---------- ------ Outstanding at December 31, 1998 15,698,720 $35.32 Granted 5,004,275 48.23 Exercised (3,436,057) 29.84 Terminated (1,431,582) 40.46 ---------- ------ Outstanding at December 31, 1999 15,835,356 $39.84 ========== ====== IV-47 HUGHES ELECTRONICS CORPOATION NOTES TO FINANCIAL STATEMENTS - Continued Note 12: Incentive Plans - Concluded The following table summarizes information about the Plan stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable ------------------------------------------- ---------------------------- Weighted- Average Remaining Weighted- Weighted- Range of Number Contractual Average Number Average Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price --------------- ----------- ------------ -------------- ----------- -------------- $9.86 to $20.00 326,686 2.9 $15.06 326,686 $ 15.06 20.01 to 30.00 663,549 4.9 22.24 663,549 22.24 30.01 to 40.00 6,634,506 7.1 31.74 3,842,272 32.01 40.01 to 50.00 5,573,775 9.0 46.37 17,712 47.63 50.01 to 85.72 2,636,840 8.5 55.78 1,031,719 54.79 --------------- ---------- --- ------ --------- ------- $9.86 to $85.72 15,835,356 7.8 $39.84 5,881,938 $ 33.59 ===== ====== ========== === ===== ========= =======
At December 31, 1999, 43.1 million shares were available for grant under the Plan subject to GM Executive Compensation Committee approval. On May 5, 1997, PanAmSat adopted a stock option incentive plan with terms similar to the Plan. As of December 31, 1999, PanAmSat had 3,455,832 options outstanding to purchase its common stock with exercise prices ranging from $29.00 per share to $59.75 per share. The options vest ratably over three to four years and have a remaining life ranging from seven years to nine years. At December 31, 1999, 439,420 options were exercisable at a weighted average exercise price of $36.46. 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: (Dollars in Millions) 1999 1998 1997 -------- ------ ------ Earnings (loss) used for computation of available separate consolidated net income (loss) as reported $(321.2) $271.7 $470.7 pro forma (384.9) 186.7 427.2 The pro forma amounts for compensation cost are not indicative of the effects on operating results for future periods. For stock options granted prior to the Hughes Transactions, the estimated compensation cost was based upon an allocation from former Hughes which was calculated using the Black-Scholes valuation model for estimation of the fair value of its options. The following table presents the estimated weighted- average fair value of options granted and the assumptions used for the 1999, 1998 and 1997 calculations (for 1998 and 1997, stock volatility was estimated based upon a three-year average derived from a study of a Hughes determined peer group): 1999 1998 1997 -------- -------- ------- Estimated fair value per option granted $ 24.02 $ 22.78 $26.90 Average exercise price per option granted 48.23 51.02 31.71 Expected stock volatility 38.0% 32.8% 32.5% Risk-free interest rate 5.2% 5.6% 5.9% Expected option life (in years) 7.0 6.2 7.0 Note 13: Other Income and Expenses (Dollars in Millions) 1999 1998 1997 ------- ------- ------ Equity losses from unconsolidated affiliates $(189.2) $(128.3) $(72.2) Gain on PanAmSat merger - - 489.7 Gain from sale of common stock of an affiliate 39.4 - - Other 13.5 (23.5) (28.9) ------- ------- ------ Total other, net $(136.3) $(151.8) $388.6 ======= ======= ====== IV-48 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 13: Other Income and Expenses - Concluded Equity losses from unconsolidated affiliates at December 31, 1999 are primarily comprised of losses at DIRECTV Japan, of which Hughes owns 42.2%, Hughes Ispat Limited, of which Hughes owns 45%, Galaxy Entertainment de Venezuela, C.A., of which Hughes owns 20% and American Mobile Satellite Corporation ("AMSC"). During the third quarter of 1999, AMSC issued new shares of its common stock, resulting in Hughes recording an increase in its investment in AMSC of $50.2 million with an offsetting adjustment to other comprehensive income (loss), a separate component of stockholder's equity. The issuance of the new shares diluted Hughes' ownership in AMSC to 14%. Since Hughes no longer exerted significant influence over AMSC's operations, the accounting for the AMSC investment from the equity method to the cost basis of accounting. Note 14: Related-Party Transactions In the ordinary course of its operations, Hughes provides telecommunications services and sells electronic components to, and purchases sub-components from, related parties. The following table summarizes significant related-party transactions: (Dollars in Millions) 1999 1998 1997 ----- ----- ----- Revenues $46.5 $40.5 $25.0 Costs and expenses Purchases 35.2 29.0 38.4 Allocation of corporate expenses - - 57.9 Allocated interest - - 31.6 Note 15: Available Separate Consolidated Net Income (Loss) 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 separate consolidated net income (loss) of Hughes, excluding the effects of GM purchase accounting adjustments arising from GM's acquisition of Hughes and including the effects of preferred 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 (124.7 million, 105.3 million and 101.5 million during 1999, 1998 and 1997, 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 100% of the tracking stock interest in the earnings of Hughes (Average Class H dividend base). The Average Class H dividend base was 418.5 million during 1999 and 399.9 million during 1998 and 1997. Upon conversion of the GM Series H preference stock into GM Class H common stock, both the numerator and the denominator used in the computation of ASCNI will increase by the number of shares of the GM Class H common stock issued (see further discussion in Note 16). In addition, the denominator used in determining the ASCNI of Hughes may be adjusted from time to time as deemed appropriate by the GM Board of Directors ("GM Board") 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. In connection with the PRIMESTAR and USSB transactions (see further discussion in Note 17), GM contributed to Hughes an amount of cash sufficient to enable Hughes to purchase from GM, for fair value as determined by the GM Board, the number of shares of GM Class H common stock delivered by Hughes. In accordance with the GM certificate of incorporation, the Class H dividend base was increased to reflect that number of shares. The number of shares issued as part of the PRIMESTAR acquisition and the USSB merger have been included in the calculation of both the numerator and denominator of the fraction described above since the consummation dates of the transactions. IV-49 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 15: Available Separate Consolidated Net Income (Loss) - Concluded Effective January 1, 1999, 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. Prior to January 1, 1999, the exercise of stock options did not affect the GM Class H dividend base (denominator). From time to time, in anticipation of exercises of stock options, Hughes purchases 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. Dividends may be paid on the GM Class H common stock only when, as, and if declared by GM's Board of Directors in its sole discretion. Dividends may be paid on GM Class H common stock to the extent of the amount initially determined to be available for the payment of dividends on GM Class H common stock, plus the portion of earnings of GM after the closing of the Hughes Transactions attributed to GM Class H common stock. The GM Board determined that the amount initially available for the payment of dividends on shares of the recapitalized GM Class H common stock was the cumulative amount available for the payment of dividends on GM Class H common stock immediately prior to the closing of the Hughes Transactions, reduced by a pro rata portion of the net reduction in GM's total stockholder's equity resulting from the Hughes Transactions. As of December 31, 1999 , the amount available for the payment of dividends on GM Class H common stock was $5.4 billion . The GM Board does not currently intend to pay cash dividends on the recapitalized GM Class H common stock. Note 16: Hughes Series A Preferred Stock On June 24, 1999, as part of a strategic alliance with Hughes, America Online ("AOL") invested $1.5 billion in shares of GM Series H 6.25% Automatically Convertible Preference Stock ("GM Series H Preference Stock"). The GM Series H preference stock will automatically convert into GM Class H common stock in three years based upon a variable conversion factor linked to the GM Class H common stock price at the time of conversion, and accrues quarterly dividends at a rate of 6.25% per year. It may be converted earlier in certain limited circumstances. GM immediately invested the $1.5 billion received from AOL in shares of Hughes Series A Preferred Stock designed to correspond to the financial terms of the GM Series H preference stock. Dividends on the Hughes Series A Preferred Stock are payable to GM quarterly at an annual rate of 6.25%. These preferred stock dividends payable to GM will reduce Hughes' earnings used for computation of the ASCNI of Hughes, which will have an effect equivalent to the payment of dividends on the Series H preference stock as if those dividends were paid by Hughes. Upon conversion of the GM Series H preference stock into GM Class H common stock, Hughes will redeem the Series A Preferred Stock through a cash payment to GM equal to the fair market value of the GM Class H common stock issuable upon the conversion. Simultaneous with GM's receipt of the cash redemption proceeds, GM will 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 ASCNI of Hughes will be increased by the corresponding number of shares of GM Class H common stock issued. Accordingly, upon conversion of the GM Series H preference stock into GM Class H common stock, both the numerator and denominator used in the computation of ASCNI will increase by the amount of the GM Class H common stock issued. Note 17: Acquisitions, Investments and Divestitures Acquisitions and Investments In September and November of 1999, DIRECTV Japan raised a total of approximately $281 million through the issuance of bonds, convertible into common stock, to five of its major shareholders, including $244.7 million issued to Hughes. On July 28, 1999, GLA acquired GLB, the exclusive distributor of DIRECTV services in Brazil, from Tevecap S.A. for approximately $114.0 million plus the assumption of debt. In connection with the transaction, Tevecap also sold its 10% equity interest in GLA to Hughes and The Cisneros Group of Companies, the remaining GLA partners, which increased Hughes' ownership interest in GLA to 77.8%. As part of the transaction, Hughes also increased its ownership interest in SurFin from 59.1% to 75.0%. The total consideration paid in the transactions amounted to approximately $101.1 million. IV-50 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 17: Acquisitions, Investments and Divestitures - Continued On May 20, 1999, Hughes acquired by merger all of the outstanding capital stock of U.S. Satellite Broadcasting Company ("USSB"), a provider of premium subscription television programming via the digital broadcasting system that it shares with DIRECTV. The total consideration of approximately $1.6 billion paid in July 1999, consisted of approximately $0.4 billion in cash and 22.6 million shares of Class H common stock. On April 28, 1999, Hughes completed the acquisition of PRIMESTAR's 2.3 million subscriber medium-power direct-to-home satellite business. The purchase price consisted of $1.1 billion in cash and 4.9 million shares of Class H common stock, for a total purchase price of $1.3 billion. As part of the agreement to acquire PRIMESTAR, Hughes agreed to purchase the high-power satellite assets and related orbital frequencies of Tempo Satellite Inc., a wholly-owned subsidiary of TCI Satellite Entertainment Inc. The purchase price for the Tempo Satellite assets consisted of $500 million in cash. Of this purchase price, $150 million was paid on March 10, 1999 for a satellite that has not yet been launched and the remaining $350 million was paid on June 4, 1999 for an in-orbit satellite and 11 related satellite orbital frequencies. Hughes agreed, in connection with its acquisition of PRIMESTAR, to exit the medium-power business prior to May 1, 2001. Hughes formulated a detailed exit plan during the second quarter of 1999 and immediately began to migrate the medium-power customers to DIRECTV's high-power platform. Accordingly, Hughes accrued exit costs of $150 million in determining the purchase price allocated to the net assets acquired. The principal components of such exit costs include penalties to terminate assumed contracts and costs to remove medium-power equipment from customer premises. The timing of subscriber migration and exit of the medium-power business is currently estimated to occur by the end of 2000, but is subject to change pending final management determination, which could result in an adjustment to the amount of accrued exit costs. The amount of accrued exit costs remaining at December 31, 1999 was $123.9 million. In February 1999, Hughes acquired an additional ownership interest in Grupo Galaxy Mexicana, S.R.L. de C.V. ("GGM"), a Latin America local operating company which is the exclusive distributor of DIRECTV in Mexico, from Grupo MVS, S.R.L. de C.V. Hughes' equity ownership represents 49.0% of the voting equity and all of the non-voting equity of GGM. In October 1998, Hughes acquired from Grupo MVS an additional 10.0% interest in GLA, increasing Hughes' ownership interest to 70.0%. Hughes also acquired an additional 19.8% interest in SurFin, a company providing financing of subscriber receiver equipment for certain local operating companies located in Latin America and Mexico, increasing Hughes' ownership percentage from 39.3% to 59.1%. The aggregate purchase price for these transactions was $197.0 million in cash. In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for $851.4 million in cash, increasing its ownership interest in PanAmSat to 81.0%. PanAmSat was originally acquired in May 1997, when Hughes and PanAmSat completed the merger of their respective satellite service operations into a new publicly- held company, which retained the name PanAmSat Corporation. Hughes contributed its Galaxy satellite services business in exchange for a 71.5% interest in the new company. Existing PanAmSat stockholders received a 28.5% interest in the new company and $1.5 billion in cash. Such cash consideration and other funds required to consummate the merger were funded by new debt financing totaling $1,725.0 million borrowed from GM, which was subsequently repaid in December 1997. The PanAmSat merger was treated as a partial sale of the Galaxy business by Hughes and resulted in a one-time pre-tax gain of $489.7 million ($318.3 million after-tax). The financial information included herein reflects the acquisitions discussed above from their respective dates of acquisition. The acquisitions were accounted for by the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on the estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair values of the net assets acquired has been recorded as goodwill, resulting in goodwill additions of $3,612.4 million and $702.9 million for the years ended December 31, 1999 and 1998, respectively. The December 31, 1999 financial statements reflect a preliminary allocation of the purchase price for the PRIMESTAR transaction based upon information currently available. Adjustments relating to the tangible assets, including equipment located on customer premises; intangible assets, including customer lists and dealer network; and accrued liabilities for programming contracts and leases with above-market rates are estimates pending the completion of independent appraisals currently in process. Additionally, the adjustment to recognize the benefit of net operating loss carryforwards of USSB represents a preliminary estimate pending further review and analysis by Hughes management. The foregoing appraisals, review and analysis are expected to be completed by March 31, 2000. Accordingly, the final purchase price allocations may be different from the amounts reflected herein. IV-51 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 17: Acquisitions, Investments and Divestitures - Concluded The following selected unaudited pro forma information is being provided to present a summary of the combined results of Hughes and USSB and PRIMESTAR for 1999 and 1998 as if the acquisitions had occurred as of the beginning of the respective periods, giving effect to purchase accounting adjustments. The pro forma data presents only significant transactions, is presented for informational purposes only and may not necessarily reflect the results of operations of Hughes had these companies operated as part of Hughes for each of 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. (Dollars in Millions) 1999 1998 --------- -------- Total Revenues $6,350.3 $5,318.6 Income (loss) before extraordinary item and cumulative effect of accounting change (297.1) 160.0 Net income (loss) (297.1) 150.8 Pro forma available separate consolidated net Income (loss) (103.1) 53.4 Divestitures On January 13, 2000, Hughes announced that it had reached an agreement to sell its satellite systems manufacturing businesses to The Boeing Company ("Boeing") for $3.75 billion in cash. The final transaction, which is subject to regulatory approval, is expected to close in the second or third quarter of 2000. The financial results for the satellite systems manufacturing businesses are treated as discontinued operations for all periods presented herein. On December 15, 1997, Hughes sold substantially all of the assets and liabilities of the Hughes Avicom business to Rockwell Collins, Inc. for cash, which resulted in an after-tax gain of $62.8 million. Hughes Avicom is treated as a discontinued operation for all periods prior to its disposition. Summarized financial information for the discontinued operations follows: (Dollars in Millions) 1999 1998 1997 -------- -------- -------- Revenues $1,780.4 $2,483.3 $2,392.5 Income tax provision 42.9 97.6 74.7 Net income 99.8 196.4 170.6 Hughes also announced on January 13, 2000, the discontinuation of its mobile cellular and narrowband local loop product lines at Hughes Network Systems. As a result of this decision, Hughes recorded a fourth quarter 1999 pre-tax charge to continuing operations of $272.1 million. The charge represents the write-off of receivables and inventories, licenses, software and equipment with no alternative use. Also, in December 1997, Hughes repurchased from AT&T for $161.8 million, a 2.5% equity interest in DIRECTV, ending AT&T's marketing agreement to distribute the DIRECTV direct broadcast satellite television service and DIRECTV/TM/ receiver equipment. Note 18: Derivative Financial Instruments and Risk Management In the normal course of business, Hughes enters into transactions that expose it to risks associated with foreign exchange rates. Hughes utilizes derivative instruments in an effort to mitigate these risks. Hughes' policy is to not enter into speculative derivative instruments for profit or execute derivative instrument contracts for which there are no underlying exposures. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and designated as a hedge at the inception of the contract. Accordingly, changes in market values of hedge instruments are highly correlated with changes in market values of the underlying transactions, both at the inception of the hedge and over the life of the hedge contract. Hughes primarily uses foreign exchange-forward contracts to hedge firm commitments denominated in foreign currencies. Foreign exchange-forward contracts are legal agreements between two parties to purchase and sell a foreign currency, for a price specified at the contract date, with delivery and settlement in the future. The total notional amounts of contracts afforded hedge accounting treatment at December 31, 1999 and 1998 were not significant. Hughes is exposed to credit risk in the event of non-performance by the counterparties to its foreign exchange-forward contracts. While Hughes believes this risk is remote, credit risk is managed through the periodic monitoring and approval of financially sound counterparties. IV-52 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 19: Segment Reporting Hughes' segments, which are differentiated by their products and services, include Direct-To-Home Broadcast, Satellite Services, and Network Systems. Direct-To-Home Broadcast is engaged in acquiring, promoting, selling and/or distributing digital entertainment programming via satellite to residential and commercial customers. Satellite Services is engaged in the selling, leasing and operating of satellite transponders and providing services for cable television systems, news companies, Internet service providers and private business networks. Network Systems is engaged in manufacturing DIRECTV receiver equipment and providing satellite wireless communications ground equipment and business communications services. Other includes the corporate office and other entities. Selected information for Hughes' operating segments are reported as follows:
Direct-To- Home Satellite Network (Dollars in Millions) Broadcast Services Systems Other Eliminations Total - --------------------------- ----------- --------- --------- --------- ------------- ---------- 1999 External Revenues $3,781.7 $ 673.6 $1,091.7 $ 13.3 - $ 5,560.3 Intersegment Revenues 3.3 137.0 293.0 2.5 $(435.8) - -------- -------- -------- -------- ------- --------- Total Revenues $3,785.0 $ 810.6 $1,384.7 $ 15.8 $(435.8) $ 5,560.3 -------- -------- -------- -------- ------- --------- Operating Profit (Loss) $ (292.1) $ 338.3 $ (227.3) $ (143.8) $(103.1) $ (428.0) Depreciation and Amortization 312.0 280.5 49.2 20.8 (11.8) 650.7 Intangibles, net 4,308.5 2,368.6 46.9 682.0 - 7,406.0 Segment Assets 9,056.6 5,984.7 1,167.3 2,765.9 (377.5) 18,597.0 Capital Expenditures (1) 516.9 956.4 35.0 170.0 (13.0) 1,665.3 -------- -------- -------- -------- ------- --------- 1998 External Revenues $1,813.7 $ 643.8 $1,000.6 $ 22.5 - $ 3,480.6 Intersegment Revenues 2.4 123.5 76.1 1.4 $(203.4) - -------- -------- -------- -------- ------- --------- Total Revenues $1,816.1 $ 767.3 $1,076.7 $ 23.9 $(203.4) $ 3,480.6 -------- -------- -------- -------- ------- --------- Operating Profit (Loss) $ (228.1) $ 318.3 $ 10.9 $ (114.2) $ (33.1) $ (46.2) Depreciation and Amortization 102.3 235.0 41.7 13.9 (5.0) 387.9 Intangibles, net - 2,433.5 53.6 698.8 - 3,185.9 Segment Assets 2,190.4 5,890.5 1,299.0 3,470.6 (233.1) 12,617.4 Capital Expenditures (1) 230.8 921.7 40.0 3.3 133.0 1,328.8 -------- -------- -------- -------- ------- --------- 1997 External Revenues $1,276.9 $ 537.3 $ 998.3 $ 25.8 - $ 2,838.3 Intersegment Revenues - 92.6 13.0 2.7 $(108.3) - -------- -------- -------- -------- ------- --------- Total Revenues $1,276.9 $ 629.9 $1,011.3 $ 28.5 $(108.3) $ 2,838.3 -------- -------- -------- -------- ------- --------- Operating Profit (Loss) $ (254.6) $ 292.9 $ 74.1 $ (63.7) $ (5.2) $ 43.5 Depreciation and Amortization 86.1 145.2 32.0 - (3.0) 260.3 Intangibles, net - 2,498.5 - 63.6 - 2,562.1 Segment Assets 1,408.7 5,682.4 1,215.6 3,918.0 (83.2) 12,141.5 Capital Expenditures (1) 105.6 625.7 43.1 0.4 (62.1) 712.7 -------- -------- -------- -------- ------- ---------
(1) Includes expenditures related to satellites in segments as follows: $136.0 million and $70.2 million in 1999 and 1998, respectively, for Direct-To-Home Broadcast segment; $532.8 million, $726.3 million and $606.1 million in 1999, 1998 and 1997, respectively, for Satellite Services segment. Satellite Services segment also includes $369.5 million and $155.5 million in 1999 and 1998, respectively, related to the early buy-out of satellite sale- leasebacks. IV-53 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 19: Segment Reporting - Concluded A reconciliation of operating profit (loss) to income (loss) from continuing operations before income taxes, minority interests, extraordinary item and cumulative effect of accounting change, as shown in the Statement of Operations and Available Separate Consolidated Net Income (Loss), follows:
(Dollars in Millions) 1999 1998 1997 -------- -------- ------- Operating profit (loss) $(428.0) $ (46.2) $ 43.5 Interest income 27.0 112.3 33.0 Interest expense (122.7) (17.5) (91.0) Other, net (136.3) (151.8) 388.6 ------ ------ ----- Income (loss) from continuing operations before income taxes, minority interests, extraordinary item and cumulative effect of accounting change $(660.0) $(103.2) $374.1 ======= ======= ======
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.
1999 1998 1997 ----------------------- ----------------------- ----------------------- Net Net Net Total Total Property & Total Property & Total Property & (Dollars in Millions) Revenues Satellites Revenues Satellites Revenues Satellites ---------- ---------- ---------- ---------- ---------- ---------- North America United States $4,407.9 $4,891.8 $2,645.6 $3,830.6 $1,781.5 $3,178.6 Canada and Mexico 114.6 51.8 56.9 2.0 44.8 - -------- -------- -------- -------- -------- -------- Total North America 4,522.5 4,943.6 2,702.5 3,832.6 1,826.3 3,178.6 -------- -------- -------- -------- -------- -------- Europe United Kingdom 175.2 10.5 111.3 14.1 25.8 10.4 Other 47.6 0.2 61.2 0.3 121.7 0.1 -------- -------- -------- -------- -------- -------- Total Europe 222.8 10.7 172.5 14.4 147.5 10.5 -------- -------- -------- -------- -------- -------- Latin America Brazil 157.7 151.1 150.9 4.6 102.1 - Other 245.3 9.8 104.2 11.1 90.4 - -------- -------- -------- -------- -------- -------- Total Latin America 403.0 160.9 255.1 15.7 192.5 - -------- -------- -------- -------- -------- -------- Asia Japan 103.6 0.7 67.5 0.5 21.1 0.5 India 85.1 12.4 79.9 14.7 41.9 12.7 China 27.7 1.2 63.4 1.7 154.3 1.5 Other 108.5 0.5 65.5 0.6 359.9 0.4 -------- -------- -------- -------- -------- -------- Total Asia 324.9 14.8 276.3 17.5 577.2 15.1 -------- -------- -------- -------- -------- -------- Total Middle East 11.9 - 20.0 - 47.2 - Total Africa 75.2 0.3 54.2 0.3 47.6 - -------- -------- -------- -------- -------- -------- Total $5,560.3 $5,130.3 $3,480.6 $3,880.5 $2,838.3 $3,204.2 ======== ======== ======== ======== ======== ========
Note 20: Commitments and Contingencies In connection with the 1997 spin-off of the defense electronics business of Hughes' predecessor as part of the Hughes restructuring transactions and the subsequent merger of that business with Raytheon Company, the terms of the merger agreement provided processes for resolving disputes that might arise in connection with post-closing financial adjustments that were also called for by the terms of the merger agreement. These financial adjustments might require a cash payment from Raytheon to Hughes or vice versa. IV-54 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 20: Commitments and Contingencies - Continued A dispute currently exists regarding the post-closing adjustments which Hughes and Raytheon have proposed to one another and related issues regarding the adequacy of disclosures made by Hughes to Raytheon in the period prior to consummation of the merger. Hughes and Raytheon are proceeding with the dispute resolution process. It is possible that the ultimate resolution of the post- closing financial adjustment and of related disclosure issues may result in Hughes making a payment to Raytheon that would be material to Hughes. However, the amount of any payment that either party might be required to make to the other cannot be determined at this time. Hughes intends to vigorously pursue resolution of the disputes through the arbitration processes, opposing the adjustments proposed by Raytheon, and seeking the payment from Raytheon that Hughes has proposed. 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 U.S. District Court for the Central District of California, alleging that DIRECTV has breached the DBS Distribution Agreement with the NRTC. The DBS Distribution Agreement provides the NRTC with certain rights, in certain specified portions of the United States, with respect to DIRECTV 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 USSB over the other five frequencies at 101 (degrees). 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). The NRTC's complaint seeks, in the alternative, the right to distribute former USSB programming on a non- exclusive basis and the recovery of related revenues from the date USSB was acquired by Hughes. DIRECTV maintains that the NRTC's right under the DBS Distribution Agreement is to market and sell the former USSB programming as its agent and the NRTC is not entitled to the claimed revenues. DIRECTV intends to vigorously defend against the NRTC claims. DIRECTV has 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 against DIRECTV alleging that DIRECTV has breached 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. Pegasus Satellite Television, Inc. and Golden Sky Systems, Inc., the two largest NRTC affiliates, filed an action on January 11, 2000 against DIRECTV in the U.S. District Court in Los Angeles. The plaintiffs allege, among other things, that DIRECTV has interfered with their contractual relationship with the NRTC. The plaintiffs plead that their rights and damages are derivative of the rights and claims asserted by the NRTC in its two cases against DIRECTV. The plaintiffs also allege that DIRECTV has interfered with their contractual relationships with manufacturers and distributors by preventing those parties from selling receiving equipment to the plaintiffs' dealers. DIRECTV denies that it has wrongfully interfered with any of plaintiffs' business relationships and will vigorously defend the lawsuit. Although an amount of loss, if any, cannot be estimated at this time, an unfavorable outcome could be reached in the NRTC and Pegasus litigation that could be material to Hughes' results of operations or financial position. General Electric Capital Corporation ("GECC") and DIRECTV, Inc. entered into a contract on July 31, 1995, in which GECC agreed to establish and manage a private label consumer credit program for consumer purchases of hardware and related DIRECTV programming. Under the contract, GECC also agreed to provide certain related services to DIRECTV, including credit risk scoring, billing and collections services. DIRECTV agreed to act as a surety for loans complying with the terms of the contract. Hughes guaranteed DIRECTV's performance under the contract. A complaint and counterclaim have been filed by the parties in the U.S. District Court for the District of Connecticut concerning GECC's performance and DIRECTV's obligation to act as a surety. GECC claims damages from DIRECTV in excess of $140 million. DIRECTV is seeking damages from GECC in excess of $45 million. Hughes intends to vigorously contest GECC's allegations and pursue its own contractual rights and remedies. Hughes does not believe that the litigation will have a material adverse impact on its results of operations or financial position. Pretrial discovery is completed. No specific trial date has been set, but a trial may be held in 2000. IV-55 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Continued Note 20: Commitments and Contingencies - Concluded There is a pending grand jury investigation into whether Hughes should be accused of criminal violations of the export control laws arising out of the participation of two of its employees on a committee formed to review the findings of Chinese engineers regarding the failure of a Long March rocket in China in 1996. Hughes is also subject to the authority of the State Department to impose sanctions for non-criminal violations of the Arms Export Control Act. The possible criminal and/or civil sanctions could include fines as well as debarment from various export privileges and participating in government contracts. If Hughes were to enter into a settlement of this matter prior to the closing of the Boeing transaction that involves a debarment from sales to the U.S. government or a material suspension of Hughes' export licenses or other material limitation on projected business activities of the satellite systems manufacturing businesses, Boeing would not be obligated to complete the purchase of Hughes' satellite systems manufacturing businesses. Hughes does not expect the grand jury investigation or State Department review to result in a material adverse effect upon its business. Hughes Space and Communications International, a wholly owned subsidiary of Hughes Space and Communications Company, has certain contracts with ICO Global Communications Operations to build the satellites and related components for a global wireless communications system. Hughes owns approximately 2.6% of the equity in ICO's parent company (which Hughes has agreed to sell to Boeing as part of the sale of Hughes' satellite systems manufacturing businesses). On August 27, 1999, the ICO parent company filed for bankruptcy protection under Chapter 11 in U.S. Bankruptcy Court in Wilmington, Delaware. On December 3, 1999, the U.S. Bankruptcy Court in this case granted final approval of debtor- in-possession financing in the amount of $500 million to a group led by Craig McCaw, the Chairman of Teledesic LLC, a company establishing a global broadband Internet-in-the-Sky satellite communications network. In October 1999, McCaw and his group also agreed to provide an additional $700 million in financing upon the ICO parent's emergence from bankruptcy court protection, to the extent that this financing is not provided by other investors. This exit financing is expected to be completed in mid-2000, upon court approval and consummation of the ICO parent company reorganization plan. There can be no assurance when the consummation of the reorganization plan will occur or if the ICO parent company will be successful in confirming any plan of reorganization. If it is unable to do so the most likely outcome would be a liquidation proceeding. In the event that a liquidation becomes probable, Hughes would expect to record a pre-tax charge to income of up to approximately $350 million, of which $100 million would be attributable to continuing operations and $250 million would be attributable to discontinued operations. A portion of the purchase price to be paid by Boeing will be placed in escrow under certain circumstances if prior to completing this sale to Boeing, Hughes' contracts with ICO are not assumed by ICO with bankruptcy court approval or new similar contracts are not entered into with bankruptcy court approval. At December 31, 1999, minimum future commitments under noncancelable operating leases having lease terms in excess of one year are primarily for real property and aggregated $250.8 million, payable as follows: $102.8 million in 2000, $52.3 million in 2001, $24.2 million in 2002, $17.8 million in 2003, $12.5 million in 2004 and $41.2 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 $58.5 million in 1999, $82.7 million in 1998 and $89.1 million in 1997. Hughes is contingently liable under standby letters of credit and bonds in the amount of $222.0 million at December 31, 1999. In Hughes' past experience, no material claims have been made against these financial instruments. In addition, at December 31, 1999 Hughes has guaranteed up to $209.1 million of bank debt, including $105.0 million related to American Mobile Satellite Corporation. Of the bank debt guaranteed, $105.0 million matures in March 2003; $55.4 million matures in September 2007; the remaining $48.7 million is due in variable amounts over the next five years. In connection with the DTH broadcast businesses, Hughes has commitments related to certain programming agreements which are variable based upon the number of underlying subscribers and market penetration rates. Minimum payments over the terms of applicable contracts are anticipated to be approximately $1,000.0 million to $1,150.0 million. As part of a marketing agreement entered into with AOL on June 21, 1999, Hughes committed to increase its sales and marketing expenditures over the next three years by approximately $1.5 billion relating to DirecPC/AOL-Plus, DIRECTV, DIRECTV/AOL TV and DirecDuo. Hughes is subject to various claims and legal actions which are pending or may be asserted against it. The aggregate ultimate liability of Hughes under these claims and actions was not determinable at December 31, 1999. In the opinion of Hughes management, such liability is not expected to have a material adverse effect on Hughes' results of operations or financial position. IV-56 HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS - Concluded Note 21: Subsequent Events On March 1, 2000, Hughes announced that DIRECTV Japan's operations will be discontinued and that its subscribers would migrate to SkyPerfecTV, a company in Japan providing direct-to-home satellite broadcasting. As a result of this transaction, Hughes will acquire a 6.8% interest in SkyPerfecTV, which is expected to complete an IPO during its fiscal year ending March 31, 2001. Hughes will be required to fund a substantial portion of the costs to be incurred over the next six to nine months to exit the DIRECTV Japan business. Hughes will accrue such exit costs during the first quarter of fiscal 2000. The first quarter charge will be offset by the fair value of the SkyPerfecTV interest received; however the amounts are not yet estimable. In addition, Hughes will continue to record its share of DIRECTV Japan's operating losses during fiscal 2000. EchoStar Communications Corporation and others commenced an action in the U.S. District Court in Colorado on February 1, 2000 against DIRECTV, Hughes Network Systems and Thomson Consumer Electronics, Inc. seeking, among other things, injunctive relief and unspecified damages, including treble damages, in connection with allegations that the defendants have entered into agreements with retailers and program providers and engaged in other conduct that violates the antitrust laws and constitutes unfair competition. DIRECTV believes that the complaint is without merit and intends to vigorously defend against the allegations raised. Although an amount of loss, if any, cannot be estimated at this time, an unfavorable outcome could be reached that could be material to Hughes' results of operations or financial position. * * * IV-57 HUGHES ELECTRONICS CORPORATION SUPPLEMENTAL INFORMATION
Selected Quarterly Data (Unaudited) 1st 2nd 3rd 4th - ------------------------------------------------------------------------------------------------- (Dollars in Millions) 1999 Quarters - ------------- Revenues $918.4 $1,316.1 $1,627.8 $1,698.0 ------ -------- -------- -------- Loss from continuing operations before income taxes and minority interests $(31.0) $ (70.8) $ (87.4) $ (470.8) Income tax benefit (13.4) (9.5) (36.8) (177.2) Minority interests in net losses of subsidiaries 6.5 6.8 8.8 9.9 Income from discontinued operations 84.1 (43.1) 6.9 51.9 ------ -------- -------- -------- Net income (loss) 73.0 (97.6) (34.9) (231.8) Earnings (Loss) used for computation of available separate consolidated net income (loss) $ 78.3 $ (93.9) $ (54.3) $ (251.3) ====== ======== ======== ======== Average number of shares of General Motors Class H common stock outstanding (in millions) 106.3 121.0 135.1 136.3 Average Class H dividend base (in millions) 400.2 414.9 428.9 430.1 Available separate consolidated net income (loss) $ 20.8 $ (27.4) $ (17.1) $ (79.6) Stock price range of General Motors Class H common stock High $53.00 $ 63.88 $ 62.44 $ 97.63 Low $38.50 $ 48.94 $ 48.75 $ 55.94
IV-58 HUGHES ELECTRONICS CORPORATION SUPPLEMENTAL INFORMATION
Selected Quarterly Data (Unaudited) - Concluded 1st 2nd 3rd 4th - -------------------------------------------------------------------------------------------- (Dollars in Millions) 1998 Quarters - ------------- Revenues $739.7 $780.5 $855.2 $1,105.2 ------ ------ ------ -------- Income (Loss) from continuing operations before income taxes, minority interests and cumulative effect of accounting change $ 19.9 $(26.3) $(19.8) $ (77.0) Income tax provision (benefit) 12.9 (8.5) (3.7) (143.0) Minority interests in net losses of subsidiaries 1.3 8.6 9.3 5.2 Income from discontinued operations 40.1 60.0 44.4 51.9 Cumulative effect of accounting change (1) (9.2) - - - ------ ------ ------ -------- Net income 39.2 50.8 37.6 123.1 Earnings used for computation of available separate consolidated net income $ 44.5 $ 56.1 $ 42.9 $ 128.2 ====== ====== ====== ======== Average number of shares of General Motors Class H common stock outstanding (in millions) 104.1 105.2 105.7 105.9 Average Class H dividend base (in millions) 399.9 399.9 399.9 399.9 Available separate consolidated net income $ 11.5 $ 14.7 $ 11.4 $ 33.9 Stock price range of General Motors Class H common stock High $48.00 $57.88 $50.81 $ 42.38 Low $31.50 $42.75 $35.00 $ 30.38
- -------------- (1) Hughes adopted SOP 98-5, Reporting on the Costs of Start-Up Activities, effective January 1, 1998. The unfavorable cumulative effect of adopting SOP 98-5 was $9.2 million. The impact on the second, third and fourth quarters of 1998 was not significant. * * * * * * * * * IV-59 EX-27 6 FDS -- FOR 12-31-1999
5 This schedule contains summary financial information extracted from General Motors Corporation December 31, 1999 Consolidated Financial Statements and is qualified in its entirety by reference to Annual Report on Form 10-K. 0000040730 General Motors Corporation 1,000,000 U.S. 12-MOS Dec-31-1999 Jan-01-1999 Dec-31-1999 1 10,442 10,808 85,720 0 10,638 41,909 67,142 34,363 274,730 53,100 131,688 218 0 1,047 19,597 274,730 152,635 176,558 126,809 157,972 1,789 404 7,750 9,047 3,118 5,576 426 0 0 6,002 9.36 9.18
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