-----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, U2k8CNkfnEsCJKGWA4rLzqnpHV/wW8LQT8CxdpoqWG47h+PuxzVdt+EOa8twAHyZ Bm+f4QTu52kjRy5Jea27dA== 0000040730-98-000066.txt : 19980817 0000040730-98-000066.hdr.sgml : 19980817 ACCESSION NUMBER: 0000040730-98-000066 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: CSX SROS: NASD SROS: NYSE SROS: PHLX 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-Q SEC ACT: SEC FILE NUMBER: 001-00143 FILM NUMBER: 98690233 BUSINESS ADDRESS: STREET 1: 100 RENAISSANCE CTR CITY: DETROIT STATE: MI ZIP: 48243-7301 BUSINESS PHONE: 3135565000 MAIL ADDRESS: STREET 1: 3044 W GRAND BOULEVARD CITY: DETROIT STATE: MI ZIP: 48202-3091 10-Q 1 SECOND QUARTER 1998 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549-1004 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 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.) 100 Renaissance Center, Detroit, Michigan 48243-7301 3044 West Grand Boulevard, Detroit, Michigan 48202-3091 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (313) 556-5000 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 . As of June 30, 1998, there were outstanding 654,201,294 shares of the issuer's $1-2/3 par value common stock and 105,616,597 shares of Class H $0.10 par value common stock. - 1 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES INDEX Page No. Part I - Financial Information (Unaudited) Item 1. Financial Statements Consolidated Statements of Income for the Three and Six Months Ended June 30, 1998 and 1997 3 Consolidated Balance Sheets as of June 30, 1998, December 31, 1997 and June 30, 1997 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Part II - Other Information (Unaudited) Item 1. Legal Proceedings 30 Item 4. Submission of Matters to a Vote of Security Holders 31 Item 6. Exhibits and Reports on Form 8-K 33 Signature 33 Exhibit 99 Hughes Electronics Corporation and Subsidiaries Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) 34 Exhibit 27 Financial Data Schedule (for SEC information only) - 2 - PART I GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in Millions Except Per Share Amounts) Net sales and revenues Manufactured products $33,577 $39,724 $70,137 $77,164 Financial services 3,280 3,204 6,441 6,401 Other income (Note 9) 2,044 2,218 3,894 3,822 ------- ------- ------- ------- Total net sales and revenues 38,901 45,146 80,472 87,387 ------ ------ ------ ------ Costs and expenses Cost of sales and other operating charges, exclusive of items listed below 28,623 33,008 58,980 64,118 Selling, general, and administrative expenses 4,401 3,984 8,143 7,575 Depreciation and amortization expenses 2,931 3,101 5,838 6,166 Interest expense 1,753 1,500 3,383 2,961 Other deductions (Note 9) 632 320 1,145 568 -------- -------- ------- -------- Total costs and expenses 38,340 41,913 77,489 81,388 ------ ------ ------ ------ Income before income taxes and minority interests 561 3,233 2,983 5,999 Income taxes 175 1,153 983 2,142 Minority interests 3 18 (7) 37 ----- ------- ------- ------- Net income 389 2,098 1,993 3,894 Dividends on preference stocks 15 20 31 40 ---- ------- ------ ------- Earnings on common stocks $374 $2,078 $1,962 $3,854 === ===== ===== ===== Basic earnings per share attributable to common stocks (Note 8) Earnings per share attributable to $1-2/3 par value $0.54 $2.68 $2.88 $4.98 Earnings per share attributable to Class H (prior to its recapitalization on December 17, 1997) $1.35 $1.94 Earnings per share attributable to Class H (subsequent to its recapitalization on December 17, 1997) $0.14 $0.27 Diluted earnings per share attributable to common stocks (Note 8) Earnings per share attributable to $1-2/3 par value $0.52 $2.67 $2.82 $4.93 Earnings per share attributable to Class H (prior to its recapitalization on December 17, 1997) $1.35 $1.94 Earnings per share attributable to Class H (subsequent to its recapitalization on December 17, 1997) $0.14 $0.27 Reference should be made to the notes to consolidated financial statements. - 3 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, June 30, 1998 Dec. 31, 1997 (Unaudited) 1997 (Unaudited) --------- ------ --------- (Dollars in Millions) ASSETS Cash and cash equivalents $8,721 $11,262 $11,674 Other marketable securities 8,407 11,722 9,605 ------- ------ ------- Total cash and marketable securities 17,128 22,984 21,279 Finance receivables - net 60,766 58,870 60,357 Accounts and notes receivable (less allowances) 8,771 7,493 7,461 Inventories (less allowances) (Note 2) 13,253 12,102 13,528 Deferred income taxes 22,179 22,478 19,291 Equipment on operating leases (less accumulated depreciation) 35,335 33,302 32,300 Property - net (Note 3) 36,050 34,567 37,653 Intangible assets - net 12,204 11,469 15,029 Other assets - net 24,938 25,623 25,007 -------- -------- -------- Total assets $230,624 $228,888 $231,905 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Accounts payable (principally trade) $15,395 $15,782 $14,197 Notes and loans payable 98,957 93,027 89,918 Deferred income taxes 3,188 2,923 3,530 Postretirement benefits other than pensions (Note 4) 40,338 41,168 44,007 Pensions 5,537 7,043 7,774 Accrued expenses and other liabilities 50,710 50,490 47,330 -------- -------- -------- Total liabilities 214,125 210,433 206,756 ------- ------- ------- Minority interests 581 727 716 General Motors - obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of General Motors (Note 5) Series D 79 79 - Series G 143 143 - Redeemable preferred stock of subsidiary - - 402 Stockholders' equity Preference stocks 1 1 1 Common stocks $1-2/3 par value (Note 6; issued, 655,007,825; 693,456,394; and 721,480,932 shares) 1,092 1,156 1,202 Class H (issued, 101,641,092 shares) - - 10 Class H (issued, 105,731,028, and 103,885,803 shares) 11 10 - Capital surplus (principally additional paid-in capital) 12,773 15,369 17,250 Retained earnings 6,706 5,416 9,201 ------- ------- ------- Subtotal 20,583 21,952 27,664 Minimum pension liability adjustment (4,062) (4,062) (3,490) Accumulated foreign currency translation adjustments (1,332) (888) (642) Net unrealized gains on securities 507 504 499 ------ ------- -------- Accumulated other comprehensive loss (4,887) (4,446) (3,633) Total stockholders' equity 15,696 17,506 24,031 -------- -------- -------- Total liabilities and stockholders' equity $230,624 $228,888 $231,905 ======= ======= ======= Reference should be made to the notes to consolidated financial statements. - 4 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, ---------------- 1998 1997 ---- ---- (Dollars in Millions) Net cash provided by operating activities $4,837 $9,773 ----- ------ Cash flows from investing activities Expenditures for property (4,614) (4,268) Investments in other marketable securities - acquisitions (13,487) (18,147) Investments in other marketable securities - liquidations 17,197 17,595 Investments in companies, net of cash acquired (1,322) (1,652) Finance receivables - acquisitions (78,491) (79,997) Finance receivables - liquidations 58,951 63,304 Proceeds from sales of finance receivables 17,356 12,930 Operating leases - acquisitions (12,379) (10,649) Operating leases - liquidations 7,732 6,227 Other 26 954 ----- ------ Net cash used in investing activities (9,031) (13,703) ----- ------ Cash flows from financing activities Net increase in loans payable 1,709 3,269 Increase in long-term debt 11,019 8,485 Decrease in long-term debt (7,564) (7,061) Proceeds from issuing common stocks 344 281 Repurchases of common stocks (3,071) (2,292) Cash dividends paid to stockholders (703) (829) ------ ------ Net cash provided by financing activities 1,734 1,853 ----- ----- Effect of exchange rate changes on cash and cash equivalents (81) (312) ----- ----- Net decrease in cash and cash equivalents (2,541) (2,389) Cash and cash equivalents at beginning of the period 11,262 14,063 ------ ------ Cash and cash equivalents at end of the period $8,721 $11,674 ===== ====== Reference should be made to the notes to consolidated financial statements. - 5 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Financial Statement Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. 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, 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") (collectively referred to as "General Motors" or "GM"). In the opinion of management, all adjustments (consisting of only normal recurring items), which are necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the GM 1997 Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission. Certain amounts for 1997 were reclassified to conform with the 1998 classifications. Note 2. Inventories Inventories included the following (in millions): June 30, Dec. 31, June 30, 1998 1997 1997 ------- -------- -------- Productive material, work in process, and supplies $7,945 $7,023 $7,879 Finished product, service parts, etc. 7,579 7,347 7,981 ----- ------- ------- Total inventories at FIFO 15,524 14,370 15,860 Less LIFO allowance 2,271 2,268 2,332 ------- ------- ------- Total inventories (less allowances) $13,253 $12,102 $13,528 ====== ====== ====== Note 3. Property - Net Property - net included the following (in millions): June 30, Dec. 31, June 30, 1998 1997 1997 -------- -------- -------- Real estate, plants, and equipment $71,369 $69,680 $69,671 Less accumulated depreciation (42,685) (41,915) (40,911) -------- ------ ------ Real estate, plants, and equipment - net 28,684 27,765 28,760 Special tools - net 7,366 6,802 8,893 ------- ------- ------- Total property - net $36,050 $34,567 $37,653 ====== ====== ====== Note 4. Postretirement Benefits Other Than Pensions 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. - 6 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 5. 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. 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 percent 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, or, under certain circumstances, prior to August 1, 1999, at a redemption price equal to 105% of the outstanding principal of the Series D Debentures from the Series D expiration date through July 31, 1998, declining ratably on each August 1 thereafter to 100% on August 1, 1999, plus accrued and unpaid interest. The Series D Preferred Securities will be redeemed upon the maturity or earlier redemption of the Series D Debentures. 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 therefore, 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 6. Common Stock Repurchases During the six months ended June 30, 1998, GM used $2.6 billion to acquire approximately 38 million shares of $1-2/3 par value common stock, which completed the second $2.5 billion stock repurchase program announced in August of 1997 and represented approximately 33 percent of the $4 billion stock repurchase program announced in February 1998. Due to work stoppages at various GM component plants, stock repurchases were suspended as part of GM's cash conservation initiatives. GM also used approximately $485 million to repurchase shares of $1-2/3 par value common stock for certain employee benefit plans during the six months ended June 30, 1998. - 7 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 7. Comprehensive Income GM's total comprehensive income was as follows (in millions): Three Months Ended Six Months Ended June 30, June 30, ----------------- ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net income $389 $2,098 $1,993 $3,894 Other comprehensive (loss) income: Foreign currency translation adjustments (68) (167) (444) (529) Unrealized gains (losses) on securities (32) 156 3 76 ---- --- ----- ---- Other comprehensive loss (100) (11) (441) (453) --- ----- ----- ----- Total comprehensive income $289 $2,087 $1,552 $3,441 === ===== ===== ===== Note 8. Earnings Per Share Attributable to Common Stocks Basic 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 assumed exercise of stock options has no effect on Class H common stock earnings per share, because to the extent that shares of Class H common stock deemed to be outstanding would increase, such increased shares would also increase the numerator of the fraction used to determine Available Separate Consolidated Net Income (ASCNI). The attribution of earnings to each class of common stock was as follows (in millions): Three Months Ended Six Months Ended June 30, June 30, ----------------- ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- Earnings attributable to common stocks Earnings attributable to $1-2/3 par value $359 $1,941 $1,933 $3,658 --- ----- ----- ----- Earnings attributable to Class H (prior to its recapitalization on December 17, 1997) $ - $137 $ - $196 --- --- --- --- Earnings attributable to Class H (subsequent to its recapitalization on December 17, 1997) $15 $ - $29 $ - -- --- -- --- 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. Earnings attributable to Class H common stock for the three and six months ended June 30, 1998 represent the ASCNI of Hughes, excluding the effects of purchase accounting adjustments arising at the time of the Corporation's acquisition of Hughes Aircraft Company (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 Class H common stock outstanding for each of the periods (105 million) and the denominator of which was 400 million. Earnings attributable to Class H common stock for the three and six months ended June 30, 1997 represent 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 the 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 Class H common stock outstanding for each of the periods (101 million) and the denominator of which was 400 million. The denominator used in determining the ASCNI of former Hughes was adjusted from time-to-time as deemed appropriate by GM's Board of Directors (GM Board) to reflect subdivisions or combinations of the Class H common stock and to reflect certain transfers of capital to or from former Hughes. 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 Class H common stock and to reflect certain transfers of capital to or from Hughes. The GM Board's discretion to make such adjustments is limited by criteria set forth in the Corporation's Restated Certificate of Incorporation. - 8 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 8. Earnings Per Share Attributable to Common Stocks (concluded) The reconciliation of the amounts used in the basic and diluted earnings per share computations for net income 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 31, 1997 ----------------------------- ----------------------------- ---------------------------------- Per Share Per Share Per Share Income Shares Amount ASCNI Shares Amount ASCNI Shares Amount ------ ------ --------- ----- ------ --------- ----- ------ --------- Three Months Ended June 30, 1998 Net income $374 $15 Less: Dividends on preference stocks 15 - ---- --- Basic EPS Net income available to common stockholders 359 661 0.54 15 105 0.14 Effect of Dilutive Securities Assumed exercise of dilutive stock options (1) 11 1 6 ------ ---- --- ---- Diluted EPS Adjusted net income available to common stockholders $358 672 $0.52 $16 111 $0.14 === === ==== == === ==== Three Months Ended June 30, 1997 Net income $1,961 $137 Less: Dividends on preference stocks 20 - ----- ----- Basic EPS Net income available to common stockholders 1,941 724 2.68 137 101 1.35 Effect of Dilutive Securities Assumed exercise of dilutive stock options (3) 5 3 3 ------ ---- ---- ---- Diluted EPS Adjusted net income available to common stockholders $1,938 729 $2.67 $140 104 $1.35 ===== === ==== === === ==== Six Months Ended June 30, 1998 Net income $1,964 $29 Less:Dividends on preference stocks 31 - ------ ---- Basic EPS Net income available to common stockholders 1,933 672 2.88 29 105 0.27 Effect of Dilutive Securities Assumed exercise of dilutive stock options (2) 10 2 5 ------ ---- --- ---- Diluted EPS Adjusted net income available to common stockholders $1,931 682 $2.82 $31 110 $0.27 ===== === ==== == === ==== Six Months Ended June 30, 1997 Net income $3,698 $196 Less: Dividends on preference stocks 40 - ------ ----- Basic EPS Net income available to common stockholders 3,658 736 4.98 196 101 1.94 Effect of Dilutive Securities Assumed exercise of dilutive stock options (5) 4 5 2 ------ ----- ---- ---- Diluted EPS Adjusted net income available to common stockholders $3,653 740 $4.93 $201 103 $1.94 ===== === ==== === === ====
- 9 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 9. Other Income and Other Deductions Other income and other deductions consisted of the following (in millions): Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1998 1997 1998 1997 ------ ------ ------ ------- Other income Nonfinancing interest $575 $483 $1,147 $949 Insurance premiums 369 261 738 516 Claims and commissions 154 137 288 258 Income from sales of receivables programs 97 85 204 213 Mortgage servicing and processing fees 221 196 403 367 Insurance capital and investment gains 123 73 271 210 Mortgage investment and other income 279 177 515 307 VW Settlement (1) - - - 88 Gain on PAS merger (2) - 490 - 490 Gain on sale of interest in Avis Europe (3) - 128 - 128 Equity in net (losses) earnings of associates (28) 33 (33) 28 Other 254 155 361 268 ----- ----- ----- ----- Total other income $2,044 $2,218 $3,894 $3,822 ===== ===== ===== ===== Other deductions Provision for financing losses 128 $127 $229 $257 Insurance losses and loss adjustment expenses 283 153 540 292 Other 221 40 376 19 --- ---- ------ ---- Total other deductions $632 $320 $1,145 $568 === === ===== === - ----------------------- (1) During the 1997 first quarter, an agreement with Volkswagen A.G. (VW) that settled a civil lawsuit GM brought against VW resulted in a pre-tax gain of $88 million ($55 million after-tax or $0.07 per share of $1-2/3 par value common stock), after deducting certain legal expenses. (2) During the 1997 second quarter, Hughes and PanAmSat Corporation (PAS) completed the merger of their respective satellite service operations into a new publicly-held company which resulted in a one-time pre-tax gain of $490 million ($318 million after-tax or $0.33 per share of $1-2/3 par value common stock and $0.80 per share of Class H common stock). (3) During the 1997 second quarter, the sale of GM's Europe's equity interest in Avis Europe resulted in a pre-tax gain of $128 million ($103 million after-tax or $0.14 per share of $1-2/3 par value common stock). Note 10. Segment Reporting Selected information regarding GM's operating segments follows: Operating Segments(a)
GM-NAO Delphi(b)GMIO GMAC Hughes(c) Other Total ------ ------ ---- ---- ------ ----- ----- For the Three Months Ended: (in millions) June 30, 1998 Net sales and revenues from external customers $21,233 $1,592 $8,697 $ - $1,366 $574 $33,462 Intersegment net sales and revenues 671 5,449 206 - 3 (6,329) - ------- ----- ------ --- ------ ----- ------ Total net sales and revenues $21,904 $7,041 $8,903 $ - $1,369 $(5,755) $33,462 ====== ===== ===== === ===== ===== ====== Net income (loss) (d) $(196) $84 $137 $365 $56 $(57) $389 Segment assets (e) $63,527 $23,215 $25,322 $ - $12,347 $5,863 $130,274 June 30, 1997 Net sales and revenues from external customers $25,621 $1,281 $9,276 $ - $2,932 $631 $39,741 Intersegment net sales and revenues 202 5,497 435 - 1,334 (7,468) - ------- ----- ------ --- ----- ----- ------ Total net sales and revenues $25,823 $6,778 $9,711 $ - $4,266 $(6,837) $39,741 ====== ===== ===== === ===== ===== ====== Net income (loss) (d) $474 $310 $488 $338 $542 $(54) $2,098 Segment assets (e) $66,976 $22,039 $25,181 $ - $18,482 $8,018 $140,696 See notes on next page.
- 10 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 10: Segment Reporting (concluded)
Operating Segments(a) GM-NAO Delphi(b) GMIO GMAC Hughes(c) Other Total ------ ------ ---- ---- ------ ----- ----- For the Six Months Ended: (in millions) June 30, 1998 Net sales and revenues from external customers $46,318 $3,110 $16,632 $ - $2,651 $1,178 $69,889 Intersegment net sales and revenues 1,475 11,554 421 - 9 (13,459) - ------- ------ ------- --- -------- ------ ------ Total net sales and revenues $47,793 $14,664 $17,053 $ - $2,660 $(12,281) $69,889 ====== ====== ====== === ===== ====== ====== Net income (loss) (d) $630 $347 $297 $714 $110 $(105) $1,993 June 30, 1997 Net sales and revenues from external customers $50,280 $2,486 $17,475 $ - $5,698 $1,259 $77,198 Intersegment net sales and revenues 402 10,956 519 - 2,696 (14,573) - ------- ------ ------- --- ----- ------ ------ Total net sales and revenues $50,682 $13,442 $17,994 $ - $8,394 $(13,314) $77,198 ====== ====== ====== === ===== ====== ====== Net income (loss) (d) $1,238 $490 $805 $710 $777 $(126) $3,894
- ------------------------- (a)Calculated with financing and insurance operations on an equity basis, which is the basis upon which such operations are evaluated. (b)Includes Delco Electronics Corporation's assets as of June 30, 1998 and operating results for the periods ended June 30, 1998. (c Represents Hughes and former Hughes for the periods ended June 30, 1998 and 1997, respectively. (d) The amount reported for Hughes excludes amortization of GM purchase accounting adjustments of approximately $5 million and $30 million for the three months ended June 30, 1998 and 1997, respectively, and $11 million and $61 million for the six months ended June 30, 1998 and 1997, respectively, related to GM's acquisition of HAC. Such amortization was allocated to GM's Other segment which is consistent with the basis upon which the segments are evaluated. (e)The amount reported for Hughes excludes the unamortized GM purchase accounting adjustments of approximately $437 million and $2,663 million, for 1998 and 1997, respectively, related to GM's acquisition of HAC. These adjustments were allocated to GM's Other segment which is consistent with the basis upon which the segments are evaluated. Note 11. Contingent Matters Hughes has maintained a suit against the U.S. Government since September 1973 regarding the Government's infringement and use of a Hughes patent (the "Williams Patent") covering "Velocity Control and Orientation of a Spin Stabilized Body," principally satellites. On April 7, 1998, the Court of Appeals for the Federal Circuit (CAFC) reaffirmed earlier decisions in the Williams case and the award of $114 million in damages. The CAFC ruled that the conclusions previously reached in the Williams case were consistent with the U.S. Supreme Court's findings in the Warner-Jenkinson case. The U.S. Government petitioned the CAFC for a rehearing and was denied. Hughes is unable to estimate the duration of any further appeal effort by the U.S. Government. While no amount has been recorded in the financial statements of Hughes to reflect the $114 million award or the interest accumulating thereon, a resolution of this issue could result in a gain that would be material to the earnings of GM attributable to Class H common stock. In connection with the 1997 spin-off of Hughes Electronics Corporation's defense business and its subsequent merger with Raytheon Company, a process was agreed to among GM, Hughes and Raytheon for resolving disputes that might arise in connection with post-closing adjustments called for by the terms of the merger agreement. Such adjustments might call for a cash payment between Hughes and Raytheon. A dispute currently exists regarding the post-closing adjustments which Hughes and Raytheon have proposed to one another. If the dispute is not resolved by negotiation, the parties will proceed to an agreed upon form of binding arbitration under which either party may be required by arbitration to make a payment to the other. It is possible that Hughes may be - 11 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Concluded (Unaudited) Note 11. Contingent Matters - concluded required by arbitration to make a payment to Raytheon that would be material to Hughes. However, the amount of payment that might be required of either party is not determinable at this time. Hughes intends to vigorously oppose the adjustments Raytheon seeks. 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 June 30,1998. 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 statements. Note 12. Subsequent Event On August 3, 1998, GM and Delphi Automotive Systems jointly announced that the GM Board of Directors has approved in principle to proceed with a series of planned transactions that would result in Delphi becoming a fully independent, publicly traded company. It is currently expected that Delphi would be incorporated and then offer 15-20 percent of its common stock in an initial public offering during the first quarter of 1999. Later in the year, all of the Delphi shares held by GM would be distributed to holders of General Motors $1-2/3 par value common stock through one of the following transactions: - A split-off transaction in which Delphi shares would be offered in exchange for GM $1-2/3 par value common stock to those GM stockholders who elected to participate in an exchange offer. - A spin-off transaction in which the shares of Delphi would be distributed to GM $1-2/3 par value common stockholders on a pro-rata basis. - Some combination of the above. General Motors also plans to structure the separation to enable GM to preserve its current credit ratings, including GMAC's "Top Tier" commercial paper rating, and to allow Delphi to have an investment-grade credit rating that would be competitive with other major automotive components and systems suppliers. An initial public offering and either split-off or spin-off of Delphi common stock would be subject to the development of definitive separation terms, further corporate approvals and government actions, including receipt of a favorable Internal Revenue Service ruling that the separation would be tax-free to GM and its stockholders for U.S. federal income tax purposes. No offer of Delphi securities will be made except by means of a prospectus. While an initial public offering of Delphi common stock is planned for the first quarter of 1999 and a full separation later in the year, it should be noted that due to the numerous uncertainties involved in these matters, there can be no assurance that an initial public offering or full separation will be completed as described or within the time periods outlined above. * * * * * * - 12 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 2. 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 MD&A included in the General Motors (GM) 1997 Annual Report on Form 10-K, as amended, (the "1997 Form 10-K"), the Hughes Electronics Corporation (Hughes) consolidated financial statements and MD&A for the period ended December 31, 1997, included as Exhibit 99 to the 1997 Form 10-K, the GMAC Annual Report on Form 10-K for the period ended December 31, 1997, the Hughes consolidated financial statements and MD&A for the period ended June 30, 1998, included as Exhibit 99 to this GM 1998 Quarterly Report on Form 10-Q, and the GMAC Quarterly Report on Form 10-Q for the period ended June 30, 1998, filed with the Securities and Exchange Commission. All earnings per share amounts included in the MD&A are reported as basic. The disaggregated financial results for GM's automotive sectors (GM's North American Operations (GM-NAO), Delphi Automotive Systems (Delphi) and GM's International Operations (GMIO)) 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. In this regard, certain common expenses were allocated among sectors less precisely than would be required for standalone 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 GM's "Other" sector. 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. Net profit margins presented in the MD&A represent net income as a percentage of net sales and revenues. - 13 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GM-NAO Financial Highlights Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 1998 1997 1998 1997 ------ ------ ------ ------ (Dollars in Millions) Net sales and revenues $21,904 $25,823 $47,793 $50,682 ------ ------ ------ ------ Pre-tax (loss) income (341) 683 861 1,810 Income tax (benefit) expense (128) 225 251 603 Earnings of nonconsolidated affiliates 17 16 20 31 ---- ---- ---- ------ Net (loss) income $(196) $474 $630 $1,238 === === === ===== Net profit margin (0.9)% 1.8% 1.3% 2.4% Vehicle Unit Deliveries of Cars and Trucks - GM-NAO Three Months Ended June 30, 1998 1997 ------------------------ ------------------------ GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- -- -------- -------- -- -------- (Units in Thousands) United States Cars 2,333 750 32.1% 2,211 712 32.2% Trucks 2,211 683 30.9% 1,891 540 28.5% ----- ---- ----- ----- Total United States 4,544 1,433 31.5% 4,102 1,252 30.5% Canada and Mexico 604 184 30.5% 525 162 30.9% --- --- ------ ------ Total North America 5,148 1,617 31.4% 4,627 1,414 30.6% ----- ----- ----- ----- Other (Central America, Caribbean, Puerto Rico) 83 10 11.7% 66 8 12.7% ----- ----- ----- ----- Total GM-NAO 5,231 1,627 31.1% 4,693 1,422 30.3% ===== ===== ===== ===== Wholesale Sales - GM-NAO Cars 637 807 Trucks 554 616 ----- ----- Total 1,191 1,423 ===== ===== Six Months Ended June 30, 1998 1997 ------------------------ ------------------------ GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- -- -------- -------- -- -------- (Units in Thousands) United States Cars 4,205 1,320 31.4% 4,237 1,351 31.9% Trucks 3,960 1,206 30.5% 3,584 1,024 28.6% ----- ----- ----- ----- Total United States 8,165 2,526 30.9% 7,821 2,375 30.4% Canada and Mexico 1,055 313 29.7% 908 283 31.2% ----- --- ----- ----- Total North America 9,220 2,839 30.8% 8,729 2,658 30.4% ----- ----- ----- ----- Other (Central America, Caribbean, Puerto Rico) 148 19 13.1% 125 16 12.9% ----- ----- ----- ----- Total GM-NAO 9,368 2,858 30.5% 8,854 2,674 30.2% ===== ===== ===== ===== Wholesale Sales - GM-NAO Cars 1,303 1,597 Trucks 1,234 1,236 ----- ----- Total 2,537 2,833 ===== ===== - 14 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GM-NAO Financial Review GM-NAO reported a net loss of $196 million for the 1998 second quarter compared with net income of $474 million in the prior year quarter. The decrease in net income was primarily due to lower production volumes associated with the work stoppages at two component plants in Flint, Michigan, as discussed below, and model change overs, combined with higher retail incentives ($1,703 per unit in the second quarter of 1998 compared with $1,060 per unit in the second quarter of 1997), partially offset by material and structural cost savings. Net income for the six months ended June 30, 1998 totaled $630 million compared with $1.2 billion for the prior year six month period. The decrease in net income for the first six months of 1998 was primarily due to the current year's work stoppages and higher retail incentives, partially offset by material and structural cost savings and an improved product mix. Members of United Auto Workers Locals 659 and 651 in Flint, Michigan ceased production at two component plants on June 5 and June 11, 1998, respectively. Work stoppages at both facilities were resolved July 28, 1998 when tentative agreements were reached. Both agreements were ratified by the rank and file July 29, 1998. Operations began to ramp-up to normal production levels July 30, 1998. GM estimates that the work stoppages in Flint have had an aggregate unfavorable after-tax impact of $1.2 billion, or $1.79 per share of GM $1-2/3 par value common stock, during the 1998 second quarter that resulted from a loss of 227,000 units of production. The above estimated unfavorable after-tax impact represents the combined effects for GM-NAO (through June 30,1998 - $890 million) and Delphi (through June 30,1998 - $290 million). GM estimates that an additional loss of 318,000 units of production occurred from the beginning of the third quarter 1998 to the point in which normal production levels were resumed. The third quarter loss of production has had an estimated aggregate unfavorable after-tax impact of $1.65 billion, representing the combined effects for GM-NAO ($1.3 billion) and Delphi ($350 million). The above estimated unfavorable after-tax impacts do not take into account the effect of possible recoveries that may occur through production increases that GM is likely to pursue at various facilities in future periods. Local union members in Oklahoma City, Oklahoma, and Pontiac, Michigan, ceased production at two assembly plants on April 4 and April 22, 1997, respectively, where new local union agreements had not been completed. The work stoppages in Oklahoma City and Pontiac, which ended on May 27, 1997 and July 21, 1997, respectively, resulted in a loss of 96,000 units of production which had an aggregate unfavorable after-tax impact of approximately $490 million, or $0.67 per share of $1-2/3 par value common stock, on the 1997 second quarter results. The above estimated unfavorable after-tax impact represents the combined effects for GM-NAO ($375 million) and Delphi ($115 million). Net sales and revenues for the 1998 second quarter were $21.9 billion, which represented a decrease of approximately $3.9 billion or 15.2% compared with the prior year quarter. Excluding the effect of the current and prior year work stoppages, GM-NAO's production volumes would have decreased approximately 156,000 units. This decrease is attributable to the start-up of the GMT-800 and the ramp-up of the high volume Grand Am and Alero. Net sales and revenues for the six months ended June 30, 1998 totaled $47.8 billion, which represented a decrease of approximately $2.9 billion or 5.7% compared with the prior year six month period. This decrease in net sales and revenues resulted from lower wholesale sales volumes primarily due to the work stoppages previously discussed and the start-up of the above mentioned models, partially offset by a favorable mix. Pre-tax income in the second quarter of 1998 decreased by $1.0 billion compared with the prior year quarter primarily due to lower wholesale sales volumes and higher retail incentives, partially offset by material and structural cost savings. Pre-tax income for the six months ended June 30, 1997 decreased by approximately $949 million over the prior year period primarily due to decreased wholesale sales volumes and higher retail incentives, partially offset by material and structural cost savings and favorable product mix. GM vehicle deliveries in North America were 1,617,000 in the 1998 second quarter, which represented a market share of 31.4% compared with 30.6% in the prior year quarter. The increase in market share was primarily due to improved consumer acceptance of GM's products, including newly introduced models. GM's North American market share for the six months ended June 30, 1998 was 30.8% compared with 30.4% in the prior year period. Market penetration will be affected in the second half of 1998 depending on the duration of the above mentioned work stoppages. - 15 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Delphi Financial Highlights Three Months Ended Six Months Ended June 30, June 30, ----------------- -------------------- Adjusted Reported Adjusted Reported 1998(1) 1997(1) 1997 1998(1) 1997(1) 1997 ---- ------- ------- ---- ------- ------- (Dollars in Millions) Net sales and revenues $7,041 $8,190 $6,778 $14,664 $16,185 $13,442 ----- ----- ----- ------ ------ ------ Pre-tax income 84 620 468 460 991 705 Income taxes 20 228 170 140 351 242 Minority interests 3 5 5 3 6 6 Earnings of nonconsolidated affiliates 17 10 7 24 25 21 -- ---- --- --- --- --- Net income $84 $407 $310 $347 $671 $490 == === === === === === Net profit margin 1.2% 5.0% 4.6% 2.4% 4.1% 3.6% (1)Amounts have been adjusted to reflect the changes to GM's organizational structure resulting from the Hughes Transactions which occured in December 1997. The 1998 and adjusted 1997 amounts include the results of Delco Electronics (Delco). Delphi Financial Review Delphi reported net income of $84 million for the 1998 second quarter compared with $407 million of income in the adjusted prior year quarter. The 1998 second quarter net income decreased primarily due to lower production volume at GM-NAO related to the current year work stoppages previously discussed. Excluding the $290 million and $115 million after-tax effect of the work stoppages in the second quarters of 1998 and 1997, respectively, Delphi's second quarter adjusted income decreased by $148 million or 28.4%. This decrease is primarily due to decreases in GM-NAO's production volumes due to model changes, competitive pressures leading to price reductions to Original Equipment Manufacturer (OEMs) customers and the economic downturn in Asia and Latin America, partially offset by significant progress in manufacturing performance and a reduction in material costs. Net income for the six months ended June 30, 1998 decreased to $347 million compared with $671 million of income for the adjusted prior year six month period. The decrease in income for the first six months of 1998 is primarily due to the unfavorable impact of the work stoppages and the other factors referred to above. Net sales and revenues for the 1998 second quarter were $7.0 billion, a decrease of approximately $1.1 billion or 14.0% compared with adjusted sales and revenues for the prior year quarter. This decrease was primarily due to work stoppages, additional decreases in GM-NAO's production volumes due to model changes and pricing pressures from customers. Delphi's 1998 second quarter sales to customers outside the GM-NAO vehicle groups represented approximately 35% of total sales, including all joint ventures. After adjusting for the work stoppages in 1998 and 1997, this is an increase of two percentage points over the same period in 1997. Net sales and revenues for the six months ended June 30, 1998 totaled $14.7 billion, compared with $16.2 billion adjusted sales and revenue in the prior year six month period. The decrease in sales and revenues for the first six months of 1998 was primarily due to work stoppages, additional decreases in GM-NAO's production volumes, pricing reductions to OEM's during the period and the economic downturn in Asia and Latin America. Pre-tax income in the second quarter of 1998 decreased by $536 million compared with the prior year quarter. Pre-tax income for the six months ended June 30, 1997 decreased to $460 million from the prior year adjusted amount of $991 million. These decreases are primarily due to decreases in GM-NAO's production volumes due to the work stoppages and model change-over, competitive pressures that resulted in price reductions to customers and the financial turmoil in Asia and Latin America partially offset by strong progress in manufacturing performance and a reduction in material costs. Delphi is the principal supplier of automotive components and systems to GM-NAO. Delphi's sales of automotive components and systems today is highly dependent on GM's production of vehicles in North America, the level of Delphi-supplied content per GM-NAO vehicle, the price of such automotive components and systems, and the competitiveness of Delphi's product offerings. Delphi's strategy is to reduce its dependence on GM-NAO sales by growing its automotive components and systems sales globally and by expanding its non-GM-NAO sales base in North America. In addition, the global automotive components and systems market is highly competitive which has led Delphi to refine its strategy to focus on profitable growth, as well as increased market share through technology leadership, quality, cost control and responsiveness. On August 3, 1998, GM and Delphi Automotive Systems jointly announced that the GM Board of Directors has approved in principle to proceed with a series of planned transactions that would result in Delphi becoming a fully independent, publicly traded company. The transactions would include the incorporation of Delphi and then an offering of 15-20 percent of its common stock in an initial public offering during the first quarter of 1999. Later in the year, all of the Delphi shares held by GM would be distributed to share holders of $1-2/3 par value common stock through a tax-free spin-off, split-off or some combination of both. Additional information regarding these planned transactions is included in Note 12 to the June 30, 1998 GM consolidated financial statements. - 16 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Delphi Financial Review (concluded) In response to the increasingly competitive automotive components and systems market, Delphi continuously reviews competitiveness of its operations, growth opportunities, and its strategy of increasing market share through technology leadership, quality, cost control, and responsiveness. Consistent with this practice, during the third quarter of 1997, Delphi initiated steps to effect the sale of its lighting, coil springs, and seating businesses. These businesses, with combined revenues of approximately $2 billion and global employment of over 11,000 are not core to Delphi's strategic growth objectives. Delphi continues to negotiate with prospective buyers for these businesses, and expects that the sale of one or all of these businesses could be concluded during the third quarter of 1998. In connection with the possible consummation of such transactions, management would expect to record an aggregate charge against earnings, the amount of which is currently not estimable. - 17 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMIO Financial Highlights Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1998 1997 1998 1997 ------ ------ ------ -------- (Dollars in Millions) Net sales and revenues $8,903 $9,711 $17,053 $17,994 ----- ----- ------ ------ Pre-tax income 265 727 478 1,200 Income taxes 123 233 195 397 Minority interests 1 7 - 10 Earnings (loss) of nonconsolidated affiliates (6) (13) 14 (8) --- --- --- ---- Net income GM Europe 124 312 223 461 Other International 13 176 74 344 ---- --- ---- --- Total net income $137 $488 $297 $805 === === === === Net profit margin 1.5% 5.0% 1.7% 4.5% Vehicle Unit Deliveries of Cars and Trucks - GMIO Three Months Ended June 30, --------------------------- 1998 1997 ----------------------- ----------------------- GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- -- -------- -------- -- -------- (Units in Thousands) International Europe 4,925 456 9.3% 4,727 492 10.4% Latin America, Africa and the Middle East 1,083 184 7.0% 1,128 188 16.7% Asia and Pacific 2,571 110 4.3% 3,100 125 4.0% ----- --- ----- --- Total International 8,579 750 8.7% 8,955 805 9.0% ===== === ===== === Wholesale Sales - GMIO Cars 721 630 Trucks 146 198 --- --- Total 867 828 === === Six Months Ended June 30, ------------------------- 1998 1997 ----------------------- ------------------------ GM as GM as a % of a % of Industry GM Industry Industry GM Industry -------- -- -------- -------- -- -------- (Units in Thousands) International Europe 9,899 948 9.6% 9,199 957 10.4% Latin America, Africa and the Middle East 2,052 360 17.5% 2,093 350 16.7% Asia and Pacific 5,540 230 4.1% 6,911 306 4.4% ----- --- ----- ---- Total International 17,491 1,538 8.8% 18,203 1,613 8.9% ====== ===== ====== ===== Wholesale Sales - GMIO Cars 1,258 1,180 Trucks 323 423 ---- ------ Total 1,581 1,603 ===== ===== - 18 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMIO Financial Review GMIO's 1998 second quarter net income was $137 million or 1.5% of net sales and revenues compared with $488 million or 5.0% of net sales and revenues in the prior year quarter. This decrease in 1998 second quarter net income was primarily due a special charge related to work schedule modifications at Opel Belgium and lower wholesale sales volumes particularly in Europe associated with the start-up of the new Astra. Additionally, the second quarter 1997 included a gain related to the sale of GM Europe's (GME) interest in Avis Europe. Net income for the six months ended June 30, 1998 totaled $297 million compared with $805 million for the prior year period. The decrease in net income for the first six months of 1998 was primarily due to lower net income for GME and LAAMO. Pre-tax income for the 1998 second quarter was $265 million compared with $727 million in the prior year quarter with the decrease primarily due a special charge related to work schedule modifications at Opel Belgium and lower wholesale sales volumes especially in Europe related to the start-up of the new Astra and a gain on the sale of GME's interest in Avis Europe in the second quarter 1997. Net sales and revenues for the 1998 second quarter decreased by 8.3% to $8.9 billion compared with $9.7 billion in the prior year quarter. The decreased net sales and revenues in the 1998 second quarter mainly reflected lower wholesale sales volumes in Europe and the impact of translating foreign currencies against a stronger U.S. dollar. Net sales and revenues for the six months ended June 30, 1998 totaled $17.1 billion, which represented a decrease of $941 million or 5.2% compared with the prior year six month period. Net income for GME totaled $124 million in the 1998 second quarter compared with $312 million in the prior year quarter. Net income for GME for the six months ended June 30, 1998 decreased $238 million compared with the prior year period. The lower net income for the three and six months ended June 30, 1998 was due primarily to a special charge related to work schedule modifications at Opel Belgium and lower wholesale sales volumes associated with the Astra start-up and introduction. Additionally, 1997 included a gain related to the sale of GME's interest in Avis Europe. Net income from the remainder of GMIO's operations, which include the Latin American and Asia and Pacific Operations, totaled $13 million in the second quarter of 1998 compared with $176 million in the prior year quarter. The decreased 1998 second quarter net income resulted primarily from the impact of the economic downturn in the Asia-Pacific region and its subsequent effect on Latin America. Net income from the remainder of GMIO's operations for the six months ended June 30, 1998, totaled $73 million compared with $344 million in the prior year period, primarily reflecting lower net income in Latin America. - 19 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES General Motors Acceptance Corporation (GMAC) Financial Highlights Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in Millions) Financing revenue Retail and lease financing $950 $890 $1,852 $1,830 Operating leases 1,809 1,817 3,594 3,619 Wholesale and term loans 446 470 865 903 ------ ------ ------ ------ Total automotive financing revenue 3,205 3,177 6,311 6,352 Interest and discount 1,455 1,312 2,839 2,578 Depreciation on operating leases 1,161 1,154 2,339 2,312 ----- ----- ----- ----- Net automotive financing revenue 589 711 1,133 1,462 Insurance premiums earned 480 306 951 612 Mortgage revenue 500 372 918 673 Other income 337 237 668 562 ------ ------ ------ ------ Net financing revenue and other 1,906 1,626 3,670 3,309 Expenses 1,378 1,043 2,627 2,096 ----- ----- ----- ----- Pre-tax income 528 583 1,043 1,213 Income tax expense 163 245 329 503 --- --- --- --- Net income $365 $338 $714 $710 === === === === Net income from automotive financing operations $288 $245 $534 $502 Net income from insurance operations 54 42 134 121 Net income from mortgage operations 23 51 46 87 ---- ---- ---- ---- Net income $365 $338 $714 $710 === === === === Return on average equity (1) 15.8% 16.1% 15.8% 17.0% - ------------------------ (1) Return on average equity represents net income as a percentage of average stockholder's equity outstanding for each month in the period. - 20 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMAC Financial Review Consolidated net income for the second quarter and first six months of 1998 increased by 8% and 1% compared to the same periods during 1997. Earnings were 18% higher from automotive financing operations during the second quarter of 1998, compared to the same period in 1997, primarily as a result of an increase in retail financing volumes and a lower effective income tax rate, partially offset by lower net financing margins. Earnings from insurance operations increased by 28% during the second quarter of 1998, compared to the same period during 1997. Earnings were higher due to increased capital gains, partially offset by higher weather-related losses on dealership inventory coverages. Net income from mortgage operations during the second quarter was $28 million lower than the second quarter of 1997. The decline is the result of the effect of higher than anticipated prepayment speeds, primarily on interest-only products. During the three months ended June 30, 1998, GMAC financed 36.5% of new GM vehicles delivered in the U.S., up from 24% during the same period last year. Penetration for the first six months of 1998 was 35.7% compared with 25% for the same 1997 period. Increased retail incentive programs sponsored by GM resulted in the higher retail financing penetration. U.S. wholesale inventory financing was provided on 643,000 and 1,367,000 new GM vehicles during the respective three and six month periods ended June 30, 1998, compared with 831,000 and 1,672,000 during the same 1997 periods. This financing represented 63.1% and 67.8% of GM's U.S. vehicle sales to dealers during the first six months of 1998 and 1997, respectively. Increased competitive market conditions led to the decline in wholesale penetration levels. The reduction in wholesale financing volume is primarily a result of the work stoppages at two GM component plants previously discussed. The continuation of the work stoppages through the settlement reached on July 28, 1998 will have a significant unfavorable effect on the number of wholesale units financed by GMAC in the third quarter of 1998. Automotive financing revenue totaled $3.2 billion and $6.3 billion in the second quarter and first six months of 1998, respectively, relatively unchanged from $3.2 billion and $6.4 billion for the comparable periods in 1997. Higher retail financing revenues were offset by a decline in wholesale revenues principally as a result of the GM work stoppage-related reduction in wholesale receivable balances. To the extent that work stoppages continued to disrupt GM's production and shipment of vehicles through the settlement reached on July 28, 1998, the resulting decline in revenues will have a continuing impact on GMAC's results of operations in the third quarter of 1998. GMAC's worldwide cost of borrowing for the second quarter and first six months of 1998 averaged 6.02% and 6.05%, respectively, a decrease of 29 and 23 basis points from the comparable periods of a year ago. Total borrowing costs for U.S. operations averaged 5.92% and 6.00% for the second quarter and first six months of 1998, compared to 6.38% and 6.35% for the respective periods in 1997. The lower average borrowing costs for the first six months of 1998 are the result of lower long-term interest rates and a greater proportion of floating rate debt compared to fixed rate debt. Insurance premiums earned, mortgage revenue and other income totaled $1.3 billion and $2.5 billion for the second quarter and six months ended June 30, 1998, respectively, compared to $915 million and $1.8 billion during the comparable 1997 periods. The increase during the first six months of 1998 compared to the same period in 1997 corresponds with higher insurance premiums and investment income resulting from the acquisition of Integon by GMAC Insurance Holdings, Inc. (GMACI) in October 1997, as well as an increase in mortgage investment income and higher capital gains for insurance operations. Consolidated salaries and other operating expenses totaled $855 million and $1.6 billion for the second quarter and first six months of 1998, respectively, compared to $675 million and $1.4 billion for the comparable periods last year. The increase is mainly attributable to the acquisition of Integon by GMACI and continued growth at GMAC Mortgage Group, Inc. (GMACMG). Annualized net retail losses were 0.73% and 0.88% of total average serviced automotive receivables during the second quarter and first six months of 1998, respectively, compared to 1.28% and 1.35% for the same periods last year. The provision for credit losses totaled $229 million and $257 million for the six month periods ended June 30, 1998 and 1997, respectively. The decline in the provision is primarily attributable to lower credit losses resulting from tightened credit standards. The effective income tax rate for the first six months of 1998 was 31.5%, compared to 41.5% for the same period last year. The decrease in the effective tax rate can be attributed to lower U.S. and foreign taxes assessed on foreign source income and a favorable change resulting from periodic assessments of state and local income tax accruals. - 21 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes Financial Highlights Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------ 1998 1997(1) 1998 1997(1) ------- ------- ------ ------- (Dollars in Millions Except Per Share Amounts) Revenues Product sales $763 $739 $1,455 $1,423 Direct broadcast, leasing and other services 606 412 1,205 752 ------ ------ ----- ------ Total revenues 1,369 1,151 2,660 2,175 Income from continuing operations before income taxes and minority interests 65 519 144 525 Income taxes 23 208 55 210 Minority interests 9 8 10 22 Income from discontinued operations, net of taxes - - - 1 --- --- --- --- Net income $51 $319 $99 $338 == === == === Earnings used for computation of Available Separate Consolidated Net Income (2) $56 $324 $110 $348 == === === === Earnings per share attributable to Class H common stock (3) $0.14 $0.81 $0.27 $0.87 - ---------------- (1)The 1997 amounts presented relate only to the results of the telecommunications and space businesses of former Hughes. See Hughes Financial Review for further discussion. (2)Excludes amortization of GM purchase accounting adjustments of $5 million for the second quarters of 1998 and 1997 and $11 million for the six-month periods ended June 30, 1998 and 1997 related to GM's acquisition of HAC in 1985. (3)The 1997 amounts are presented on a pro forma basis to reflect the changes to GM's organizational structure resulting from the Hughes Transactions which occurred in December 1997. See Hughes Financial Review for further discussion. - 22 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES 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 $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, 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 amounts presented for Hughes relate only to the telecommunications and space businesses of former Hughes. For 1997, earnings per share attributable to Class H common stock is 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 statements for 1997 relate only to the telecommunications and space businesses of former Hughes, they do not reflect the earnings attributable to the former 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 Class H common stock based solely on the performance of the telecommunications and space businesses of former Hughes. In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for $851 million in cash, increasing Hughes' ownership interest in PanAmSat to 81%. Hughes Electronics reported net income of $51 million for the second quarter of 1998 compared with last year's $1 million, and $99 million for the first six months of 1998 compared with $20 million in the same period of 1997. 1997 net income excludes the $318 million after-tax gain ($0.80 per share of Class H common stock) recognized in connection with the May 1997 PanAmSat merger. Excluding amortization of purchase accounting adjustments related to GM's acquisition of HAC and the 1997 $318 million after-tax gain, Hughes' earnings used for computation of available separate consolidated net income was $56 million and $6 million for the second quarters of 1998 and 1997, respectively, and $110 million and $30 million for the six months ended June 30, 1998 and 1997, respectively. Earnings per share on the same basis increased to $0.14 for the second quarter of 1998 versus pro forma earnings per share of $0.01 for the same period in 1997. Earnings per share on the same basis increased to $0.27 for the first six months of 1998 versus pro forma earnings per share of $0.07 in 1997. The increases were principally due to record DIRECTV subscriber growth through June, continued strong performance in the satellite services segment resulting from the PanAmSat merger, and higher commercial satellite sales. Second quarter 1998 revenues increased 18.9% to $1.4 billion compared with $1.2 billion in the second quarter of 1997. Revenues for the first six months of 1998 increased 22.3% to $2.7 billion compared with $2.2 billion in the first half of 1997. The 1998 increase in revenues compared to the same periods in 1997 resulted from an increase in the Direct-To-Home Broadcast segment due to strong subscriber growth and average monthly revenues per subscriber, as well as low subscriber churn rates; an increase in the Satellite Services segment primarily from the May 1997 PanAmSat merger and increased operating lease revenues for video, data and Internet-related services; and, an increase in the Satellite Manufacturing segment which resulted principally from higher commercial satellite sales. Operating profit, excluding amortization of purchase accounting adjustments related to GM's acquisition of HAC, increased 36.5% for the second quarter of 1998 to $78 million, compared with $57 million in the second quarter of 1997 and increased 79.0% for the first six months of 1998 to $162 million from $90 million for the same period in 1997. The increases were primarily due to the above noted increases in revenue. Second quarter operating profit margin on the same basis increased to 5.7% from 5.0% in 1997 and increased to 6.1% in the first half of 1998 compared with 4.2% in the first half of 1997. The increased operating profit margin resulted primarily from increases in subscribers in the Direct-To-Home Broadcast segment, and the May 1997 PanAmSat merger and increased operating leases revenues in the Satellite Services segment. - 23 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES To facilitate analysis, the following sections present GM's financial statements with its financing and insurance operations (primarily GMAC) reflected on an equity basis. Consolidated Statements of Income With Financing and Insurance Operations on an Equity Basis (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in Millions) Net sales and revenues $33,462 $39,741 $69,889 $77,198 ------ ------ ------ ------ Costs and expenses Cost of sales and other operating charges, exclusive of items listed below 28,619 32,998 58,942 64,102 Selling, general, and administrative expenses 3,421 3,290 6,281 6,174 Depreciation and amortization expenses 1,727 1,918 3,410 3,797 ------- ------- ------ ------- Total costs and expenses 33,767 38,206 68,633 74,073 ------ ------ ------ ------ Operating (loss) income (305) 1,535 1,256 3,125 Other income less income deductions 654 1,330 1,236 2,069 Interest expense 322 219 577 438 ----- ------ ------ ------ Income before income taxes, minority interests, and earnings of nonconsolidated affiliates 27 2,646 1,915 4,756 Income taxes 10 909 651 1,639 -- ------ ------ ----- Income before minority interests and earnings of nonconsolidated affiliates 17 1,737 1,264 3,117 Minority interests 7 18 3 37 Earnings of nonconsolidated affiliates 365 343 726 740 --- ------ ------ ------ Net income $389 $2,098 $1,993 $3,894 === ===== ===== ===== Net profit margin 1.2% 5.3% 2.9% 5.0% Results of Operations With Financing and Insurance Operations on an Equity Basis In the second quarter of 1998, GM's net income totaled $389 million or $.54 per share of $1-2/3 par value common stock, compared to $2.1 billion or $2.68 per share of $1-2/3 par value common stock. GM's net income for the six months ended June 30, 1997 was $2.0 billion, or $2.88 per share of $1-2/3 par value common stock, compared with $3.9 billion, or $4.98 per share of $1-2/3 par value common stock, for the first six months ended June 30, 1996. GM's 1998 and 1997 net income included $1.2 billion and $490 million after-tax unfavorable impact from the previously discussed work stoppages. The decreases in net income are primarily due to the economic downturn in Asia and Latin America and the Hughes Transactions. Highlights of financial performance by GM's major business sectors for the three months and six months ended June 30 were as follows (in millions): Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 1998 1997 1998 1997 ------ ------ ------ ----- GM-NAO $(196) $474 $630 $1,238 Delphi 84 310 347 490 GMIO 137 488 297 805 GMAC 365 338 714 710 Hughes 56 542 110 777 Other (57) (54) (105) (126) ---- --- ----- ----- Net Income $389 $2,098 $1,993 $3,894 === ===== ===== ===== - 24- GENERAL MOTORS CORPORATION AND SUBSIDIARIES Results of Operations With Financing and Insurance Operations on an Equity Basis (concluded) Reference should be made to the GM sectors' financial reviews that are presented on pages 12 through 24 and incorporated by reference to supplement the information presented herein. Second quarter 1998 net sales and revenues were $33.5 billion, which represented a decrease of $6.3 billion compared with the prior year quarter. Net sales and revenues for the six months ended June 30, 1998 were $69.9 billion compared with $77.2 billion for the first six months of 1997. These decreases in net sales and revenues for the second quarter and the first six months were primarily due to the spin-off of Hughes Defense and lower wholesale sales volumes in North America due to the work stoppages previously discussed. The gross margin percentage for the 1998 second quarter was 14.5% compared with 17.0% in the prior year quarter. The gross margin percentage for the six months ended June 30, 1998 was 15.7%, compared with 17.0% for the first six months of 1997. The decreases in the gross margins primarily resulted from the decrease in wholesale sales volumes and higher sales incentives in North America. Cost of sales and other operating charges decreased to $28.6 billion in the second quarter and $59.0 billion for the first six months of 1998 compared with $33.0 billion and $64.1 billion, respectively. These decreases were primarily due to the spin-off of Hughes Defense and lower wholesale sales volumes in North America due to the work stoppages and model change-overs previously discussed. Depreciation and amortization expenses decreased by $191 million and $387 million in the second quarter of 1998 and for the six months ended June 30, 1998, respectively, primarily due to a reduction in tool amortization at GM-NAO as a result of the previously reported competitiveness studies at GM. Other income less income deductions decreased to $654 million for the 1998 second quarter compared with $1.3 billion in the prior year quarter primarily due to a $490 million pre-tax gain ($318 million after-tax or $0.33 per share of $1-2/3 par value common stock and $0.80 per share of Class H common stock) related to the merger of the satellite service operations of Hughes and PanAmSat(PAS) and a $128 million pre-tax gain ($103 million after-tax or $0.14 per share of $1-2/3 par value common stock) related to the sale of GME's equity interest in Avis Europe in the second quarter of 1997. Other income less income deductions for the six months ended June 30, 1998 was $1.2 billion compared with $2.1 billion for the first six months of 1997. This decrease is primarily due to the previously discussed second quarter 1997 gains and an $88 million pre-tax gain ($55 million after-tax or $0.07 per share of $1-2/3 par value common stock) related to an agreement in the first quarter of 1997 with Volkswagen A.G. (VW) that settled a civil lawsuit which GM brought against VW. - 25 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets With Financing and Insurance Operations on an Equity Basis (Unaudited) June 30, Dec. 31, June 30, 1998 1997 1997 ------- ------- ------- (Dollars in Millions) ASSETS Cash and cash equivalents $8,637 $10,685 $10,855 Other marketable securities 477 3,826 4,062 ------ ------- ------- Total cash and marketable securities 9,114 14,511 14,917 Accounts and notes receivable (less allowances) Trade 4,617 5,164 5,887 Nonconsolidated affiliates 1,721 836 1,478 Inventories (less allowances) 11,942 12,102 13,528 Equipment on operating leases (less accumulated depreciation) 4,754 4,677 4,047 Deferred income taxes and other 6,069 6,278 5,425 ------- ------- ------- Total current assets 38,217 43,568 45,282 Equity in net assets of nonconsolidated affiliates 11,091 10,164 10,061 Deferred income taxes 20,399 20,721 19,692 Other investments and miscellaneous assets 13,803 13,564 13,586 Property - net 35,293 33,914 37,211 Intangible assets -net 11,471 10,752 14,864 -------- -------- -------- Total assets $130,274 $132,683 $140,696 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $10,230 $12,474 $11,235 Loans payable 1,850 656 1,281 Accrued expenses and customer deposits 31,956 33,459 31,431 ------ ------ ------ Total current liabilities 44,036 46,589 43,947 Long-term debt 7,097 5,491 5,967 Capitalized leases 178 185 188 Postretirement benefits other than pensions 37,535 38,388 41,393 Pensions 4,780 4,271 5,822 Other liabilities and deferred income taxes 20,192 19,336 18,230 -------- -------- -------- Total liabilities 113,818 114,260 115,547 ------- ------- ------- Minority interests 538 695 716 General Motors - obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of General Motors Series D 79 79 - Series G 143 143 - Redeemable preferred stock of subsidiary - - 402 Stockholders' equity 15,696 17,506 24,031 -------- -------- -------- Total liabilities and stockholders' equity $130,274 $132,683 $140,696 ======= ======= ======= Liquidity and Capital Resources With Financing and Insurance Operations on an Equity Basis GM's cash and marketable securities totaled $9.1 billion at June 30, 1998, compared with $14.5 billion at December 31, 1997 and $14.9 billion at June 30, 1997. The decrease in cash and marketable securities from June 30, 1997 and December 31, 1997 to June 30, 1998 was primarily due to the work stoppages previously mentioned and approximately $2.6 billion in cash used in 1998 to acquire 38.4 million shares of $1-2/3 par value common stock under the stock repurchase program announced in August 1997, a $1.5 billion contibution to a VEBA trust and a $1.1 billion pension contribution. Stock repurchases have been temporarily suspended as part of GM's cash conservation initiatives due to the work stoppages. During the second quarter of 1998, loans payable and long-term debt increased to $9.0 billion at June 30, 1998 from balances of $6.1 billion and $7.2 billion at December 31, 1997 and June 30, 1997, respectively. The increases were primarily due to issuances of commercial paper and an increase in long-term debt to fund a VEBA. Net liquidity, calculated as cash and marketable securities less the total of loans payable, long-term debt and capitalized leases was $(11) million at June 30, 1998, compared with $8.2 billion at December 31, 1997 and $7.5 billion at June 30, 1997. - 26 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Liquidity and Capital Resources With Financing and Insurance Operations on an Equity Basis (concluded) Book value per share of $1-2/3 par value common stock decreased to $20.90 at June 30, 1998, from $22.26 at December 31, 1997 and $29.99 at June 30, 1997. Book value per share of Class H common stock increased to $12.54 at June 30, 1998, from $13.36 at December 31, 1997 and $14.99 at June 30, 1997. Liquidity and Capital Resources for GMAC At June 30, 1998, GMAC owned assets and serviced automotive receivables totaling $124.8 billion, $3.6 billion above year-end 1997, and $13.1 billion above June 30, 1997. The higher balance compared to year-end 1997 predominantly reflects increases in retail earning assets partially offset by a decline in off-balance sheet wholesale serviced assets. Earning assets totaled $108.8 billion at June 30, 1998, compared to $104.5 billion and $100.9 billion at December 31 and June 30, 1997, respectively. The change from year-end 1997 is principally the result of a $2.2 billion increase in receivables due from GM as well as $1.8 billion and $1.7 billion increases in net finance receivables and operating lease assets, respectively, partially offset by a $1.2 billion decrease in real estate mortgages held for sale. Finance receivables serviced by GMAC, including sold receivables, totaled $73.4 billion at June 30, 1998, $65 million below December 31, 1997 levels and $3.2 billion above June 30, 1997 levels. Retail receivables were $4.4 billion higher than year-end 1997, a direct result of increased retail incentive programs sponsored by GM. On-balance sheet wholesale receivables declined $3.3 billion during the same period due to the GM work stoppages. Also contributing to the change, off-balance sheet serviced wholesale receivables decreased $1.6 billion, attributable to the scheduled wind down of a revolving wholesale trust and the effects of the work stoppages. Consolidated operating lease assets, net of depreciation, totaled $27.6 billion at June 30, 1998, reflecting an increase of $1.7 billion over both December 31 and June 30, 1997 periods. The increase from year-end 1997 is primarily attributable to additional GM sponsored lease incentive programs in the U.S. during the first six months of 1998. Investments in securities at June 30, 1998 totaled $7.9 billion, compared with $7.9 billion and $5.5 billion at December 31 and June 30, 1997, respectively. The increase from June 1997 to June 1998 is principally the result of continued growth at GMACMG and the acquisition of Integon by GMACI. GMAC's due and deferred from receivable sales (net) totaled $240 million at June 30, 1998, compared with $691 million and $635 million at December 31 and June 30, 1997, respectively. The significant decline in the June 30, 1998 balance was primarily due to the upgrade in GMAC's short-term debt rating by Standard & Poor's Ratings Group (S&P) in January 1998, which eliminated the requirement to segregate and hold in trust the collections on sold receivables. As of June 30, 1998, GMAC's total borrowings were $88.3 billion, compared with $86.7 billion and $82.5 billion at December 31, 1997 and June 30, 1997, respectively. The higher borrowings were used to fund increased earning asset levels. GMAC's ratio of debt to total stockholder's equity at June 30, 1998 was 9.5:1, compared to 9.9:1 at December 31, 1997 and 9.7:1 at June 30, 1997. Continuing to utilize its asset securitization program, GMAC sold additional retail finance receivables totaling $1.6 billion (net) during the second quarter of 1998. GMAC and its subsidiaries maintain substantial bank lines of credit which totaled $40.7 billion at June 30, 1998, compared to $39.8 billion at year-end 1997 and $40.2 billion at June 30, 1997. The unused portion of these credit lines totaled $31.9 billion at June 30, 1998, $1.5 billion and $370 million higher than December 31 and June 30, 1997, respectively. Included in the unused credit lines are a committed U.S. revolving credit facility of $10.0 billion which serves primarily as back-up for GMAC's unsecured commercial paper program and an $11.5 billion U.S. asset-backed commercial paper liquidity and receivables credit facility for New Center Asset Trust (NCAT), a non-consolidated limited purpose business trust established to issue asset-backed commercial paper. Effective April 23, 1998, Moody's Investors Service increased the rating of GMAC's senior debt from A3 to A2. The increase in the rating was closely related to the improved financial condition of GM. Effective August 3, 1998, S&P affirmed its current ratings on GMAC and revised its outlook on GMAC from stable to negative. - 27 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows With Financing and Insurance Operations on an Equity Basis (Unaudited) Six Months Ended June 30, ---------------- 1998 1997 ---- ---- (Dollars in Millions) Net cash provided by operating activities $1,166 $7,582 ----- ----- Cash flows from investing activities Expenditures for property (4,369) (4,070) Investments in companies, net of cash acquired (1,322) (1,652) Investments in other marketable securities - acquisitions (4,984) (7,963) Investments in other marketable securities - liquidations 8,332 7,543 Operating leases - acquisitions (3,042) (2,610) Operating leases - liquidations 2,815 1,667 Other 72 (29) ----- ----- Net cash used in investing activities (2,498) (7,114) ----- ----- Cash flows from financing activities Net increase in loans payable 1,194 66 Increase in long-term debt 2,652 195 Decrease in long-term debt (1,052) (37) Proceeds from issuing common stocks 344 281 Repurchases of common stocks (3,071) (2,292) Cash dividends paid to stockholders (703) (829) ------ ------ Net cash used in financing activities (636) (2,616) ------ ----- Effect of exchange rate changes on cash and cash equivalents (80) (317) ----- ----- Net decrease in cash and cash equivalents (2,048) (2,465) ----- ----- Cash and cash equivalents at beginning of the period 10,685 13,320 ------ ------ Cash and cash equivalents at end of the period $8,637 $10,855 ===== ====== Cash Flows With Financing and Insurance Operations on an Equity Basis Net cash provided by operating activities was approximately $1.2 billion for the six months ended June 30, 1998, compared with net cash provided by operating activities of approximately $7.6 billion in the prior year period. The decrease was primarily the result of a decrease in cash generated from lower net income and a run-off of trade payables due primarily to the work stoppages previously discussed. Net cash used in investing activities amounted to $2.5 billion for the six months ended June 30, 1998 compared with $7.1 billion in the prior year period. The decrease in net cash used in investing activities during the 1998 period was primarily due to approximately $1.5 billion of cash consideration used in 1997 to consummate the merger of the satellite service operations of Hughes and PAS, combined with a $1.7 billion net increase in cash used for operating leases in 1997. Net cash used in financing activities totaled $636 million for the six months ended June 30, 1998, compared with $2.6 billion for the prior year period. The change was primarily due to net increases in short and long-term debt. Dividends may be paid on common stocks only when, as and if declared by the GM Board of Directors (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. On August 3,1998, the GM Board declared quarterly dividends of $0.50 per share on $1-2/3 par value common stock, payable September 10, 1998. The GM Board also declared quarterly dividends on the Series B, Series D, and Series G Depositary Shares of $0.57, $0.495, and $0.57 per share, respectively, payable November 2, 1998. With respect to Class H common stock, which was recapitalized on December 17, 1997, the GM Board has decided that initially no cash dividends will be paid in order to allow the earnings of Hughes to be retained for investment in its telecommunications and space businesses. - 28- GENERAL MOTORS CORPORATION AND SUBSIDIARIES Cash Flows for GMAC Cash provided by operating activities during the six months ended June 30, 1998 totaled $6.5 billion, an increase from the $3.2 billion provided during the comparable 1997 period. The increase was mainly attributed to increased net sales of mortgage loans and other mortgage liabilities. Cash used for investing activities during the first six months of 1998 totaled $8.2 billion, compared with $7.2 billion during the same period in 1997. The period-to-period increase was the result of lower finance receivable liquidations, increases in both operating lease acquisitions and receivables due from GM, partially offset by higher sale of receivable proceeds resulting from increased wholesale asset securitization activity. During the first six months of 1998, cash provided by financing activities totaled $1.9 billion, compared with approximately $4 billion of cash provided by financing activities during the first six months of 1997. The $2.1 billion change was primarily attributable to lower proceeds from the issuance of short term debt due to lower funding requirements for wholesale receivables, partially offset by reduced long term debt liquidations and lower dividends paid to GM. Employment and Payrolls June 30, 1998 1997 ---- ---- Worldwide Employment (in thousands) GM-NAO 231 243 Delphi 205 207 GMIO 116 114 GMAC 22 18 Hughes 15 15 Other 9 10 --- --- Total employees 598 607 === === Three Months Ended Six Months Ended June 30, June 30, ------------------ --------------- 1998 1997 1998 1997 ---- ---- ---- ---- Worldwide payrolls - (in billions) $6.7 $7.1 $13.8 $14.1 === === ==== ==== Employment and payroll amounts reported for 1997 have been adjusted to reflect the changes to GM's organizational structure resulting from the Hughes Transactions. As such, Delphi reported amounts include Delco and Hughes reported amounts exclude Delco and Hughes Defense. The decrease in worldwide payrolls are partially due to the work stoppages previously discussed. New Accounting Standards In April 1998, the AICPA issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 provides guidance on the financial reporting of start-up and organizational costs, requiring those costs to be expensed as incurred. GM will adopt the standard by January 1, 1999. Adoption of this standard is not expected to have a material impact on GM's consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. GM plans to adopt SFAS No. 133 by January 1, 2000, as required. GM is currently assessing the impact of this Statement on GM's consolidated financial statements. * * * * * * - 29 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES PART II ITEM 1. 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 quarter ended June 30, 1998 or subsequent thereto, but before the filing of this report are summarized below. Environmental Matters With respect to the previously reported matter in which the Illinois Environmental Protection Agency and the U.S. Environmental Protections Agency had asserted that portions of a facility maintained by the Electro-Motive Division of General Motors (EMD) at LaGrange, Illinois for engine testing was required to have permits under Title I of the Clean Air Act, the Corporation has reached a settlement with the government agencies which is the subject of a judicial consent order entered on June 17, 1998. The settlement provides for the Corporation's payment of a $125,000 penalty, a $100,000 contribution to a local education program and participation in two supplemental environmental projects. EMD has obtained a permit for the subject facilities. With respect to the previously reported matter in which the Delaware Department of Natural Resources & Environmental Control (DDNREC) issued a Notice of Administrative Penalty Assessment to the Corporation's Wilmington Assembly Plant concerning alleged violations of the Delaware volatile organic compound rules, the Corporation has agreed to a settlement which is contained in an Administrative Order that became effective on June 16, 1998. The Order requires the Corporation to, among other things, pay a $100,000 penalty and contribute $100,000 to a supplemental environmental project. With respect to the previously reported matter in which the Michigan Department of Environmental Quality (MDEQ) had alleged that the Corporation's Powertrain Group (GMPTG) had violated various MDEQ regulations at GMPTG's Malleable Iron facility in Saginaw, Michigan, the Corporation has agreed to a settlement which is contained in a March 16, 1998 Consent Judgment filed with the Circuit Court for Saginaw County. The settlement provides for the Corporation to pay a civil penalty of $200,000 and contribute $200,000 to environmental projects in the Saginaw, Michigan area. Other Matters As previously reported, Hughes has maintained a suit against the U.S. Government since September 1973 regarding the Government's infringement and use of a Hughes patent (the "Williams Patent") covering "Velocity Control and Orientation of a Spin Stabilized Body," principally satellites. On April 7, 1998, the Court of Appeals for the Federal Circuit (CAFC)reaffirmed earlier decisions in the Williams case and the award of $114 million in damages. The CAFC ruled that the conclusions previously reached in the Williams case were consistent with the U.S. Supreme Court's findings in the Warner-Jenkinson case. The U.S. Government petitioned the CAFC for a rehearing and was denied. Hughes is unable to estimate the duration of any further appeal effort by the U.S. Government. While no amount has been recorded in the financial statements of Hughes to reflect the $114 million award or the interest accumulating thereon, a resolution of this issue could result in a gain that would be material to the earnings of GM attributable to Class H common stock. In connection with the 1997 spin-off of Hughes Electronics Corporation's defense business and its subsequent merger with Raytheon Company, a process was agreed to among GM, Hughes and Raytheon for resolving disputes that might arise in connection with post-closing adjustments called for by the terms of the merger agreement. Such adjustments might call for a cash payment between Hughes and Raytheon. A dispute currently exists regarding the post-closing adjustments which Hughes and Raytheon have proposed to one another. If the dispute is not resolved by negotiation, the parties will proceed to an agreed upon form of binding arbitration under which either party may be required by arbitration to make a payment to the other. It is possible that Hughes may be required by arbitration to make a payment to Raytheon that would be material to Hughes. However, the amount of payment that might be required of either party is not determinable at this time. Hughes intends to vigorously oppose the adjustments Raytheon seeks. * * * - 30 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The annual meeting of stockholders of the Registrant was held on June 1, 1998. At that meeting, the following matters were submitted to a vote of the stockholders of General Motors Corporation: 1998 General Motors Annual Meeting Final Voting Results (All classes of common stock) Proposal Voting Results - -------- --------------------- Votes* Percent** ------ --------- Item No. 1 Nomination and Election of Directors The Judges subscribed and delivered a certificate reporting that the following nominees for directors had received the number of votes* set opposite their respective names. Percy N. Barnevik For 579,645,721 98.6% Withheld 8,004,510 1.4 John H. Bryan For 579,649,967 98.6 Withheld 8,000,264 1.4 Thomas E. Everhart For 579,420,531 98.6 Withheld 8,229,700 1.4 Charles T. Fisher, III For 579,482,263 98.6 Withheld 8,167,968 1.4 George M. C. Fisher For 579,654,849 98.6 Withheld 7,995,382 1.4 Karen Katen For 579,546,199 98.6 Withheld 8,104,032 1.4 J. Willard Marriott, Jr. For 579,504,241 98.6 Withheld 8,145,990 1.4 Ann D. McLaughlin For 579,057,384 98.5 Withheld 8,592,847 1.5 Harry J. Pearce For 579,613,393 98.6 Withheld 8,036,838 1.4 Eckhard Pfeiffer For 579,781,652 98.6 Withheld 7,868,579 1.4 John G. Smale For 579,131,675 98.5 Withheld 8,518,556 1.5 John F. Smith, Jr. For 579,568,170 98.6 Withheld 8,082,061 1.4 Louis W. Sullivan For 579,079,186 98.5 Withheld 8,571,045 1.5 Dennis Weatherstone For 579,557,023 98.6 Withheld 8,093,208 1.4 Thomas H. Wyman For 579,335,078 98.6 Withheld 8,315,153 1.4 Item No. 2 A proposal of the Board of For 583,619,369 99.3% Directors that the stockholders Against 2,069,231 0.4 ratify the selection of Abstain 1,961,624 0.3 Deloitte & Touche LLP as independent public accountants for the year 1998. - 31 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Concluded Proposal Voting Results - -------- --------------------- Votes* Percent** ------ --------- Item No. 3 A stockholder proposal that future For 20,113,835 4.0% outside directors not serve for Against 475,813,051 94.7 more than six years Abstain 6,462,181 1.3 Item No. 4 A stockholder proposal that the For 141,501,553 28.2% Board of Directors provide for Against 353,508,863 70.3 cumulative voting in the election Abstain 7,376,979 1.5 of directors. Item No. 5 A stockholder proposal regarding For 22,117,577 4.4% greenhouse gas emissions. Against 454,288,666 90.4 Abstain 25,955,848 5.2 Item No. 6 A stockholder proposal regarding For 23,455,070 4.7% dealings with China and the Against 453,911,923 90.3 former Soviet Union. Abstain 25,014,978 5.0 Item No. 7 A stockholder proposal to limit For 29,472,032 5.9% the outside board memberships Against 464,924,288 92.5 of GM directors. Abstain 7,993,372 1.6 * Numbers represent the aggregate voting power of all votes cast with holders of $1-2/3 par value common stock casting one vote per share and holders of Class H common stock casting one-half of a vote per share. ** Percentages represent the aggregate voting power of both classes of GM common stock cast for each item. * * * * * * - 32 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS (Including Those Incorporated by Reference). Exhibit Number Exhibit Name Page No. - ------- ------------ -------- 3(i) Corrected Restated Certificate of Incorporation of General Motors Corporation, filed as Exhibit 3(i to the Current Report on Form 8-K of General Motors Corporation dated June 8, 1998 and filed on July 30, 1998 N/A 99 Hughes Electronics Corporation and Subsidiaries Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations 34 27 Financial Data Schedule (for SEC information only) (b) REPORTS ON FORM 8-K. Two reports on Form 8-K, dated April 16, 1998 and June 5, 1998 were filed during the quarter ended June 30, 1998 reporting matters under Item 5, Other Events. * * * * * * SIGNATURES Pursuant to the requirements 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 August 14, 1998 /s/Peter R. Bible - -------------------- ----------------- (Peter R. Bible, Chief Accounting Officer) - 33 - EX-99 2 HUGHES INFORMATION EXHIBIT 99 HUGHES ELECTRONICS CORPORATION FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENT OF INCOME AND AVAILABLE SEPARATE CONSOLIDATED NET INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------- ----------------- 1998 1997 1998 1997 ------ ------ ------- ------- (Dollars in Millions Except Per Share Amounts) Revenues Product sales $762.6 $739.4 $1,454.7 $1,422.6 Direct broadcast, leasing and other services 606.4 412.0 1,205.3 752.8 ------- ------- ------- ------- Total revenues 1,369.0 1,151.4 2,660.0 2,175.4 ------- ------- ------- ------- Operating costs and expenses Cost of products sold 580.6 606.3 1,122.9 1,161.1 Broadcast programming and other costs 250.8 190.7 515.6 354.5 Selling, general and administrative expenses 359.2 230.1 661.8 452.1 Depreciation and amortization 100.2 67.0 197.9 117.3 Amortization of GM purchase accounting adjustments 5.3 5.3 10.6 10.6 ------- ------- ------- -------- Total operating costs and expenses 1,296.1 1,099.4 2,508.8 2,095.6 ------- ------- ------- ------- Operating profit 72.9 52.0 151.2 79.8 Interest income 30.6 5.7 68.1 7.7 Interest expense (2.9) (18.6) (5.9) (33.7) Other, net (35.1) 479.5 (69.4) 470.4 ------- ------ ------- ------ Income from continuing operations before income taxes and minority interests 65.5 518.6 144.0 524.2 Income taxes 23.3 207.5 54.7 209.7 Minority interests in net losses of subsidiaries 8.6 7.7 9.9 21.9 ----- ----- ----- ----- Income from continuing operations 50.8 318.8 99.2 336.4 Income from discontinued operations, net of taxes - 0.3 - 1.3 ----- ----- ----- ----- Net income 50.8 319.1 99.2 337.7 Adjustments to exclude the effect of GM purchase accounting adjustments 5.3 5.3 10.6 10.6 ------ ------- ------ ------ Earnings Used for Computation of Available Separate Consolidated Net Income $56.1 $324.4 $109.8 $348.3 ==== ===== ===== ===== Available Separate Consolidated Net Income Average number of shares of General Motors Class H Common Stock outstanding (in millions) (numerator) 105.2 101.0 104.7 100.7 Class H dividend base (in millions) (denominator) 399.9 399.9 399.9 399.9 Available Separate Consolidated Net Income $14.7 $82.0 $28.7 $88.0 ==== ==== ==== ==== Earnings Attributable to General Motors Class H Common Stock on a Per Share Basis $0.14 $0.81 $0.27 $0.87 ==== ==== ==== ==== Reference should be made to the Notes to Financial Statements. - 34 - HUGHES ELECTRONICS CORPORATION BALANCE SHEET June 30, 1998 December 31, ASSETS (Unaudited) 1997 --------- ----------- (Dollars in Millions) Current Assets Cash and cash equivalents $1,592.8 $2,783.8 Accounts and notes receivable (less allowances) 892.6 662.8 Contracts in process, less advances and progress payments of $32.9 and $50.2 564.0 575.6 Inventories 581.8 486.4 Prepaid expenses and other, including deferred income taxes of $101.4 and $93.2 376.8 297.3 -------- -------- Total Current Assets 4,008.0 4,805.9 Satellites, net 2,897.5 2,643.4 Property, net 927.6 889.7 Net Investment in Sales-type Leases 231.1 337.6 Intangible Assets, net of accumulated amortization of $362.7 and $318.3 3,559.6 2,954.8 Investments and Other Assets 1,160.4 1,132.4 --------- --------- Total Assets $12,784.2 $12,763.8 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts payable $655.4 $ 472.8 Advances on contracts 244.1 209.8 Deferred revenues 121.8 110.6 Notes payable 100.0 - Accrued liabilities 563.2 689.4 -------- -------- Total Current Liabilities 1,684.5 1,482.6 Long-Term Debt 787.9 637.6 Deferred Gains on Sales and Leasebacks 138.6 191.9 Accrued Operating Leaseback Expense 54.1 100.2 Postretirement Benefits Other Than Pensions 155.7 154.8 Other Liabilities and Deferred Credits 670.1 706.4 Deferred Income Taxes 636.5 570.8 Commitments and Contingencies Minority Interests 436.8 607.8 Stockholder's Equity Capital stock and additional paid-in capital 8,140.7 8,322.8 Net income retained for use in the business 106.3 7.1 ------- ------- Subtotal 8,247.0 8,329.9 Minimum pension liability adjustment (34.8) (34.8) Accumulated unrealized gains on securities 15.1 21.4 Accumulated foreign currency translation adjustments (7.3) (4.8) ------- ------- Accumulated other comprehensive loss (27.0) (18.2) -------- -------- Total Stockholder's Equity 8,220.0 8,311.7 -------- -------- Total Liabilities and Stockholder's Equity $12,784.2 $12,763.8 ======== ======== Reference should be made to the Notes to Financial Statements. - 35 - HUGHES ELECTRONICS CORPORATION CONDENSED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended June 30, ------------------- 1998 1997 -------- -------- (Dollars in Millions) Cash Flows from Operating Activities Net cash provided by (used in) continuing operations $157.1 $(376.6) Net cash used by discontinued operations - (0.5) ----- ----- Net Cash Provided by (Used in) Operating Activities 157.1 (377.1) ----- ------ Cash Flows from Investing Activities Investment in companies (908.0) (1,468.0) Expenditures for property (121.4) (89.4) Increase in satellites (255.5) (130.4) Early buyout of satellite under sale and leaseback (155.5) - Proceeds from disposal of property 46.7 - -------- -------- Net Cash Used in Investing Activities (1,393.7) (1,687.8) -------- -------- Cash Flows from Financing Activities Notes and loans payable 100.0 - Long-term debt borrowings 875.3 1,759.1 Repayment of long-term debt (725.0) - Payment to General Motors for Delco post-closing price adjustment (204.7) - Contributions from Parent Company - 641.9 ------- ------- Net Cash Provided by Financing Activities 45.6 2,401.0 ------- ------- Net (decrease) increase in cash and cash equivalents (1,191.0) 336.1 Cash and cash equivalents at beginning of the period 2,783.8 6.7 ------- ----- Cash and cash equivalents at end of the period $1,592.8 $342.8 ======= ===== - -------------- Reference should be made to the Notes to Financial Statements. - 36 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting. In the opinion of management, all adjustments (consisting only of normal recurring items) which are necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year. For further information, refer to the financial statements and notes thereto included in the General Motors ("GM") 1997 Annual Report on Form 10-K, as amended, the unaudited information relating to Hughes filed as Exhibit 99 in GM's Quarterly Report on Form 10-Q dated March 31, 1998, and Current Reports on Form 8-K filed subsequent to the filing date for the GM 1997 Annual Report on Form 10-K, as amended. GM purchase accounting adjustments relate to GM's purchase of Hughes in 1985. On December 17, 1997, Hughes Electronics Corporation ("Hughes Electronics") and 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 GM tracking stock, Class H common stock, that is linked to the remaining telecommunications and space businesses. 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. In connection with the recapitalization of Hughes Electronics on December 17, 1997, the telecommunications and space businesses of former Hughes, consisting principally of its direct-to-home broadcast, satellite services, satellite manufacturing and network systems businesses, were contributed to the recapitalized Hughes Electronics. Such telecommunications and space businesses, both before and after the recapitalization, are 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. The 1997 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, the interest expense for 1997 in the Statement of Income and Available Separate Consolidated Net Income ("Statement of Income") included an allocated share of total former Hughes' interest expense. Note 2. Inventories Major Classes of Inventories June 30, December 31, (Dollars in Millions) 1998 1997 ---- ---- Productive material and supplies $91.7 $57.5 Work in process 361.7 328.5 Finished goods 128.4 100.4 ----- ----- Total $581.8 $486.4 ===== ===== - 37 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--Continued (Unaudited) Note 3. Comprehensive Income Hughes' total comprehensive income was as follows: Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ (Dollars in Millions) 1998 1997 1998 1997 ------- ------ ------- ------- Net income $50.8 $319.1 $99.2 $337.7 Other comprehensive loss: Foreign currency translation adjustments (2.2) (0.9) (2.5) (0.8) Unrealized gains on securities: Unrealized holding gains $1.6 $ - $1.0 $ - Less: reclassification adjustment for unrealized gains included in net income (7.3) - (7.3) - ---- ----- ---- ---- Unrealized gains on securities (5.7) - (6.3) - ---- ----- ---- ---- Other comprehensive loss (7.9) (0.9) (8.8) (0.8) ----- ----- ---- ----- Total comprehensive income $42.9 $318.2 $90.4 $336.9 ==== ===== ==== ===== Note 4. Earnings Per Share Attributable to GM Class H Common Stock and Available Separate Consolidated Net Income Earnings per share attributable to GM Class H common stock is determined based on the relative amounts available for the payment of dividends to holders of GM Class H 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). Amounts available for the payment of dividends on GM Class H common stock are based on the available separate consolidated net income of Hughes. The available separate consolidated net income of Hughes is determined quarterly and is equal to the separate consolidated net income of Hughes, excluding the effects of GM purchase accounting adjustments arising from GM's acquisition of Hughes (earnings used for computation of available separate consolidated net income), multiplied by a fraction, the numerator of which is a number equal to the weighted-average number of shares of GM Class H common stock outstanding during the period (105.2 million and 101.0 million during the second quarters of 1998 and 1997, respectively) and the denominator of which was 399.9 million during the second quarters of 1998 and 1997. For 1997, available separate consolidated net income and earnings attributable to General Motors 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 1997 financial statements relate only to the telecommunications and space businesses of former Hughes, they do not reflect the earnings 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 businesses of former Hughes. Earnings per share represent basic earnings per share. There is no dilutive effect resulting from the assumed exercise of stock options, since the exercise of stock options would not affect the GM Class H dividend base (denominator) used in calculating earnings per share. As Hughes has no other common stock equivalents that may impact the calculation, diluted earnings per share is not presented. - 38 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--Continued (Unaudited) Note 5. Other Postretirement Benefits Hughes has disclosed in the 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, 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 6. Acquisitions In May 1997, Hughes and PanAmSat, a leading provider of international satellite services, merged their respective satellite service operations into a new publicly-held company, which retained the name PanAmSat. Hughes contributed its Galaxy(R) satellite services business in exchange for a 71.5% interest in the new company. PanAmSat stockholders received a 28.5% interest in the new company and $1.5 billion in cash. For accounting purposes, the merger was treated by Hughes as an acquisition of 71.5% of PanAmSat and was accounted for using the purchase method. Accordingly, the purchase price was allocated to the net assets acquired, including intangible assets, based on estimated fair values at the date of acquisition. The purchase price exceeded the fair value of net assets acquired by $2.4 billion. In addition, the 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). In May 1998, Hughes purchased an additional 9.5% interest in PanAmSat for $851.4 million in cash, increasing Hughes' ownership interest from 71.5% to 81.0%. Note 7. Hughes Transactions In connection with the Hughes Transactions and the resulting Delco post-closing price adjustment, Hughes made a cash payment to GM in June of 1998 for $204.7 million. The payment was treated as an adjustment to additional paid-in capital. Note 8. Discontinued Operations On December 15, 1997, Hughes sold substantially all of the assets and liabilities of the Hughes Avicom International, Inc. ("Hughes Avicom") business to Rockwell Collins, Inc. for cash. Hughes Avicom is a supplier of products and services to the commercial airline market. The 1997 net operating results of Hughes Avicom have been reported, net of applicable income taxes, as "Income from discontinued operations, net of taxes" and the net cash flows as "Net cash used by discontinued operations." - 39 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--Continued (Unaudited) Note 9. Segment Reporting Hughes' operating segments selected information for the three months ended and six months ended June 30, 1998 and 1997, are reported as follows: Operating Segments: Direct-To- Home Satel. Satel. Network Broadcast Services Manuf. Systems Other Elim. Total --------- -------- ------ ------- ----- ----- ------ (Dollars in Millions) For the Three Months Ended: June 30, 1998 External Revenues $401.5 $161.6 $593.0 $207.0 $5.9 - $1,369.0 Intersegment Revenues - 29.5 81.8 14.7 0.6 $(126.6) - - ------------------------------------------------------------------------------- Total Revenues $401.5 $191.1 $674.8 $221.7 $6.5 $(126.6)$1,369.0 - -------------------------------------------------------------------------------- Operating (Loss) Profit(1) $(40.2) $73.6 $60.0 $(25.2) $(0.6) $5.3 $72.9 - -------------------------------------------------------------------------------- June 30, 1997 External Revenues $281.7 $111.9 $568.4 $210.9 $(21.5) - $1,151.4 Intersegment Revenues - 22.2 16.1 - 0.6 $(38.9) - - ------------------------------------------------------------------------------- Total Revenues $281.7 $134.1 $584.5 $210.9 $(20.9) $(38.9)$1,151.4 - -------------------------------------------------------------------------------- Operating (Loss) Profit(1) $(47.9) $62.1 $53.8 $(1.0) $(32.7) $17.7 $52.0 - -------------------------------------------------------------------------------- For the Six Months Ended: June 30, 1998 External Revenues $789.4 $328.7 $1,146.7 $386.1 $9.1 - $2,660.0 Intersegment Revenues - 55.4 152.4 20.3 0.9 $(229.0) - - ------------------------------------------------------------------------------- Total Revenues $789.4 $384.1 $1,299.1 $406.4 $10.0 $(229.0)$2,660.0 - -------------------------------------------------------------------------------- Operating (Loss) Profit(1) $(71.8) $158.5 $115.1 $(37.1) $(11.4) $(2.1) $151.2 - -------------------------------------------------------------------------------- June 30, 1997 External Revenues $517.3 $215.8 $1,064.6 $393.3 $(15.6) - $2,175.4 Intersegment Revenues - 45.9 79.2 0.1 1.1 $(126.3) - - ------------------------------------------------------------------------------- Total Revenues $517.3 $261.7 $1,143.8 $393.4 $(14.5) $(126.3)$2,175.4 - -------------------------------------------------------------------------------- Operating (Loss) Profit(1) ($115.4) $129.6 $106.6 $(16.3) $(30.0) $5.3 $79.8 - -------------------------------------------------------------------------------- (1) Includes amortization arising from purchase accounting adjustments related to GM's acquisition of Hughes amounting to $0.8 million in each of the three month periods and $1.6 million in each of the six months periods for the Satellite Services segment and $4.5 million in each of the three month periods and $9.0 million in each of the six month periods for Other. A reconciliation of operating profit to income from continuing operations before income taxes and minority interests, as shown in the Statement of Income, follows: Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- (Dollars in Millions) 1998 1997 1998 1997 ---- ---- ---- ---- Operating profit $72.9 $52.0 $151.2 $79.8 Interest income 30.6 5.7 68.1 7.7 Interest expense (2.9) (18.6) (5.9) (33.7) Other, net (35.1) 479.5 (69.4) 470.4 ----- ------ ----- ----- Income from continuing operations before income taxes and minority interests $65.5 $518.6 $144.0 $524.2 ==== ===== ===== ===== - 40 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--Concluded (Unaudited) Note 10. Contingencies In connection with the 1997 spin-off of Hughes Defense and its subsequent merger with Raytheon, a process was agreed to among General Motors, Hughes and Raytheon for resolving disputes that might arise in connection with post-closing adjustments called for by the terms of the merger agreement. Such adjustments might call for a cash payment between Hughes and Raytheon. A dispute currently exists regarding the post-closing adjustments which Hughes and Raytheon have proposed to one another. If the dispute is not resolved by negotiation, the parties will proceed to an agreed upon form of binding arbitration under which either party may be required by arbitration to make a payment to the other. It is possible that Hughes may be required by arbitration to make a payment to Raytheon that would be material to Hughes. However, the amount of payment that might be required of either party is not determinable at this time. Hughes intends to vigorously oppose the adjustments Raytheon seeks. Hughes has maintained a suit against the U.S. Government since September 1973 regarding the Government's infringement and use of a Hughes patent (the "Williams Patent") covering "Velocity Control and Orientation of a Spin Stabilized Body," principally satellites. On April 7, 1998, the Court of Appeals for the Federal Circuit ("CAFC") reaffirmed earlier decisions in the Williams case and the award of $114.0 million in damages. The CAFC ruled that the conclusions previously reached in the Williams case were consistent with the U.S. Supreme Court's findings in the Warner-Jenkinson case. The U.S. Government petitioned the CAFC for a rehearing and was denied. Hughes is unable to estimate the duration of any further appeal effort by the U.S. Government. While no amount has been recorded in the financial statements of Hughes to reflect the $114.0 million award or the interest accumulating thereon, a resolution of this issue could result in a gain that would be material to the earnings of GM attributable to Class H common stock. - 41 - HUGHES ELECTRONICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis should be read in conjunction with the Hughes management's discussion and analysis included in the General Motors ("GM") 1997 Annual Report to the Securities and Exchange Commission on Form 10-K, as amended, the management's discussion and analysis relating to Hughes included in Exhibit 99 to GM's Quarterly Report on Form 10-Q dated March 31, 1998, and Current Reports on Form 8-K filed subsequent to the filing date for GM's 1997 Form 10-K, as amended. In addition, the following discussion excludes purchase accounting adjustments related to GM's acquisition of Hughes (see Supplemental Data beginning on page 47). Statements made concerning expected financial performance, ongoing financial performance strategies, and possible future action which Hughes (as defined below) intends to pursue to achieve strategic objectives for each of its four principal business segments constitute forward-looking information. The implementation of these strategies and of such future actions and the achievement of such financial performance are each subject to numerous conditions, uncertainties and risk factors, and, accordingly, no assurance can be given that Hughes will be able to successfully accomplish its strategic objectives or achieve such financial performance. 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, competition, ability to achieve cost reductions, technological risk, interruptions to production attributable to causes outside of Hughes' control, the success of satellite launches, in-orbit performance of satellites and Hughes' ability to access capital to maintain its financial flexibility. General On December 17, 1997, Hughes Electronics Corporation ("Hughes Electronics") and 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 GM tracking stock, GM Class H common stock, that is linked to the remaining telecommunications and space businesses. 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. In connection with the recapitalization of Hughes Electronics on December 17, 1997, the telecommunications and space businesses of former Hughes, consisting principally of its direct-to-home broadcast, satellite services, satellite manufacturing and network systems businesses, were contributed to the recapitalized Hughes Electronics. Such telecommunications and space businesses, both before and after the recapitalization, is hereinafter referred to as Hughes. The following discussion and accompanying financial statements pertain only to Hughes and do not pertain to balances of former Hughes related to Hughes Defense or Delco. During 1998, three Hughes built satellites experienced the failure of a primary spacecraft control processor (SCP). The satellites affected were the DBS1 satellite operated by DIRECTV(R) and the Galaxy IV and Galaxy VII satellites operated by PanAmSat. The control of the DBS1 and Galaxy VII satellites were automatically switched to the spare SCP and the spacecrafts are currently operating normally. The spare SCP on the Galaxy IV satellite was unavailable due to unrelated and not previously detected damage, resulting in the loss of the satellite. The loss of the Galaxy IV satellite is not expected to have a material effect on Hughes' consolidated financial position due to insurance coverage and the utilization of in-orbit spare capacity. An extensive investigation by Hughes revealed that electrical shorts involving tin-plated relay switches are the most likely cause of the primary SCP failures. It appears the most probable cause of the electrical shorts is that under certain conditions, a tiny, crystalline structure, less than the width of a human hair, can grow and bridge a relay terminal to its case. Efforts are currently underway to narrow the number of in-orbit HS-601 satellites that are possibly susceptible to the phenomenon and determine steps that might reduce the probability of recurrence in orbit. Although there exists the possibility of failure of other currently operating SCP's, Hughes believes the probability of a primary and spare SCP failing in one in-orbit HS-601 satellite is very low. Hughes is confident that the phenomenon will not be repeated on satellites currently being built and those ready for launch. - 42 - HUGHES ELECTRONICS CORPORATION Results of Operations Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997 Revenues. Second quarter 1998 revenues increased 18.9% to $1,369.0 million compared with $1,151.4 million in the second quarter of 1997. The increase reflects continued record subscriber growth in the Direct-To-Home Broadcast segment, increased revenues in the Satellite Services segment resulting primarily from the May 1997 PanAmSat merger and increased revenues in the Satellite Manufacturing segment due to higher commercial satellite sales. Direct-To-Home Broadcast segment second quarter 1998 revenues increased 42.5% to $401.5 million from $281.7 million in the second quarter of 1997. The increase resulted from continued strong subscriber growth, strong average monthly revenue per subscriber and low subscriber churn rates. Domestic DIRECTV propelled this growth with quarterly revenues of $368 million, a 49% increase over last year's second quarter revenues of $247 million. With 227,000 net new subscribers in the second quarter, total DIRECTV(R) subscribers grew to 3,755,000 in the United States as of June 30, 1998. Hughes' Latin American DIRECTV subsidiary, Galaxy Latin America ("GLA"), had second quarter revenues of $32 million compared with $13 million in the second quarter of 1997. With the addition of 49,000 net new subscribers in the second quarter, cumulative DIRECTV subscribers in Latin America were 387,000 as of June 30, 1998. The Satellite Services segment second quarter 1998 revenues were up 42.5% to $191.1 million compared with $134.1 million in the prior year. The increase was primarily due to the May 1997 PanAmSat merger and increased operating lease revenues for video, data and Internet-related services. For the second quarter of 1998, revenues for the Satellite Manufacturing segment increased 15.4% to $674.8 million from revenues of $584.5 million for the same period in 1997. The increase in revenue was principally due to higher commercial satellite sales to customers such as Thuraya Satellite Telecommunications Company, ICO Global Communications and PanAmSat Corporation. Second quarter revenues for the Network Systems segment were $221.7 million compared with $210.9 million in the same period last year. Increased sales of satellite-based mobile telephony equipment were mostly offset by lower sales of international wireless local loop telephone systems. Operating Profit. Operating profit in the quarter increased 36.5% to $78.2 million compared to $57.3 million in the second quarter of 1997. The increase resulted from the above noted increase in revenues. Second quarter operating profit margin on the same basis increased to 5.7% in 1998 from 5.0% in 1997. The increase in operating profit for the second quarter of 1998 resulted primarily from record DIRECTV subscriber growth through June, continued strong performance in the Satellite Services segment resulting from the PanAmSat merger and higher commercial satellite sales. The Direct-To-Home Broadcast segment operating loss for the second quarter of 1998 was $40.2 million compared with an operating loss of $47.9 million in the second quarter of 1997. The lower operating loss in 1998 was principally due to increased subscriber revenues that more than offset higher sales and marketing expenditures. The second quarter 1998 operating loss for the domestic DIRECTV business was $7 million compared with $21 million for last year, and GLA's second quarter operating loss was $32 million compared with $33 million last year. With respect to the worldwide DIRECTV businesses, particularly in the United States, Hughes has implemented a number of strategic initiatives designed to expand its market share and enhance its competitive position. These include new distribution channels, expanded services, broader programming and marketing and other promotional strategies designed to address "barriers to entry" identified by consumers. The implementation of such strategies increased subscriber acquisition costs and, as a result, is likely to affect the timing and amount of revenues and the overall profitability of the DIRECTV businesses. However, Hughes believes that early capture of market share and the establishment of market leadership are important to the maximization of the long-term value of the DIRECTV businesses. The Satellite Services segment operating profit in the second quarter rose 18.3% to $74.4 million from $62.9 million in 1997, resulting from the PanAmSat merger and increased operating lease revenues noted above. Operating profit margin in the period declined to 38.9% from 46.9% in the same period last year primarily from goodwill amortization associated with the PanAmSat merger and a provision for losses relating to the May 1998 failure of PanAmSat's Galaxy IV satellite. For the second quarter 1998, operating profit for the Satellite Manufacturing segment increased 11.5% to $60.0 million from $53.8 million in the prior year. The increase in operating profit was principally due to the higher commercial satellite sales noted above. Operating profit margin in the quarter declined slightly to 8.9% from 9.2% last year. The Network Systems segment operating loss in the second quarter of 1998 was $25.2 million compared with an operating loss of $1.0 million in the second quarter of 1997. The increased operating loss in the second quarter of 1998 was primarily due to a $26 million provision for estimated losses associated with the bankruptcy filing by a customer. - 43 - HUGHES ELECTRONICS CORPORATION Costs and Expenses. Selling, general and administrative expenses increased to $359.2 million in the second quarter of 1998 from $230.1 million in the same period of 1997. The increase resulted primarily from the PanAmSat merger, increased programming, marketing and subscriber acquisition costs in the Direct-To-Home Broadcast segment and increased business activity in the satellite manufacturing segment. The increase in depreciation and amortization expenses to $100.2 million in the second quarter of 1998 from $67.0 million in the same period of 1997 resulted from increased goodwill amortization related to the PanAmSat merger and additional satellite depreciation. Interest Income and Expense. Interest income increased to $30.6 million in the second quarter of 1998 compared with $5.7 million in the second quarter of 1997. The increase was due to the higher level of cash and cash equivalents resulting from the Hughes Transactions as well as the PanAmSat merger. Interest expense decreased $15.7 million in the second quarter of 1998 from the same period in 1997 due to the repayment of debt in conjunction with the Hughes Transactions. Other, net. The second quarter 1998 amount primarily relates to losses from unconsolidated subsidiaries of $22.0 million and a provision for estimated losses associated with bankruptcy filings by two customers. The second quarter 1997 amount includes the $489.7 million pre-tax gain recognized in connection with the May 1997 PanAmSat merger offset by losses from unconsolidated subsidiaries of $10.9 million. Income Taxes. The effective income tax rate was 32.9% in the second quarter of 1998 and 39.6% in the second quarter of 1997. The decrease in the effective tax rate resulted from Hughes increasing its ownership in PanAmSat in the second quarter of 1998. As a result of Hughes' increased ownership in PanAmSat, Hughes now benefits from the inclusion of PanAmSat in the Hughes consolidated tax return. Discontinued Operations. On December 15, 1997, Hughes sold substantially all of the assets and liabilities of the Hughes Avicom International, Inc. ("Hughes Avicom") business to Rockwell Collins, Inc. for cash. As a result, Hughes Avicom is treated as a discontinued operation for 1997. Net Earnings. 1998 second quarter earnings increased to $56.1 million compared with last year's $6.1 million, which excludes the $318.3 million after-tax gain ($0.80 per share) recognized in connection with the May 1997 PanAmSat merger. Earnings per share on the same basis increased to $0.14 per share versus pro forma earnings per share of $0.01 in 1997. Including the gain associated with the PanAmSat merger, second quarter 1997 pro forma earnings per share was $0.81. See Note 4 to the financial statements for further discussion regarding pro forma presentation. Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997 Revenues. For the first six months of 1998, revenues increased 22.3% to $2,660.0 million compared with $2,175.4 million in the first half of 1997. This growth was primarily the result of strong DIRECTV subscriber growth, the May 1997 PanAmSat merger and higher commercial satellite sales. Direct-To-Home Broadcast segment revenues for the first six months of 1998 increased 52.6% to $789.4 million from $517.3 million for the same period in 1997. The increase resulted from continued strong subscriber growth and average monthly revenues per subscriber, as well as low subscriber churn rates. For the first six months of 1998, the Satellite Services segment revenues increased 46.8% to $384.1 million from $261.7 million for the same period in 1997. The increase was primarily due to the May 1997 PanAmSat merger and increased operating lease revenues for video, data and Internet-related services. Revenues for the first six months of 1998 for the Satellite Manufacturing segment were $1,299.1 million compared to $1,143.8 million for the same period in 1997. The 13.6% increase in revenues resulted principally from higher commercial satellite sales to customers such as Thuraya Satellite Telecommunications Company, ICO Global Communications and PanAmSat Corporation. Network Systems segment revenues for the first six months of 1998 increased 3.3% to $406.4 million from $393.4 million for the first six months of 1997. Increased sales resulting from the sale of private business networks and satellite-based mobile telephony equipment, were mostly offset by lower sales of international wireless local loop telephone systems. Operating Profit. Driven by the above noted revenue growth, operating profit for the first six months of 1998 rose sharply to $161.8 million versus $90.4 million in 1997, an increase of 79.0%. The increase in operating profit for the first six months of 1998 is a result of increases in revenues noted above. Operating profit margin on the same basis increased to 6.1% compared with 4.2% in the first half of 1997. The increase in operating profit margin for the second quarter of 1998 resulted primarily from record DIRECTV subscriber growth through June, continued strong performance in the Satellite Services segment resulting from the PanAmSat merger and higher commercial satellite sales. The Direct-To-Home Broadcast segment operating loss for the first six months of 1998 was $71.8 million compared with an operating loss of $115.4 million for first six months of 1997. The lower operating loss in 1998 was principally due to increased subscriber revenues that more than offset higher sales and marketing expenditures. - 44 - HUGHES ELECTRONICS CORPORATION The Satellite Services segment operating profit for the first six month of 1998 increased 22.0% to $160.1 million from $131.2 million for the first six months of 1997, resulting from the PanAmSat merger and increased operating lease revenues noted above. Operating profit margin in the period declined to 41.7% from 50.1% in the same period last year primarily from goodwill amortization associated with the PanAmSat merger and a provision for losses relating to the May 1998 failure of PanAmSat's Galaxy IV satellite. For the first six months of 1998, operating profit for the Satellite Manufacturing segment increased 8.0% to $115.1 million from $106.6. The increased operating profit was principally due to the higher commercial satellite sales noted above. Operating profit margin in the first six months of 1998 declined slightly to 8.9% from 9.3% in the prior year. The Network Systems segment operating loss in the first six months of 1998 was $37.1 million compared with an operating loss of $16.3 million in the first six months of 1997. The increased operating loss was primarily due to a $26 million provision for estimated losses associated with the bankruptcy filing by a customer. Cost and Expenses. Selling, general and administrative expenses increased to $661.8 million from $452.1 million in the same period of 1997. The increase in these expenses resulted primarily from the PanAmSat merger, increased programming, marketing and subscriber acquisition costs in the Direct-To-Home Broadcast segment and increased business activity in the satellite manufacturing segment. Depreciation and amortization expenses increased to $197.9 million in the first six months of 1998 from $117.3 million for the same period in 1997. The increase in depreciation and amortization expenses resulted from increased goodwill amortization related to the PanAmSat merger and additional satellite depreciation. Interest Income and Expense. Interest income increased to $68.1 million in the first six months of 1998 from $7.7 million in the first six months of 1997. The increase was due to the higher level of cash and cash equivalents resulting from the Hughes Transactions as well as the PanAmSat merger. Interest expense decreased $27.8 million in the first six months of 1998 from the same period in 1997 due to the repayment of debt in conjunction with the Hughes Transactions. Other, net. Other, net for the first six months of 1998 relates primarily to losses from unconsolidated subsidiaries of $50.9 million, attributable principally to equity investments, and a provision for estimated losses associated with bankruptcy filings by two customers. The amount for the first six months of 1997 includes the $489.7 million pre-tax gain recognized in connection with the May 1997 PanAmSat merger offset by losses from unconsolidated subsidiaries of $20.3 million. Income Taxes. The effective income tax rate was 35.4% in the first six months of 1998 and 39.2% in the first six months of 1997. The decrease in the effective tax rate resulted from Hughes increasing its ownership of PanAmSat in the second quarter of 1998. As a result of Hughes' increased ownership in PanAmSat, Hughes now benefits from the inclusion of PanAmSat in the Hughes consolidated tax return. Net Earnings. Earnings for the first six months of 1998 increased to $109.8 million compared with last year's $30.0 million, which excludes the $318.3 million after-tax gain ($0.80 per share) recognized in connection with the may 1997 PanAmSat merger. Earnings per share on the same basis increased to $0.27 per share versus pro forma earnings per share of $0.07 in 1997. Including the gain associated with the PanAmSat merger, for the first six months of 1997, pro forma earnings per share was $0.87. See Note 4 to the financial statements for further discussion regarding pro forma presentation. Liquidity and Capital Resources Cash and Cash Equivalents. Cash and cash equivalents were $1,592.8 million at June 30, 1998 compared to $2,783.8 million at December 31, 1997. The $1,191.0 million decrease was primarily due to the purchase of an additional 9.5% interest in PanAmSat, expenditures for PanAmSat satellites and cash paid to General Motors for the Delco post-closing price adjustment. Cash provided by operating activities for the six months ended June 30, 1998 was $157.1 million, compared to $377.1 million cash used in operating activities for the same period in 1997. The change for the first six months of 1998 compared to that of 1997 resulted primarily from higher cash provided by operations in 1998 resulting from the above noted increases in revenues while there was a use of cash for the build-up in working capital for 1997. Net cash used in investing activities was $1,393.7 million for the six months ended June 30, 1998 and $1,687.8 million for the same period in 1997. The 1998 investing activities reflect the purchase of an additional 9.5% interest in PanAmSat, an increase in satellite expenditures and the early buyout of satellite sale-leasebacks at PanAmSat. The 1997 investing activities reflect the PanAmSat merger in May 1997. Net cash provided by financing activities was $45.6 million for the six months ended June 30, 1998 compared with $2,401.0 million for same period in 1997. The 1998 financing activities reflect PanAmSat's net borrowings of $250.0 million, offset by the $204.7 million payment to GM for the Delco post-closing price adjustment. The 1997 financing activities resulted from former Hughes contributing $641.9 million to Hughes and Hughes borrowing $1,725.0 million from GM for the PanAmSat merger. - 45 - HUGHES ELECTRONICS CORPORATION Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) at June 30, 1998 and December 31, 1997 was 2.38 and 3.24, respectively. Current assets decreased by $797.9 million to $4,008.0 million at June 30, 1998 from $4,805.9 million at December 31, 1997, resulting primarily from the decrease in cash, noted above. Dividend Policy and Use of Cash. Hughes does not initially anticipate paying cash dividends to GM nor does GM anticipate paying cash dividends initially to holders of GM Class H common stock. Hughes anticipates using its cash to fund 1998 capital expenditures for property and equipment and to fund additional equity investments. Although, Hughes may be required to make a cash payment to or receive a cash payment from Raytheon for a post-closing purchase price adjustment in connection with the merger of Hughes Defense and Raytheon, the amount of a cash payment to or from Raytheon, if any, is not determinable at this time. (See further discussion in Note 10). Debt and Credit Facilities. In January 1998, PanAmSat borrowed $125.0 million under their five-year revolving credit facility, principally for the purpose of exercising an early buyout option on a satellite sale-leaseback agreement. Also in January 1998, PanAmSat completed a private placement debt offering for five, seven, ten and thirty year notes aggregating $750.0 million, the proceeds of which were used to repay outstanding bank borrowings of $725.0 million, which included the $125.0 million of borrowings in January. PanAmSat maintains a $500 million five-year revolving credit facility, which provides for short-term and long-term borrowings, and a $500 million commercial paper program, which provides for short-term borrowings. Borrowings under the credit facility and commercial paper program are limited to $500 million in the aggregate. There were $100.0 million of short-term borrowings against the credit facility at June 30, 1998, principally for the purpose of exercising an early buyout option on satellite sale-leaseback agreements. In addition, Hughes maintains two unsecured revolving credit facilities, consisting of a $750 million multi-year facility and a $250 million 364-day facility. There were no borrowings against the credit facilities at June 30, 1998. Hughes believes that existing cash balances and amounts available under its credit facilities will provide sufficient resources to meet currently identified working capital requirements, satellite construction, debt service and other cash needs. New Accounting Standards In February of 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 132, Employers' Disclosures About Pensions and Other Postretirement Benefits. SFAS No. 132 requires an entity to disclose certain information about pensions and other postretirement benefits. The effect of adopting this new accounting standard, which is required for adoption in the current fiscal year, will result in additional disclosure only and will have no impact on Hughes' consolidated financial statements. In March of 1998, the American Institute of Certified Public Accountant's (AICPA) Accounting Standards Executive Committee (ASEC) issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance on the capitalization of software developed and/or purchased for internal use. Hughes will adopt SOP 98-1 by January 1, 1999, as required. Management is currently assessing the impact of this SOP to Hughes' consolidated financial statements. In April of 1998, the ASEC of the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 provides guidance on the financial reporting of start-up and organizational costs, requiring those costs to be expensed as incurred. Hughes will adopt the standard by January 1, 1999. Adoption of this standard is not expected to have a material impact on Hughes' consolidated financial statements. In June of 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be recognized immediately or deferred depending on the use of the derivative and if the derivative is a qualifying hedge. Hughes plans to adopt SFAS No. 133 by January 1, 2000, as required. Hughes is currently assessing the impact of this statement on Hughes' consolidated financial statements. - 46 - HUGHES ELECTRONICS CORPORATION Supplemental Data The financial statements reflect the application of purchase accounting adjustments as previously discussed. However, as provided in GM's Restated Certificate of Incorporation, the earnings attributable to GM Class H common stock for purposes of determining the amount available for the payment of dividends on GM Class H common stock specifically excludes such adjustments. More specifically, amortization of the intangible assets associated with GM's purchase of Hughes amounted to $5.3 million for the second quarters of 1998 and 1997 and $10.6 million for the six months ended June 30, 1998 and 1997. Such amounts are excluded from the earnings available for the payment of dividends on GM Class H common stock and are charged against earnings available for the payment of dividends on GM's $1-2/3 par value stock. Unamortized purchase accounting adjustments associated with GM's purchase of Hughes were $437.0 million at June 30, 1998 and $447.6 million at December 31, 1997. In order to provide additional analytical data to the users of Hughes' financial information, supplemental data in the form of unaudited summary pro forma financial data are provided. Consistent with the basis on which earnings of Hughes available for the payment of dividends on the GM Class H common stock is determined, the pro forma data exclude purchase accounting adjustments related to GM's acquisition of Hughes. Included in the supplemental data are certain financial ratios which provide measures of financial returns excluding the impact of purchase accounting adjustments. The pro forma data are not presented as a measure of GM's total return on its investment in Hughes. - 47 - HUGHES ELECTRONICS CORPORATION Unaudited Summary Pro Forma Financial Data* Pro Forma Condensed Statement of Income Three Months Ended Six Months Ended June 30, June 30, --------------- --------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in Millions Except Per Share Amounts) Total revenues $1,369.0 $1,151.4 $2,660.0 $2,175.4 Total operating costs and expenses 1,290.8 1,094.1 2,498.2 2,085.0 ------- ------- ------- ------- Operating profit 78.2 57.3 161.8 90.4 Non-operating (loss) income (7.4) 466.6 (7.2) 444.4 Income taxes 23.3 207.5 54.7 209.7 Minority interests in net losses of subsidiaries 8.6 7.7 9.9 21.9 Income from discontinued operations - 0.3 - 1.3 ----- --- ----- --- Earnings Used for Computation of Available Separate Consolidated Net Income $56.1 $324.4 $109.8 $348.3 ==== ===== ===== ===== Earnings Attributable to General Motors Class H Common Stock on a Per Share Basis $0.14 $0.81 $0.27 $0.87 ==== ==== ==== ==== Pro Forma Condensed Balance Sheet June 30, December 31, Assets 1998 1997 -------- --------- (Dollars in Millions) Total Current Assets $4,008.0 $4,805.9 Satellites, net 2,897.5 2,643.4 Property, net 927.6 889.7 Net Investment in Sales-type Leases 231.1 337.6 Intangible Assets, Investments and Other Assets, net 4,283.0 3,639.6 -------- -------- Total Assets $12,347.2 $12,316.2 ======== ======== Liabilities and Stockholder's Equity Total Current Liabilities $1,684.5 $1,482.6 Long-Term Debt 787.9 637.6 Postretirement Benefits Other Than Pensions, Other Liabilities and Deferred Credits 1,655.0 1,724.1 Minority Interests 436.8 607.8 Total Stockholder's Equity (1) 7,783.0 7,864.1 --------- --------- Total Liabilities and Stockholder's Equity (1) $12,347.2 $12,316.2 ======== ======== * The summary excludes purchase accounting adjustments related to GM's acquisition of Hughes. 1997 earnings attributable to General Motors Class H common stock on a per share basis are presented on a pro forma basis for comparative purposes. See Note 4 to the financial statements for further discussion. (1)General Motors' equity in its wholly-owned subsidiary, Hughes. Holders of GM Class H common stock have no direct rights in the equity or assets of Hughes, but rather have rights in the equity and assets of GM (which includes 100% of the stock of Hughes). - 48 - HUGHES ELECTRONICS CORPORATION Unaudited Summary Pro Forma Financial Data* - Continued Pro Forma Selected Segment Data Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in Millions) Direct-To-Home Broadcast Total Revenues $401.5 $281.7 $789.4 $517.3 Operating Loss $(40.2) $(47.9) $(71.8) $(115.4) Depreciation and Amortization $23.5 $23.0 $46.0 $41.3 Capital Expenditures $34.4 $18.8 $48.1 $30.2 Satellite Services Total Revenues $191.1 $134.1 $384.1 $261.7 Operating Profit $74.4 $62.9 $160.1 $131.2 Operation Profit Margin 38.9% 46.9% 41.7% 50.1% Depreciation and Amortization $58.7 $30.1 $113.2 $43.9 Capital Expenditures (1) $164.7 $18.1 $414.3 $352.7 Satellite Manufacturing Total Revenues $674.8 $584.5 $1,299.1 $1,143.8 Operating Profit $60.0 $53.8 $115.1 $106.6 Operation Profit Margin 8.9% 9.2% 8.9% 9.3% Depreciation and Amortization $11.5 $9.1 $22.2 $17.8 Capital Expenditures $21.6 $24.5 $32.3 $40.1 Network Systems Total Revenues $221.7 $210.9 $406.4 $393.4 Operating Loss $(25.2) $(1.0) $(37.1) $(16.3) Depreciation and Amortization $9.9 $8.9 $18.4 $16.1 Capital Expenditures $10.9 $10.8 $15.7 $17.7 Eliminations and Other Total Revenues $(120.1) $(59.8) $(219.0) $(140.8) Operating Loss $9.2 $(10.5) $(4.5) $(15.7) Depreciation and Amortization $(3.4) $(4.1) $(1.9) $(1.8) Capital Expenditures $10.0 $52.8 $135.9 $(221.7) - ------------------------- * The Financial Statements reflect the application of purchase accounting adjustments related to GM's acquisition of Hughes. However, as provided in the General Motor's Restated Certificate of Incorporation, the earnings attributable to GM Class H common stock for purposes of determining the amount available for the payment of dividends on GM Class H common stock specifically excludes such adjustments. In order to provide additional analytical data the above unaudited pro forma selected segment data, which exclude the purchase accounting adjustments related to GM's acquisition of Hughes, are presented. (1) Includes expenditures related to satellites amounting to $94.4 million, $15.0 million, $240.0 and $347.1 million, respectively. Also included in 1998 is $58.9 million for the three months ended June 30 and $155.5 million for the six months ended June 30 related to the early buyout of satellite sale-leasebacks. - 49 - HUGHES ELECTRONICS CORPORATION AND SUBSIDIARIES Unaudited Summary Pro Forma Financial Data* - Concluded Pro Forma Selected Financial Data Three Months Ended Six Months Ended June 30, June 30, ----------------- ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in Millions Except Per Share Amounts) Operating profit $78 $57 $162 $90 Income from continuing operations before income taxes and minority interests 71 524 155 535 Earnings used for computation of available separate consolidated net income 56 324 110 348 Average number of GM Class H dividend base shares (1) 399.9 399.9 399.9 399.9 Stockholder's equity $7,783 $3,413 $7,783 $3,413 Working capital 2,324 781 2,324 781 Operating profit as a percent of revenues 5.7% 5.0% 6.1% 4.2% Income from continuing operations before income taxes and minority interests as a percent of revenues 5.2% 45.5% 5.8% 24.6% Net income as a percent of revenues 4.1% 28.2% 4.1% 16.0% - --------------------- * The summary excludes purchase accounting adjustments related to GM's acquisition of Hughes. (1)Class H dividend base shares is used in calculating earnings attributable to GM Class H common stock on a per share basis. This is not the same as the average number of GM Class H shares outstanding, which was 105.2 million for the second quarter of 1998 and 101.0 million for the second quarter of 1997. * * * * * * - 50 - EX-27 3 FDS --
5 This schedule contains summary financial information extracted from General Motors Corporation June 30, 1998 Consolidated Financial Statements and is qualified in its entirety by reference to second quarter 1998 Form 10-Q. 0000040730 General Motors Corporation 1,000,000 U.S. Dollars 6-mos Dec-31-1998 Jan-01-1998 Jun-30-1998 1 8,721 8,407 69,537 0 13,253 0 78,735 42,685 230,624 0 98,957 222 1 1,103 14,592 230,624 70,137 80,472 58,980 67 64,751 229 3,383 2,983 983 1,993 0 0 0 1,993 2.88 2.82
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