-----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, FH9rOhDsREgHpP3i9FuguRLYDeJqhvTpqxkrEMtYZzCk3RLc/yPzjplLfVVRaq3x gobQJlYsSbu7oHenrVN1tQ== 0000040730-98-000085.txt : 19981118 0000040730-98-000085.hdr.sgml : 19981118 ACCESSION NUMBER: 0000040730-98-000085 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98752401 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 THIRD QUARTER 10-Q 1998 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 September 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 48265-1000 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 September 30, 1998, 654,476,779 shares of the issuer's $1-2/3 par value common stock and 105,845,334 shares of Class H $0.10 par value common stock were outstanding. - 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 Nine Months Ended September 30, 1998 and 1997 3 Consolidated Balance Sheets as of September 30, 1998, December 31, 1997 and September 30, 1997 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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 14 Part II - Other Information (Unaudited) Item 1. Legal Proceedings 31 Item 6. Exhibits and Reports on Form 8-K 32 Signature 32 Exhibit 99 Hughes Electronics Corporation and Subsidiaries Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations 33 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 Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ------ ------ ------ ------ (Dollars in Millions Except Per Share Amounts) Net sales and revenues Manufactured products $29,978 $37,103 $100,115 $114,267 Financial services 3,220 3,162 9,661 9,563 Other income (Note 9) 1,225 1,625 5,119 5,447 ------- ------- -------- -------- Total net sales and revenues 34,423 41,890 114,895 129,277 ------ ------ ------- ------- Costs and expenses Cost of sales and other operating charges, exclusive of items listed below 26,484 31,484 85,464 95,602 Selling, general, and administrative expenses 4,076 3,884 12,219 11,459 Depreciation and amortization expenses 2,874 3,030 8,712 9,196 Interest expense 1,754 1,508 5,137 4,469 Other deductions (Note 9) 499 388 1,644 956 -------- ------- -------- --------- Total costs and expenses 35,687 40,294 113,176 121,682 ------ ------ ------- ------- (Loss) income before income taxes and minority interests (1,264) 1,596 1,719 7,595 Income tax (benefit) expense (451) 533 532 2,675 Minority interests 4 4 (3) 41 ----- ------- ------- ------- Net (loss) income (809) 1,067 1,184 4,961 Premium on exchange of preference stocks (Note 5) - 26 - 26 Dividends on preference stocks 16 16 48 56 ---- ------ ------ ------ Earnings (loss) on common stocks $(825) $1,025 $1,136 $4,879 === ===== ===== ===== Basic earnings (loss) per share attributable to common stocks (Note 8) Earnings per share attributable to $1-2/3 par value $(1.28) $1.35 $1.65 $6.35 Earnings per share attributable to Class H (prior to its recapitalization on December 17, 1997) $0.60 $2.54 Earnings per share attributable to Class H (subsequent to its recapitalization on December 17, 1997) $0.11 $0.38 Diluted earnings (loss) per share attributable to common stocks (Note 8) Earnings per share attributable to $1-2/3 par value $(1.28) $1.34 $1.60 $6.28 Earnings per share attributable to Class H (prior to its recapitalization on December 17, 1997) $0.60 $2.54 Earnings per share attributable to Class H (subsequent to its recapitalization on December 17, 1997) $0.11 $0.38 Reference should be made to the notes to consolidated financial statements.
- 3 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Sept. 30, Sept. 30, 1998 Dec. 31, 1997 (Unaudited) 1997 (Unaudited) ----------- -------- ---------- (Dollars in Millions) ASSETS Cash and cash equivalents $7,961 $11,262 $10,406 Other marketable securities 8,688 11,722 10,823 ------ ------ ------ Total cash and marketable securities 16,649 22,984 21,229 Finance receivables - net 63,091 58,870 58,966 Accounts and notes receivable (less allowances) 10,419 7,493 7,223 Inventories (less allowances) (Note 2) 12,869 12,102 12,820 Deferred income taxes 22,306 22,478 19,588 Equipment on operating leases (less accumulated depreciation) 36,179 33,302 32,964 Property - net (Note 3) 37,329 34,567 38,520 Intangible assets - net 12,309 11,469 14,979 Other assets - net 26,494 25,623 26,846 ------- -------- -------- Total assets $237,645 $228,888 $233,135 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Accounts payable (principally trade) $18,142 $15,782 $15,021 Notes and loans payable 102,460 93,027 90,914 Deferred income taxes 3,156 2,923 4,269 Postretirement benefits other than pensions (Note 4) 40,806 41,168 44,427 Pensions 7,219 7,043 7,100 Accrued expenses and other liabilities 50,340 50,490 46,869 ------- -------- -------- Total liabilities 222,123 210,433 208,600 ------- ------- ------- Minority interests 621 727 735 General Motors - obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of General Motors (Note 5) Series D 79 79 79 Series G 142 143 143 Stockholders' equity Preference stocks 1 1 1 Common stocks $1-2/3 par value (Note 6; issued, 655,036,035; 693,456,394; and 707,772,699 shares) 1,092 1,156 1,180 Class H (issued, 102,648,686 shares) - - 10 Class H (issued, 105,959,765 and 103,885,803 shares) 11 10 - Capital surplus (principally additional paid-in capital) 12,769 15,369 16,211 Retained earnings 5,554 5,416 9,846 ------ ------- ------- Subtotal 19,427 21,952 27,248 Minimum pension liability adjustment (4,062) (4,062) (3,490) Accumulated foreign currency translation adjustments (1,097) (888) (727) Net unrealized gains on securities 412 504 547 ------ ------ ------ Accumulated other comprehensive loss (4,747) (4,446) (3,670) Total stockholders' equity 14,680 17,506 23,578 -------- -------- -------- Total liabilities and stockholders' equity $237,645 $228,888 $233,135 ======= ======= =======
Reference should be made to the notes to consolidated financial statements. - 4 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended Sept.30, 1998 1997 (Dollars in Millions) Net cash provided by operating activities $7,497 $13,123 ----- ------ Cash flows from investing activities Expenditures for property (7,043) (6,958) Investments in companies, net of cash acquired (569) (1,788) Investments in other marketable securities - acquisitions (23,248) (24,790) Investments in other marketable securities - liquidations 26,912 23,547 Finance receivables - acquisitions (112,962) (128,300) Finance receivables - liquidations 86,659 105,401 Proceeds from sales of finance receivables 21,922 20,512 Operating leases - acquisitions (18,281) (16,206) Operating leases - liquidations 11,961 10,138 Other (712) 721 Net cash used in investing activities (15,361) (17,723) ------ ------ Cash flows from financing activities Net increase in loans payable 2,240 3,162 Increase in long-term debt 16,620 11,658 Decrease in long-term debt (10,795) (9,340) Proceeds from issuing common stocks 344 471 Repurchases of common stocks (3,071) (3,353) Cash dividends paid to stockholders (1,046) (1,252) ----- ----- Net cash provided by financing activities 4,292 1,346 ----- ----- Effect of exchange rate changes on cash and cash equivalents 271 (403) ------ ------ Net decrease in cash and cash equivalents (3,301) (3,657) Cash and cash equivalents at beginning of the period 11,262 14,063 ------ ------ Cash and cash equivalents at end of the period $7,961 $10,406 ====== ====== 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 and Subsidiaries, prior to the December 17, 1997 restructuring of the company (hereinafter referred to as "former Hughes") and subsequent to the December 17, 1997 restructuring of the company (hereinafter referred to as "Hughes") (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
Major classes of inventories were as follows (in millions): Sept. 30, Dec. 31, Sept. 30, 1998 1997 1997 --------- -------- --------- Productive material, work in process, and supplies $8,050 $7,023 $8,102 Finished product, service parts, etc. 7,090 7,347 7,066 ------- ------- ------- Total inventories at FIFO 15,140 14,370 15,168 Less LIFO allowance 2,271 2,268 2,348 ------- ------- ------- Total inventories (less allowances) $12,869 $12,102 $12,820 ====== ====== ======
Note 3. Property - Net
Property - net included the following (in millions): Sept. 30, Dec. 31, Sept. 30, 1998 1997 1997 --------- -------- --------- Real estate, plants, and equipment $73,073 $69,680 $70,679 Less accumulated depreciation (43,459) (41,915) (41,287) ------ ------ ------ Real estate, plants, and equipment - net 29,614 27,765 29,392 Special tools - net 7,715 6,802 9,128 ------- ------- ------- Total property - net $37,329 $34,567 $38,520 ====== ====== ======
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 nine months ended September 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 nine months ended September 30, 1998. - 7 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited)
Note 7. Comprehensive Income GM's total comprehensive (loss) income was as follows (in millions): Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net (loss) income $(809) $1,067 $1,184 $4,961 Other comprehensive income (loss): Foreign currency translation adjustments 235 (85) (209) (614) Unrealized (losses) gains on securities (95) 48 (92) 124 --- -- --- --- Other comprehensive income (loss) 140 (37) (301) (490) --- --- ---- ---- Total comprehensive (loss) income $(669) $1,030 $883 $4,471 ===== ===== === =====
Note 8. Earnings (loss) 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 Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Earnings (loss) attributable to common stocks Earnings attributable to $1-2/3 par value $(836) $964 $1,096 $4,622 --- --- ----- ----- Earnings attributable to Class H (prior to its recapitalization on December 17, 1997) $ - $61 $ - $257 -- -- -- --- Earnings attributable to Class H (subsequent to its recapitalization on December 17, 1997) $11 $ - $40 $ - -- -- -- -- 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 nine months ended September 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 (106 million and 105 million for the three and nine months ended September 30, 1998, respectively) and the denominator of which was 400 million. Earnings attributable to Class H common stock for the three and nine months ended September 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 (102 million and 101 million for the three and nine months ended September 30, 1997, respectively) 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 Decembewr 17, 1997 ----------------------------- ----------------------------- ----------------------------------- Per Share Per Share Per Share Income Shares Amount ASCNI Shares Amount ASCNI Shares Amount ------ ------ --------- ----- ------ --------- ------ ------- --------- Three Months Ended September 30, 1998 Net (loss) lncome $(820) $11 Less: Dividends on preference stocks 16 - ---- --- Basic EPS Net (loss) income available to common stockholders (836) 654 $(1.28) 11 106 $0.11 ---- ---- Effect of Dilutive Securities Assumed exercise of dilutive stock options - - - 4 --- --- --- --- Adjusted net (loss) income available to common stockholders $(836) 654 $(1.28) $11 110 $0.11 ===== === ==== == === ==== Three Months Ended September 30, 1997 Net income $1,006 $61 Less:Dividends on preference stocks 16 - Premium on exchange of preference stocks 26 - ----- --- Basic EPS Net income available to common stockholders 964 713 $1.35 61 102 $0.60 ---- ---- Effect of Dilutive Securities Assumed exercise of dilutive stock options (2) 7 2 3 ---- ----- --- ---- Diluted EPS Adjusted net income available to common stockholders $962 720 $1.34 $63 105 $0.60 === === ==== == === ==== Nine Months Ended September 30, 1998 Net income $1,144 $40 Less:Dividends on preference stocks 48 - ------ --- Basic EPS Net income available to common stockholders 1,096 666 $1.65 40 105 $0.38 ---- ---- Effect of Dilutive Securities Assumed exercise of dilutive stock options (2) 10 2 5 ------ ---- --- ---- Diluted EPS Adjusted net income available to common stockholders $1,094 676 $1.60 $42 110 $0.38 ===== === ==== == === ==== Nine Months Ended September 30, 1997 Net income $4,704 $257 Less: Dividends on preference stocks 56 - Premium on exchange of preference stocks 26 - ------ ---- Basic EPS Net income available to common stockholders 4,622 728 $6.35 257 101 $2.54 ---- ---- Effect of Dilutive Securities Assumed exercise of dilutive stock options (8) 6 8 3 ------ ----- ----- ---- Diluted EPS Adjusted net income available to common stockholders $4,614 734 $6.28 $265 104 $2.54 ===== === ==== === === ==== - 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 Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ------ ------ ------ ------ Other income Nonfinancing interest $512 $561 $1,659 $1,510 Insurance premiums 356 252 1,094 767 Income from sales of receivables programs 88 98 292 311 Mortgage servicing and processing fees 238 161 641 528 Insurance capital and investment gains 119 43 390 303 Mortgage investment and other income 299 256 814 563 (Loss) gain on divestiture of businesses (1) (430) - (430) 128 Gain on PAS merger (2) - - - 490 VW Settlement (3) - - - 88 Equity in net (losses) earnings of associates (21) (13) (54) 15 Other 64 267 713 744 ----- ----- ----- ------ Total other income $1,225 $1,625 $5,119 $5,447 ===== ===== ===== ===== Other deductions Provision for financing losses $94 $139 $323 $396 Insurance losses and loss adjustment expenses 268 156 808 448 Other 137 93 513 112 --- ---- ----- --- Total other deductions $499 $388 $1,644 $956 === === ===== ===
(1) During the 1998 third quarter, the Delphi divestiture of Seating, Lighting and Coil Spring Operations resulted in a pretax loss of $430 million ($271 million after tax or $0.41 per share of $1-2/3 par value common stock ). During the 1997 second quarter, the sale of GM 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). (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 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. - 10 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 10. Segment Reporting Selected information regarding GM's operating segments (a) - General Motors Automotive (GMA), which is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin American/Africa/Mid-East (GMLAAM); Delphi; GMAC; Hughes and Other follows:
Elimin- GMNA GME GMLAAM GMAP ations GMA Delphi(b) GMAC Hughes(c) Other Total ----- ----- ------ ---- ------ ----- -------- ---- -------- ----- ----- For the Three Months Ended: (in millions) September 30, 1998 Net sales and revenues from external customers $18,122 $5,925 $1,664 $615 $ - $26,326 $1,374 $ - $1,507 $639 $29,846 Intersegment net sales and revenues 374 302 37 56 (769) - 4,641 - 6 (4,647) - ------- ------ ------ ---- --- -------- ------- ----- ------ ----- -------- Total net sales and revenues $18,496 $6,227 $1,701 $671 $(769) $26,326 $6,015 $ - $1,513 $(4,008) $29,846 ====== ===== ===== === === ====== ===== === ===== ===== ====== Net (loss) income (d) $(612) $50 $(64) $2 $(24) $(648) $(485) $313 $43 $(32) $(809) Segment assets (e) $65,132 $18,243 $5,970 $1,384 $(505) $90,224 $22,683 $ - $12,461 $7,451 $132,819 September 30, 1997 Net sales and revenues from external customers $23,851 $5,510 $2,245 $682 $ - $32,288 $1,172 $ - $3,040 $625 $37,125 Intersegment net sales and revenues 196 176 28 - (400) - 4,872 - 1,077 (5,949) - ------- ------ ------ ------ --- -------- ------- ---- ----- ----- -------- Total net sales and revenues $24,047 $5,686 $2,273 $682 $(400) $32,288 $6,044 $ - $4,117 $(5,324) $37,125 ====== ===== ===== === === ====== ===== === ===== ===== ====== Net income (loss) (d) $423 $(21 $165 $(7) $1 $561 $55 $312 $240 $(101) $1,067 Segment assets (e) $67,842 $18,288 $5,936 $1,881 $(469) $93,478 $22,158 $ - $18,581 $6,787 $141,004 For the Nine Months Ended: September 30, 1998 Net sales and revenues from external customers $64,440 $16,967 $5,776 $2,093 $ - $89,276 $4,484 $ - $4,158 $1,817 $99,735 Intersegment net sales and revenues 1,849 884 143 62 (2,938) - 16,195 - 15 (16,210) - ------- ------- ------ ------ ----- -------- -------- ---- ------- ------ --------- Total net sales and revenues $66,289 $17,851 $5,919 $2,155$(2,938) $89,276 $20,679 $ - $4,173 $(14,393) $99,735 ====== ====== ===== ===== ===== ====== ====== === ===== ====== ====== Net income (loss) (d) $18 $273 $38 $(26) $3 $306 $(138) $1,027 $153 $(164) $1,184 September 30, 1997 Net sales and revenues from external customers $74,131 $17,380 $6,387 $2,144 $- $100,042 $3,658 $ - $8,738 $1,885 $114,323 Intersegment net sales and revenues 598 623 101 - (1,322) - 15,828 - 3,773 (19,601) - -------- ------ ----- ----- ------ ------- ------- ---- ------ ------ ------- Total net sales and revenues $74,729 $18,003 $6,488 $2,144$(1,322)$100,042 $19,486 $ - $12,511 $(17,716) $114,323 ====== ====== ===== ===== ===== ======= ====== === ====== ====== ======= Net income (loss) (d) $1,661 $440 $475 $27 $ - $2,603 $545 $1,022 $1,017 $(226) $4,961 See notes on next page
- 11 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (Unaudited) Note 10. Segment Reporting (concluded) (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 September 30, 1998 and operating results for the periods ended September 30, 1998. (c)Represents Hughes and former Hughes for the periods ended September 30, 1998 and 1997, respectively. (d)The amount reported for Hughes excludes amortization of GM purchase accounting adjustments of approximately $5 million and $31 million for the three months ended September 30, 1998 and 1997, respectively, and $16 million and $92 million for the nine months ended September 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 $432 million and $2,632 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 and is presently considering a further appeal to the U.S. Supreme Court. 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. Hughes has reached an agreement with the Internal Revenue Service regarding a claim for refund of federal income taxes for the years 1983, 1984 and 1985. The agreement requires approval by the Joint Commission on Taxation of Congress before the refund claim becomes final. If the agreement is approved, a favorable adjustment to Hughes' tax provision would occur which would be material to the earnings of GM attributable to Class H common stock. 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 September 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. - 12 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Concluded (Unaudited) Note 12. Subsequent Event On November 16, 1998, Delphi Automotive Systems Corporation announced that it filed a registration statement with the Securities and Exchange Commission relating to an initial public offering of its common stock. The offering is expected to occur in the first quarter of 1999, subject to market conditions and other factors. The number of shares to be offered will be determined at the time of the offering and is expected to be about 15-19 percent of Delphi's outstanding common stock. All of the shares to be included in the initial public offering will be sold by Delphi. GM intends to divest its ownership of Delphi later in 1999 by distributing all of its shares of Delphi common stock to holders of GM $1-2/3 par value common stock, either in a split-off exchange transaction, a pro rata spin-off distribution, or some combination of both. Any such divestiture would be subject to a number of conditions and there can be no assurance as to whether or when it will occur. A registration statement relating to Delphi common stock has been filed with the Securities and Exchange Commission but has not yet become effective. Delphi common stock may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. * * * * * * - 13 - 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 September 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 September 30, 1998, filed with the Securities and Exchange Commission. All earnings per share amounts included in the MD&A are reported as basic. There are forward looking statements contained in this Form 10-Q, including Exhibit 99 hereto as to which General Motors Corporation has identified certain risk factors which may make actual results materially different than the results indicated in such forward looking statements. Those risk factors are identified on page II-64 of the Corporation's Form 10-K for 1997. The disaggregated financial results for General Motors Automotive (GMA) (which is comprised of four regions: GM North America (GMNA), GM Europe (GME), GM Asia/Pacific (GMAP), and GM Latin American/Africa/Mid-East (GMLAAM)) and Delphi Automotive Systems (Delphi) 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. - 14 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Highlights
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ------ ------- ------- ------- GMNA (Dollars in Millions) Net sales and revenues $18,496 $24,047 $66,289 $74,729 Pre-tax (loss) income (911) 608 (50) 2,418 Income tax (benefit) expense (299) 172 (48) 775 Earnings of nonconsolidated affiliates and minority interests - (13) 20 18 ------ -------- ---- ------- GMNA net (loss) income $(612) $423 $18 $1,661 === === == ===== GME Net sales and revenues $6,227 $5,686 $17,851 $18,003 ----- ----- ------ ------ Pre-tax income 64 87 511 951 Income tax expense 18 48 238 382 Earnings of nonconsolidated affiliates and minority interests 4 (60) - (129) ---- --- ------ --- GME net income (loss) $50 $(21) $273 $440 == == === === GMLAAM Net sales and revenues $1,701 $2,273 $5,919 $6,488 ----- ----- ----- ----- Pre-tax (loss) income (136) 154 (103) 468 Income tax (benefit) expense (45) 14 (74) 76 Earnings of nonconsolidated affiliates and minority interests 27 25 67 83 -- ---- -- ----- GMLAAM net (loss) income $(64) $165 $38 $475 == === == === GMAP Net sales and revenues $671 $682 $2,155 $2,144 --- --- ----- ----- Pre-tax income (loss) 22 (73) 20 (51) Income tax expense (benefit) 3 (15) 7 (14) Earnings of nonconsolidated affiliates and minority interests (17) 51 (39) 64 -- -- -- -- GMAP net income (loss) $2 $(7) $(26) $27 = = == == GMA Net sales and revenues $26,326 $32,288 $89,276 $100,042 ------ ------ ------ ------- Pre-tax (loss) income (1,000) 778 382 3,786 Income tax (benefit) expense (338) 220 124 1,219 Earnings of nonconsolidated affiliates and minority interests 14 3 48 36 ---- ----- ---- ------ GMA net (loss) income $(648) $561 $306 $2,603 === === === =====
- 15 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Vehicle Unit Deliveries of Cars and Trucks - GMA Three Months Ended September 30, 1998 1997 ----------------------------------------------------- GM as GM as a % of a % of Industry GM Industry Industry GM Industry (Units in Thousands) United States Cars 2,007 517 25.7% 2,157 727 33.7% Trucks 1,835 411 22.4% 1,807 526 29.1% ----- --- ----- ------ Total United States 3,842 928 24.2% 3,964 1,253 31.6% Canada, Mexico and Other 608 160 26.3% 539 158 29.3% --- --- ----- ------ Total GMNA 4,450 1,088 24.4% 4,503 1,411 31.3% GME 4,782 466 9.7% 4,445 456 10.3% GMLAAM 1,005 162 16.1% 1,182 215 18.2% GMAP 2,714 119 4.4% 3,326 149 4.5% ----- --- ----- --- Total Worldwide 12,951 1,835 14.2% 13,456 2,231 16.6% ====== ===== ====== ===== Nine Months Ended September 30, 1998 1997 ------------------------------------------------------- GM as GM as a % of a % of Industry GM Industry Industry GM Industry (Units in Thousands) United States Cars 6,213 1,837 29.6% 6,394 2,078 32.5% Trucks 5,794 1,617 27.9% 5,391 1,550 28.8% ----- ----- ------ ----- Total United States 12,007 3,454 28.8% 11,785 3,628 30.8% Canada, Mexico and Other 1,810 493 27.2% 1,571 457 29.1% ----- --- ------ ------ Total GMNA 13,817 3,947 28.6% 13,356 4,085 30.6% GME 14,680 1,414 9.6% 13,644 1,414 10.4% GMLAAM 3,058 522 17.1% 3,275 564 17.2% GMAP 8,254 348 4.2% 10,237 455 4.4% ------- ------ ------ ------ Total Worldwide 39,809 6,231 15.7% 40,512 6,518 16.1% ====== ===== ====== ===== Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ------------------- ----------------- (Units in Thousands) Wholesale Sales GMNA Cars 597 729 1,901 2,318 Trucks 413 553 1,648 1,782 ----- ----- ----- ----- Total GMNA 1,010 1,282 3,549 4,100 ----- ----- ----- ----- GME Cars 514 410 1,451 1,273 Trucks 20 38 89 106 ---- ---- ------- ------ Total GME 534 448 1,540 1,379 --- --- ----- ----- GMLAAM Cars 102 146 327 380 Trucks 61 83 194 218 -- ---- --- --- Total GMLAAM 163 229 521 598 --- --- --- --- GMAP Cars 52 40 147 129 Trucks 62 127 181 356 ---- --- --- --- Total GMAP 114 167 328 485 ---- --- --- --- Total Worldwide 1,821 2,126 5,938 6,562 ===== ===== ===== ===== - 16 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review GMA reported a net loss of $648 million for the 1998 third quarter compared with net income of $561 million in the prior year quarter. The decrease in net income was primarily due to lower production volumes at GMNA associated with the work stoppages at two component plants in Flint, Michigan, as discussed below, and the economic downturn throughout Latin America, partially offset by material and structural cost savings. Net income for the nine months ended September 30, 1998 totaled $306 million compared with $2,603 million for the prior year nine month period. The decrease in net income for the first nine months of 1998 was primarily due to the current year's work stoppages and the economic downturn throughout Latin America. 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 on July 29, 1998. Operations began to ramp-up to normal production levels July 30, 1998. GM estimated that the work stoppages in Flint 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 GMNA (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 above estimated impacts do not take into account the effect of possible recoveries that have or may occur through production increases that GM is likely to pursue at various facilities in future periods. The third quarter loss of production offset by subsequent production increases has had an estimated net unfavorable after-tax impact of approximately, $1.2 billion or $1.89 per share of GM $1-2/3 par value common stock, representing the combined effects for GMNA ($965 million) and Delphi ($270 million). Net sales and revenues for GMA in the third quarter of 1998 were $26.3 billion, which represented a decrease of approximately $6.0 billion or 18.5% compared with the prior year quarter. Net sales and revenues for the nine months ended September 30, 1998 totaled $89.3 billion, which represented a decrease of approximately $10.8 billion or 10.8% compared with the prior year nine month period. These decreases in net sales and revenues resulted from lower wholesale sales volumes primarily due to the work stoppages previously discussed at GMNA and the economic downturn throughout Latin America. Pre-tax income in the third quarter of 1998 decreased by $1.8 billion compared with the prior year quarter and pre-tax income for the nine months ended September 30, 1998 decreased by approximately $3.4 billion over the prior year period. These decreases were primarily due to lower wholesale sales volumes and higher retail incentives, partially offset by material, engineering and manufacturing cost improvements. GMA's worldwide vehicle deliveries were 1,835,000 in the 1998 third quarter, which represented a market share of 14.2% compared with 16.6% in the prior year quarter. The decrease in market share was primarily due to dealer inventory shortages due to the above mentioned work stoppages at GMNA. GMNA's market share in the 1998 third quarter was 24.4% compared with 31.3% in the prior year quarter. GMNA's market share for the nine months ended September 30, 1998 was 28.6% compared with 30.6% in the prior year period. GMNA reported a net loss of $612 million for the 1998 third quarter compared with net income of $423 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 above, partially offset by material and structural cost savings. Net income for the nine months ended September 30, 1998 totaled $18 million compared with $1,661 million for the prior years nine month period. The decrease in net income for the first nine months of 1998 was primarily due to the previously discussed work stoppages. GME reported net income of $50 million for the 1998 third quarter compared with a net loss of $21 million in the prior year quarter. The increase in net income was primarily due to lower equity losses recorded for SAAB. GM is currently not incurring a share of the operating losses, as provided for under its agreement with the other equity owner of SAAB. This increase was partially offset by the launch cost of the Astra. Net income for the nine months ended September 30, 1998 totaled $273 million compared with $440 million for the prior year nine month period. The decrease in net income for the first nine months of 1998 was primarily due to a special charge related to work schedule modifications at Opel Belguim, launch costs associated with the Astra, and a gain in 1997 related to the sale of GME's interest in Avis Europe. GMLAAM reported a net loss of $64 million for the 1998 third quarter compared with net income of $165 million in the prior year quarter. Net income for the nine months ended September 30, 1998 totaled $38 million compared with $475 million for the prior year nine month period. The decreases in net income for the three and nine months ended September 30, 1998 were primarily due to the economic downturn throughout Latin America. Additionally, the increased cost of financing in the region resulted in higher incentive cost. - 17 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES GMA Financial Review (concluded) GMAP reported net income of $2 million for the 1998 third quarter compared with a net loss of $7 million in the prior year quarter. This increase in net income was primarily due to improved sales of the new Holden Commodore, where the costs associated with the launch of this vehicle were incurred in 1997. This was partially offset by a decrease in equity earnings at Isuzu due to the economic downturn in Asia. Net loss for the nine months ended September 30, 1998 totaled $26 million compared with net income of $27 million for the prior year nine month period. This decrease was primarily attributable to decreased equity earnings at Isuzu. Delphi Financial Highlights Three Months Ended Nine Months Ended September 30, September 30, Adjust Reported Adjusted Reported 1998(1)1997(1) 1997 1998(1) 1997(1) 1997 (Dollars in Millions) Net sales and revenues $6,015 $7,183 $6,044 $20,679 $23,368 $19,486 ----- ----- ----- ------ ------ ------ Pre-tax (loss) income (798) 136 30 (338) 1,127 735 Income tax (benefit) expense (297) 35 (6) (157) 386 236 Minority interests 5 2 2 8 8 8 Earnings of nonconsolidated affiliates 11 20 17 35 45 38 ---- ---- -- ---- ---- ---- Net (loss) income $(485) $123 $55 $(138) $794 $545 === === == === === === Net (loss) profit margin (8.1%) 1.7% 0.9% (0.7%) 3.4% 2.8% (1)Amounts have been adjusted to reflect the changes to GM's organizational structure resulting from the Hughes Transactions which occurred in December 1997. The 1998 and adjusted 1997 amounts include the results of Delco Electronics (Delco). Delphi Financial Review Delphi reported a net loss of $485 million for the 1998 third quarter compared with $123 million of adjusted income in the prior year quarter. The 1998 third quarter net income decreased primarily due to lower production volume at GMNA related to the current year work stoppages previously discussed. Excluding the $270 million after-tax effect of the work stoppages in the third quarter of 1998, Delphi's third quarter adjusted income decreased by $338 million. This decrease is primarily due to charges associated with the divestitures of Delphi's lighting, coil-spring, and seating businesses, discussed below, partially offset by significant progress in manufacturing performance and a reduction in material costs. Net income for the nine months ended September 30, 1998 decreased to a loss of $138 million compared with adjusted income of $794 million for the prior year nine month period. The decrease in income for the first nine 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 third quarter were $6.0 billion, a decrease of approximately $1.2 billion or 16.3% compared with adjusted sales and revenues for the prior year quarter. This decrease was primarily due to work stoppages, the economic downturn in Asia and Latin America and pricing pressures from customers. After adjusting for the work stoppages, Delphi's 1998 third quarter sales to customers outside the GMNA vehicle groups represented approximately 37% of total sales, including all joint ventures which represents an increase of one and one half percentage points over the same period in 1997. Net sales and revenues for the nine months ended September 30, 1998 totaled $20.7 billion, compared with $23.4 billion adjusted sales and revenue in the prior year nine month period. The decrease in sales and revenues for the first nine months of 1998 was primarily due to work stoppages, additional decreases in GMNA'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 third quarter of 1998 decreased by $934 million compared with the adjusted prior year quarter. Pre-tax income for the nine months ended September 30, 1998 decreased to a loss of $338 million from the prior year adjusted income of $1,127 million. These decreases are primarily due to decreases in GMNA'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. - 18 - 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 1998, Delphi entered into agreements for the divestiture of its seating, lighting, and coil springs businesses. These businesses, with combined revenues of approximately $2 billion and global employment of approximately 10,000 are not core to Delphi's strategic growth objectives. In connection with consummation of these transactions Delphi recorded an after-tax loss of $271 million. Delphi is the principal supplier of automotive components and systems to GMNA. 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 GMNA 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 GMNA sales by growing its automotive components and systems sales globally and by expanding its non-GMNA 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 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 15-19 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 GM's $1-2/3 par value common stock through a tax-free spin-off, split-off or some combination of both. Further, on November 16, 1998 it was announced that Delphi has filed a registration statement with the Securities and Exchange Commission relating to the initial public offering of its common stock. Additional information regarding these planned transactions is included in Note 12 to the September 30, 1998 GM consolidated financial statements. General Motors Acceptance Corporation (GMAC) Financial Highlights Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ------------------- ----------------- (Dollars in Millions) Financing revenue Retail and lease financing $982 $862 $2,834 $2,692 Operating leases 1,822 1,827 5,416 5,446 Wholesale and term loans 346 417 1,212 1,320 ----- ----- ----- ----- Total automotive financing revenue 3,150 3,106 9,462 9,458 Interest and discount 1,477 1,308 4,317 3,886 Depreciation on operating leases 1,149 1,163 3,488 3,475 ----- ----- ----- ----- Net automotive financing revenue 524 635 1,657 2,097 Insurance premiums earned 466 302 1,417 914 Mortgage revenue 538 418 1,456 1,091 Other income 292 281 960 843 ----- ------ ----- ------ Net financing revenue and other 1,820 1,636 5,490 4,945 Expenses 1,377 1,081 4,004 3,177 ----- ----- ----- ----- Pre-tax income 443 555 1,486 1,768 Income tax expense 130 243 459 746 ----- --- ------ ----- Net income $313 $312 $1,027 $1,022 === === ===== ===== Net income from automotive financing operations $250 $223 $784 $724 Net income from insurance operations 54 50 188 171 Net income from mortgage operations 9 39 55 127 ----- ---- ------ ----- Net income $313 $312 $1,027 $1,022 === === ===== ===== Return on average equity (1) 13.3% 14.4% 14.9% 16.1% - ------------------ (1) Return on average equity represents net income as a percentage of average monthly stockholder's equity outstanding for each month in the period. - 19 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES General Motors Acceptance Corporation (GMAC) Financial Review Consolidated net income for the third quarter and nine months ended September 30, 1998 was relatively unchanged when compared to the same periods during 1997. Earnings were 12% higher from automotive financing operations during the third quarter of 1998, compared to the same period in 1997, primarily due to increased retail financing and leasing assets, reduced credit losses and a lower effective income tax rate, partially offset by lower net interest margins and lower wholesale volume. Earnings from insurance operations increased by 8% during the third quarter of 1998, compared to the same period during 1997. Earnings were higher due to the inclusion of Integon Corporation (Integon) and increased capital gains. Net income from mortgage operations during the third quarter of 1998 was $9.4 million. The significant decline in income, when compared to the same period last year, is the result of widening credit spreads and increasing prepayments, which have reduced the value of its mortgage inventory and investment positions. During the three months ended September 30, 1998, GMAC financed 37.7% of new GM vehicles delivered in the U.S., up from 31.3% during the same period last year. Financing of new GM vehicles for the first nine months of 1998 was 36.2% compared with 27.2% for the comparable 1997 period. Increased incentive programs sponsored by GM resulted in GMAC's higher retail financing penetration. U.S. wholesale inventory financing was provided on 564,000 and 1,931,000 new GM vehicles during the third quarter and first nine months of 1998, respectively, compared with 756,000 and 2,428,000 new GM vehicles during the same periods in 1997. GMAC's wholesale financing represented 63.4% of all GM U.S. vehicle sales to dealers during the first nine months of 1998, down from 67.5% for the comparable period a year ago. 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 GM. Automotive financing revenue totaled $3.2 billion and $9.5 billion in the third quarter and first nine months of 1998, respectively, compared to $3.1 billion and $9.5 billion for the same periods in 1997. Higher retail financing revenues were offset by a decline in wholesale revenues, principally as a result of the reduction in wholesale receivable balances related to the GM work stoppages. GMAC's worldwide cost of borrowing, including the effects of derivatives, for the third quarter and first nine months of 1998 averaged 6.06% and 6.07%, respectively, a decrease of 31 and 26 basis points from the comparable periods of a year ago. Total borrowing costs for U.S. operations averaged 5.93% and 6.00% for the third quarter and first nine months of 1998, compared to 6.48% and 6.41% for the respective periods in 1997. The lower average borrowing costs for both comparable periods of 1998 are largely a 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 $3.8 billion for the third quarter and nine months ended September 30, 1998, respectively, compared to $1.0 billion and $2.8 billion during the comparable 1997 periods. The quarterly and year-to-year comparative increases can be primarily attributed to 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. Consolidated salaries and other operating expenses totaled $922 million and $2.6 billion for the third quarter and first nine months of 1998, respectively, compared to $694 million and $2.1 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 0.74% and 0.83% of total average serviced automotive receivables during the third quarter and first nine months of 1998, respectively, compared to 1.12% and 1.27% for the same periods last year. The provision for credit losses totaled $323 million and $396 million for the nine month periods ended September 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 nine months ended September 30, 1998 was 30.9%, compared to 42.2% 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. - 20 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes Financial Highlights Three Months Ended Nine Months Ended September 30, September 30, 1998 1997(1) 1998 1997(1) ----------------- ---------------- (Dollars in Millions Except Per Share Amounts) Revenues Product sales $873 $703 $2,327 $2,126 Direct broadcast, leasing and other services 640 555 1,846 1,308 ----- ----- ----- ----- Total revenues 1,513 1,258 4,173 3,434 Income from continuing operations before income taxes and minority interests 46 87 190 611 Income taxes 17 35 72 244 Minority interests 9 (5) 19 17 Income from discontinued operations, net of taxes - - - 1 ---- ---- ----- ---- Net income $38 $47 $137 $385 == == === === Earnings used for computation of Available Separate Consolidated Net Income (2) $43 $52 $153 $401 Earnings per share attributable to Class H common stock (3) $0.11 $0.13 $0.38 $1.00 - -------------------- (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 third quarters of 1998 and 1997 and $16 million for the nine-month periods ended September 30, 1998 and 1997 related to GM's acquisition of Hughes Aircraft Company (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. Hughes Financial Review On December 17, 1997, GM and former Hughes completed a series of transactions (Hughes Transactions) that were designed to address strategic challenges facing the three principal businesses of former Hughes (consisting of the defense electronics, automotive electronics and telecommunications and space businesses). The Hughes Transactions included the tax-free spin-off of the defense electronics business of former Hughes (Hughes Defense) to holders of GM's $1-2/3 par value and Class H common stocks, the transfer of Delco from former Hughes to Delphi, and the recapitalization of Class H common stock into a new GM tracking stock, 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 highlights 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 81.0%. Hughes Electronics reported net income of $38 million for the third quarter of 1998 compared with last year's $47 million, and $137 million for the first nine months of 1998 compared with $67 million in the same period of 1997. 1997 net income for the first nine months 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 $43 million and $52 million for the third quarters of 1998 and 1997, respectively, and $153 million and $82 million for the nine months ended September 30, 1998 and 1997, respectively. Earnings per share on the same basis decreased to $0.11 for the third quarter of 1998 versus earnings per share of $0.13 for the same period in 1997. Earnings per share on the same basis increased to $0.38 for the first nine months of 1998 versus pro forma earnings per share of $0.20 in 1997. The quarterly decline resulted primarily from the expected increase in DIRECTV sales and marketing - 21 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Hughes Financial Review (concluded) expenses to support record subscriber growth, DIRECTV Japan start-up losses, and increased other expenses, including pension expense. The reductions were partially offset by lower interest expense and higher interest income. The increase for the nine months was principally due to record DIRECTV subscriber growth through September, continued strong performance in the satellite services segment resulting from the PanAmSat merger and higher commercial satellite sales. Third quarter 1998 revenues increased 20.3% to $1.5 billion compared with $1.3 billion in the third quarter of 1997. Revenues for the first nine months of 1998 increased 21.5% to $4.2 billion compared with $3.4 billion in the same period of 1997. The 1998 increase in revenues compared to the same periods in 1997 resulted from an increase in the DIRECTV businesses due to strong subscriber growth and average monthly revenues per subscriber, as well as low subscriber churn rates; an increase in satellite services primarily from increased operating lease revenues for video, data and Internet-related services; an increase in satellite manufacturing which resulted principally from higher commercial satellite sales; and an increase in network systems resulting from higher DIRECTV equipment sales. Operating profit, excluding amortization of purchase accounting adjustments related to GM's acquisition of HAC, decreased to $68 million for the third quarter of 1998 compared with $124 million in the third quarter of 1997 and increased to $229 million for the first nine months of 1998 from $215 million for the same period in 1997. Third quarter operating profit margin on the same basis decreased to 4.5% from 9.9 % in 1997 and decreased to 5.5% in the first nine months of 1998 compared with 6.2% in the same period of 1997. The quarterly declines resulted primarily from the increased expenses noted above. The increase in operating profit for the nine months resulted from the increased revenues which more than offset the noted increases in third quarter operating expenses and a provision for estimated losses related to the bankruptcy filing by a network systems customer and goodwill amortization associated with PanAmSat. - 22 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES To facilitate analysis, the following sections present GM's financial statements with the 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 Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 -------- -------- -------- -------- (Dollars in Millions) Net sales and revenues $29,846 $37,125 $99,735 $114,323 ------ ------ ------ ------- Costs and expenses Cost of sales and other operating charges, exclusive of items listed below 26,457 31,484 85,399 95,586 Selling, general, and administrative expenses 3,076 3,157 9,357 9,331 Depreciation and amortization expenses 1,672 1,830 5,082 5,627 ------- ------- ------- -------- Total costs and expenses 31,205 36,471 99,838 110,544 ------ ------ ------ ------- Operating (loss) income (1,359) 654 (103) 3,779 Other income less income deductions (28) 613 1,208 2,682 Interest expense 343 225 920 663 ------ ------ ------ ------ (Loss) income before income taxes, minority interests, and earnings of nonconsolidated affiliates (1,730) 1,042 185 5,798 Income tax (benefit) expense (588) 289 63 1,928 ------ ------ ------- ----- (Loss) income before minority interests and earnings of nonconsolidated affiliates (1,142) 753 122 3,870 Minority interests 10 13 13 50 Earnings of nonconsolidated affiliates 323 301 1,049 1,041 ----- ------ ----- ----- Net (loss) income $(809) $1,067 $1,184 $4,961 === ===== ===== ===== Net (loss) profit margin (2.7%) 2.9% 1.2% 4.3%
Results of Operations With Financing and Insurance Operations on an Equity Basis In the third quarter of 1998, GM reported a net loss of $(809) million or $(1.28) per share of $1-2/3 par value common stock, compared to net income of $1.1 billion or $1.35 per share of $1-2/3 par value common stock for the third quarter of 1997. GM's third quarter 1998 net income included a $1.2 billion after-tax unfavorable impact from the previously discussed work stoppages. GM's net income for the nine months ended September 30, 1998 was $1.2 billion, or $1.65 per share of $1-2/3 par value common stock, compared with $5.0 billion, or $6.35 per share of $1-2/3 par value common stock, for the nine months ended September 30, 1997. GM's 1998 and 1997 net income included a $2.4 billion and $490 million after-tax unfavorable impact from 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 nine months ended September 30 were as follows (in millions): Three Months Ended Nine Months Ended September 30, September 30, ------------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- GMNA $(612) $423 $18 $1,661 GME 50 (21) 273 440 GMLAAM (64) 165 38 475 GMAP 2 (7) (26) 27 Delphi (485) 55 (138) 545 GMAC 313 312 1,027 1,022 Hughes 43 240 153 1,017 Other (56) (100) (161) (226) ---- ----- ----- ----- Net (loss) income $(809) $1,067 $1,184 $4,961 ===== ===== ===== ===== - 23 - 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 14 through 21 and incorporated by reference to supplement the information presented herein. Third quarter 1998 net sales and revenues were $29.8 billion, which represented a decrease of $7.3 billion compared with the prior year quarter. Net sales and revenues for the nine months ended September 30, 1998 were $99.7 billion compared with $114.3 billion for the nine months ended September 30, 1997. These decreases in net sales and revenues for the third quarter and the first nine months were primarily due to the spin-off of Hughes Defense and lower wholesale sales volumes in North America due to the launch of the GMT-800 and the work stoppages previously discussed. The gross margin percentage for the 1998 third quarter was 11.4% compared with 15.2% in the prior year quarter. The gross margin percentage for the nine months ended September 30, 1998 was 14.4%, compared with 16.4% for the first nine 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 $26.5 billion in the third quarter and $85.4 billion for the first nine months of 1998 compared with $31.5 billion and $95.6 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 the launch of the GMT-800. Depreciation and amortization expenses decreased by $158 million and $545 million in the third quarter of 1998 and for the nine months ended September 30, 1998, respectively, primarily due to a reduction in tool amortization at GMNA as a result of the previously reported competitiveness studies at GM. Other income less income deductions decreased to $(28) million for the 1998 third quarter compared with $613 million in the prior year quarter primarily due to a $430 million pre-tax loss ($271 million after-tax or $0.41 per share of $1-2/3 par value common stock) in the third quarter related to the divestitures of Delphi's seating, lighting and coil spring businesses. Other income less income deductions for the nine months ended September 30, 1998 was $1.2 billion compared with $2.7 billion for the first nine months of 1997. This decrease is primarily due to the previously discussed third quarter 1998 loss 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), 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 . - 24 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets With Financing and Insurance Operations on an Equity Basis (Unaudited)
Sept. 30, Dec. 31, Sept. 30, 1998 1997 1997 --------- --------- --------- (Dollars in Millions) ASSETS Cash and cash equivalents $7,885 $10,685 $9,930 Other marketable securities 601 3,826 4,669 ------ ------ ------ Total cash and marketable securities 8,486 14,511 14,599 Accounts and notes receivable (less allowances) Trade 6,076 5,164 5,627 Nonconsolidated affiliates 1,725 836 1,722 Inventories (less allowances) 11,751 12,102 12,820 Equipment on operating leases (less accumulated depreciation) 4,797 4,677 3,854 Deferred income taxes and other 6,300 6,278 4,989 ------- ------- ------- Total current assets 39,135 43,568 43,611 Equity in net assets of nonconsolidated affiliates 11,308 10,164 10,313 Deferred income taxes 20,676 20,721 20,341 Other investments and miscellaneous assets 13,646 13,564 13,926 Property - net 36,529 33,914 38,010 Intangible assets -net 11,525 10,752 14,803 -------- -------- -------- Total assets $132,819 $132,683 $141,004 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $12,760 $12,474 $11,871 Loans payable 1,854 656 1,766 Accrued expenses and customer deposits 31,707 33,459 32,440 ------ ------ ------ Total current liabilities 46,321 46,589 46,077 Long-term debt 7,016 5,491 6,002 Capitalized leases 181 185 184 Postretirement benefits other than pensions 38,002 38,388 41,820 Pensions 5,679 4,271 4,275 Other liabilities and deferred income taxes 20,144 19,336 18,141 -------- -------- -------- Total liabilities 117,343 114,260 116,499 ------- ------- ------- Minority interests 575 695 705 General Motors - obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of General Motors Series D 79 79 79 Series G 142 143 143 Stockholders' equity 14,680 17,506 23,578 -------- -------- -------- Total liabilities and stockholders' equity $132,819 $132,683 $141,004 ======= ======= =======
Liquidity and Capital Resources With Financing and Insurance Operations on an Equity Basis GM's cash and marketable securities totaled $8.5 billion at September 30, 1998, compared with $14.5 billion at December 31, 1997 and $14.6 billion at September 30, 1997. The decrease in cash and marketable securities from December 31, 1997 and September 30, 1997 to September 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 net increase of $1.5 billion in the balance of GM's VEBA trust and a $1.3 billion pension contribution, partially offset by increases in loans payable and long-term debt. Loans payable and long-term debt increased by approximately $2.8 billion and $1.1 billion to $8.9 billion at September 30, 1998 from balances of $6.1 billion at December 31, 1997 and $7.8 billion at September 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 $(565) million at September 30, 1998, compared with $8.2 billion at December 31, 1997 and $6.6 billion at September 30, 1997. Book value per share of $1-2/3 par value common stock decreased to $19.49 at September 30, 1998, from $22.26 at December 31, 1997 and $30.17 at September 30, 1997. Book value per share of Class H common stock decreased to $11.69 at September 30, 1998, from $13.36 at December 31, 1997 and $15.09 at September 30, 1997. - 25 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Liquidity and Capital Resources for GMAC At September 30, 1998, GMAC owned assets and serviced automotive receivables totaling $126.1 billion, $4.9 billion above year-end 1997, and $12.5 billion above September 30, 1997. The higher balance compared to year-end 1997 predominantly reflects increases in retail earning assets partially offset by declines in wholesale receivables and off-balance sheet wholesale and retail serviced assets. Earning assets totaled $113.3 billion at September 30, 1998, compared to $104.5 billion and $102.3 billion at December 31 and September 30, 1997, respectively. Finance receivables serviced by GMAC, including sold receivables, totaled $72.6 billion at September 30, 1998, $800 million below December 31, 1997 levels and $3.5 billion above September 30, 1997 levels. On-balance sheet retail receivables were $5.9 billion higher than year-end 1997, primarily a result of increased retail incentive programs sponsored by GM. On-balance sheet wholesale receivables declined $2.7 billion during the same period due to the GM work stoppages. Also contributing to the change, sold wholesale receivables decreased $3.7 billion, attributable to the scheduled wind down of a revolving wholesale trust and the effects of the work stoppages. Additionally, sold retail receivables (including the retained subordinated interest portion) declined by $1.2 billion. Consolidated operating lease assets, net of depreciation, totaled $28.4 billion at September 30, 1998, reflecting increases of $2.6 billion and $2.0 billion over December 31 and September 30, 1997 periods, respectively. The increase from year-end 1997 is primarily attributable to additional GM sponsored lease incentive programs in the U.S. during the first nine months of 1998. Investments in securities at September 30, 1998 totaled $8.1 billion, compared with $7.9 billion and $6.2 billion at December 31 and September 30, 1997, respectively. The increase from September 1997 to September 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 $186 million at September 30, 1998, compared with $691 million and $661 million at December 31 and September 30, 1997, respectively. The significant decline in the September 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 daily collections on sold receivables. As of September 30, 1998, GMAC's total borrowings were $91.9 billion, compared with $86.7 billion and $82.9 billion at December 31, 1997 and September 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 September 30, 1998 was 9.7:1, compared to 9.9:1 at December 31, 1997 and 9.6:1 at September 30, 1997. GMAC and its subsidiaries maintain substantial bank lines of credit which totaled $42.7 billion at September 30, 1998, compared to $39.8 billion at year-end 1997 and $39.6 billion at September 30, 1997. The unused portion of these credit lines totaled $33.8 billion at September 30, 1998, $3.4 billion and $2.7 billion higher than December 31 and September 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 a $12.0 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. - 26 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows With Financing and Insurance Operations on an Equity Basis (Unaudited)
Nine Months Ended September 30, ----------------- 1998 1997 ------ ------ (Dollars in Millions) Net cash provided by operating activities $2,616 $11,254 ----- ------ Cash flows from investing activities Expenditures for property (6,688) (6,648) Investments in companies, net of cash acquired (569) (1,788) Investments in other marketable securities - acquisitions (8,553) (11,083) Investments in other marketable securities - liquidations 11,777 10,056 Operating leases - acquisitions (4,382) (3,963) Operating leases - liquidations 4,092 2,981 Other (287) - ------ ------- Net cash used in investing activities (4,610) (10,445) ----- ------ Cash flows from financing activities Net increase in loans payable 1,178 552 Increase in long-term debt 2,695 358 Decrease in long-term debt (1,178) (568) Proceeds from issuing common stocks 344 471 Repurchases of common stocks (3,071) (3,353) Cash dividends paid to stockholders (1,046) (1,252) ----- ----- Net cash used in financing activities (1,078) (3,792) ----- ----- Effect of exchange rate changes on cash and cash equivalents 272 (407) ----- ----- Net decrease in cash and cash equivalents (2,800) (3,390) Cash and cash equivalents at beginning of the period 10,685 13,320 ------ ------ Cash and cash equivalents at end of the period $7,885 $9,930 ====== ======
Cash Flows With Financing and Insurance Operations on an Equity Basis Net cash provided by operating activities was approximately $2.6 billion for the nine months ended September 30, 1998, compared with net cash provided by operating activities of approximately $11.2 billion in the prior year period. The decrease was primarily the result of a decrease in cash generated from lower net income primarily due to the work stoppages previously discussed, a net increase of $1.5 billion in the balance of GM's VEBA trust, a $1.3 billion pension contribution and other changes in operating assets and liabilities. Net cash used in investing activities amounted to $4.6 billion for the nine months ended September 30, 1998 compared with $10.4 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 net liquidation of marketable securities of $3.2 billion primarily due to the work stoppages and a net decrease in cash used for operating leases in 1998. Net cash used in financing activities totaled $1.1 billion for the nine months ended September 30, 1998, compared with $3.8 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 November 2,1998, the GM Board declared quarterly dividends of $0.50 per share on $1-2/3 par value common stock, payable December 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 February 1, 1999. With respect to Class H common stock, which was recapitalized on December 17, 1997, the GM Board has decided that at this time 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. - 27 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Cash Flows for GMAC Cash provided by operating activities during the first nine months ended September 30, 1998 totaled $6.3 billion, an increase from the $3.8 billion provided during the comparable 1997 period. The additional operating cash flow was primarily the result of lower net purchases of mortgage loans and increased other mortgage liabilities. Cash used for investing activities during the first nine months of 1998 totaled $11.9 billion, compared with $8.6 billion during the same period in 1997. Cash usage increased as a result of greater net finance receivable acquisitions, increases in both operating lease acquisitions and receivables due from GM, partially offset by increased proceeds from investment in securities sales and wholesale asset securitization activity. During the first nine months of 1998, cash provided by financing activities totaled $5.4 billion, compared with approximately $4.5 billion of cash provided by financing activities during the comparable 1997 period. The change is primarily the result of an increase in notes payable to GM and lower dividends paid to GM. Year 2000 Many computerized systems and microprocessors that are embedded in a variety of products either made or used by GM have the potential for operational problems if they lack the ability to handle the transition to the Year 2000. Because this issue has the potential to cause disruption of GM's business operations, GM has developed a comprehensive worldwide program to identify and remediate potential Year 2000 problems in its business information systems and other systems embedded in its engineering and manufacturing operations. In addition, GM has initiated communications and site assessments with its suppliers, its dealers and other third parties in order to assess and reduce the risk that GM's operations could be adversely affected by the failure of these third parties to adequately address the Year 2000 issue. One of GM's first priorities was the analysis of microprocessors used in GM passenger cars and trucks. This review included all current and planned models as well as the electronics in older vehicles produced during the period of approximately the last 15 years when vehicles have contained microchips capable of processing date information. Most of the processors reviewed have no date-related functionality, and accordingly have no Year 2000 issues. Of the vehicles with processors that perform date-related functions, none had any Year 2000 issues except for one vehicle model where an indicator light prematurely indicates the need for an oil change at the end of every decade. GM's Year 2000 program teams are responsible for remediating all of GM's information technology and embedded systems. Information technology principally consists of business information systems (such as mainframe and other shared computers and associated business application software) and infrastructure (such as personal computers, operating systems, networks and devices like switches and routers). Embedded systems include microprocessors used in factory automation and in systems such as elevators, security and facility management. GM's Year 2000 program includes assessment and remediation services provided by Electronic Data Systems Corporation (EDS) pursuant to a Master Service Agreement with GM. The Year 2000 program is being implemented in seven phases, some of which are being conducted concurrently: Inventory -- identification and validation of an inventory of all systems that could be affected by the Year 2000 issue. The inventory phase commenced in earnest in 1996 and is substantially complete. It has identified approximately 7,600 business information systems and about 1.7 million infrastructure items and embedded systems. Assessment -- initial testing, code scanning, and supplier contacts to determine whether remediation is needed and to develop a remediation plan, if applicable. The assessment of business information systems is substantially complete and included a determination that about one quarter of such systems should be regarded as "critical" based on criteria such as the potential for business disruption. The assessment of infrastructure items and embedded systems is still underway but is expected to be substantially complete by the end of 1998. Remediation -- design and execution of a remediation plan, followed by testing for adherence to the design. GM is targeting the end of 1998 for remediation of its critical systems and will continue to address remediation of other systems on a prioritized basis thereafter; unimportant systems have been and will continue to be removed from GM's Year 2000 inventory and will not be remediated. While some critical systems will not be remediated until after the target date, GM believes that it is substantially on track to meet its target. In the normal course of its business plans, GM's Delphi Automotive Systems unit is incrementally implementing enterprise software that will replace and thereby eliminate the need to remediate certain existing systems. Implementation of this software at several Delphi sites is scheduled for completion in the first quarter of 1999, and another Delphi site implementation is not expected to be complete until July 1999. - 28 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Year 2000 (continued) System Test -- testing of remediated items to ensure that they function normally after being replaced in their original operating environment. This phase is closely related to the remediation phase and follows essentially the same schedule. Implementation -- return of items to normal operation after satisfactory performance in system testing. This phase follows essentially the same schedule as remediation and system testing. Readiness Testing -- planning for and testing of integrated systems in a Year 2000 ready environment, including ongoing auditing and follow-up. Readiness testing is currently underway and this phase is expected to become the major focus of the Year 2000 program commencing in the fourth quarter of 1998 and continuing throughout 1999. Contingency Planning -- development and execution of plans that narrow the focus on specific areas of significant concern and concentrate resources to address them. GM currently believes that the most reasonably likely worst case scenario is that there will be some localized disruptions of systems that will affect individual business processes, facilities or suppliers for a short time rather than systemic or long-term problems affecting its business operations as a whole. GM contingency planning will continue to identify systems or other aspects of its business or that of its suppliers that it believes would be most likely to experience Year 2000 problems as well as those business operations in which a localized disruption could have the potential for causing a wider problem by interrupting the flow of products, materials or data to other operations. Because there is uncertainty as to which activities may be affected and the exact nature of the problems that may arise, GM's contingency planning will focus on minimizing the scope and duration of any disruptions by having sufficient personnel, inventory and other resources in place to permit a flexible, real-time response to specific problems as they may arise at individual locations around the world. Some of the actions that GM may consider include the deployment of emergency response teams on a regional or local basis and the development of plans for the allocation, stockpiling or re-sourcing of components and materials that may be critical to our continued production. Specific contingency plans and resources for permitting the necessary flexibility of response are expected to be identified and put into place commencing in mid-1999. GM's communication with its suppliers is a focused element of the assessment and remediation phases described above. GM is a leading participant in an industry trade association, the Automotive Industry Action Group (AIAG), which has distributed Year 2000 compliance questionnaires as well as numerous awareness and assistance mailings to about half of the 100,000 supplier sites that supply GM throughout the world. Responses to these questionnaires, which were generally sent to GM's principal suppliers, have been received from about half of the supplier sites to which they were sent. Many of the non-responding suppliers are communicating directly with GM on an informal basis. In addition, GM has initiated its own review of suppliers considered to be critical to GM's operations, including approximately 1,650 on-site assessments to date. These assessment efforts are expected to be substantially complete for critical supplier sites by the end of 1998. Based on its assessment activity to date, GM believes that a substantial majority of its suppliers are making acceptable progress toward Year 2000 readiness. GM has established a program to provide further assistance to suppliers that desire more input or that are believed to be at high risk of noncompliance as a result of the foregoing assessment efforts. This supplier assistance program currently includes providing compliance workshops and remediation consultants to work with suppliers on developing and implementing their own remediation programs. GM's contingency planning efforts described above are also expected to address any critical suppliers that GM identifies as being at high risk of encountering Year 2000 problems. GM also has a program to work with its independent dealers on their Year 2000 readiness. This program includes distributing materials that assist dealers in designing and executing their own assessment and remediation efforts. GM has also included Year 2000 compliance criteria as part of its established program for certifying that third-party business information systems properly interface with other systems provided to dealers by GM. The cost of GM's Year 2000 program is being expensed as incurred with the exception of capitalizable replacement hardware. Total incremental spending by GM is not expected to be material to the Corporation's operations, liquidity or capital resources. GM incurred approximately $40 million of Year 2000 expense during 1997 and approximately $85 million in the first nine months of 1998. GM currently expects its total Year 2000 expense to be approximately $560 million, with peak spending occurring late in 1998 and early in 1999. This total spending also includes an additional payment of $75 million that GM has agreed to pay to EDS at the end of the first quarter of 2000 if systems remediated by EDS under the Master Service Agreement are capable of continued operation before, on and after January 1, 2000 without causing a significant business disruption that results in a material financial loss to GM due to the millennium change. In addition, the estimated value of the services EDS is required to provide to GM under the Master Service Agreement that are part of normal fixed price services and other on-going payments to EDS attributable to work being performed in connection with GM's Year 2000 program is - 29 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES Year 2000 (concluded) approximately $300 million. Despite the incremental Year 2000 spending expected to be incurred throughout the Corporation, GM's current business plan projects declining information technology expenses. GM's total Year 2000 costs noted above do not include information technology projects that have been accelerated due to Year 2000, which are estimated to be approximately $30 million. In view of the foregoing, GM does not currently anticipate that it will experience a significant disruption of its business as a result of the Year 2000 issue. However, there is still uncertainty about the broader scope of the Year 2000 issue as it may affect GM and third parties that are critical to GM's operations. For example, lack of readiness by electrical and water utilities, financial institutions, government agencies or other providers of general infrastructure could, in some geographic areas, pose significant impediments to GM's ability to carry on its normal operations in the area or areas so affected. In the event that GM is unable to complete its remedial actions as described above and is unable to implement adequate contingency plans in the event that problems are encountered, there could be a material adverse effect on GM's business, results of operations or financial condition. The foregoing discussion describes the Year 2000 program being implemented by GM and its consolidated subsidiaries other than Hughes. Information about the Year 2000 efforts of Hughes can be found in Exhibit 99. Statements made herein about the implementation of various phases of GM's Year 2000 program, the costs expected to be associated with that program and the results that GM expects to achieve constitute forward-loking information. As noted above, there are many uncertainties involved in the Year 2000 issue, including the extent to which GM will be able to successfully remediate systems and adequately provide for contingencies that may arise, as well as the broader scope of the Year 2000 issues as it may affect third parties that are not controlled by GM. Accordingly, the costs and results of GM's Year 2000 program and the extent of any impact on GM's operations could vary materially from those stated herein. Euro Conversion On January 1, 1999, eleven of fifteen member countries of the European Union will establish fixed conversion rates between their existing currencies and adopt the euro as their new common currency. The euro will trade on currency exchanges and the legacy currencies will remain legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002. Beginning on January 1, 2002, euro denominated bills and coins will be issued and legacy currencies will be withdrawn from circulation. The Corporation has established plans to assess and address the potential impact to the Corporation, which may result from the euro conversion. These issues include, but are not limited to, 1) the technical challenges to adapt information systems to accommodate euro transactions; 2) the competitive impact of cross-border price transparency; 3) the impact on currency exchange rate risks; 4) the impact on existing contracts and 5) tax and accounting implications. The Corporation expects that the euro conversion will not have a material adverse impact on its financial condition or results of operations. Competitiveness Studies GM periodically evaluates the carrying value of long-lived assets to be held and used, when events and circumstances warrant such review. This evaluation and review is generally done in conjunction with the annual business planning cycle. The 1998 evaluation and review, anticipated to be completed prior to December 31, 1998, and other actions which may be taken, are expected to result in an after-tax charge of $300 million to $350 million. Employment and Payrolls 1998 1997 ---- ---- Worldwide Employment at September 30, (in thousands) GMNA 229 240 GME 81 79 GMLAAM 25 27 GMAP 10 10 Delphi 199 205 GMAC 23 18 Hughes 15 16 Other 12 11 ---- ---- Total employees 594 606 === === Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Worldwide payrolls - (in billions) $6.1 $6.9 $19.9 $21.0 === === ==== ==== 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 is partially due to the work stoppages previously discussed. - 30- GENERAL MOTORS CORPORATION AND SUBSIDIARIES New Accounting Standard In the first quarter of 1998, the AICPA's Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This SOP requires that entities capitalize certain internal-use software cost once specific criteria are met. Currently, GM generally expenses the costs of developing or obtaining internal-use software as incurred. GM will adopt SOP 98-1 on January 1, 1999, as required. GM expects that under the new SOP, approximately $300 million to $350 million in spending will be capitalized in 1999 that would have otherwise been expensed. * * * * * * 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 September 30, 1998 or subsequent thereto, but before the filing of this report are summarized below: Environmental Matters As previously reported, the Ohio Environmental Protection Agency filed an enforcement action against the Powertrain Group Defiance Foundry alleging, among other things, that GM failed to: 1) timely perform a stack test on certain equipment, 2) comply with an air permit variance granted to the foundry, 3) comply with the "Prevention of Significant Deterioration" regulations in connection with the installation of certain equipment, and 4) comply with certain air emission limits set forth in a number of permits. This matter has been settled in a Consent Order, entered July 10, 1998, with GM paying a $220,000 civil penalty, performing a supplemental environmental project valued at $465,000, and paying $20,000 to the Ohio-Kentucky-Indiana Regional Council of Governments to be used for the distribution of new gas caps for late model vehicles. Other Matters The Louisiana Court of Appeals has reversed the certification of a nationwide class covering owners of 1973 to 1991 C/K and R/V pickup trucks and cab chassis with fuel tanks mounted outside the frame rails. As previously reported, the trial court had certified the class and approved a settlement. The appeals court decision requires the trial court to make additional findings that the proposed class meets Louisiana class action requirements. It does not address the objectors' appeal from the approval of the fairness of the settlement or GM's appeal from the award of attorneys' fees and expenses. GM and plaintiffs are seeking review by the Louisiana Supreme Court. As previously reported, three class actions were pending alleging that front seat air bags installed in 1993 to 1997 model vehicles are defective. The federal court in Louisiana has granted a motion to dismiss the Louisiana and Texas cases. A motion for change of venue in the Alabama case has been denied. A writ of mandamus to review the denial of the change of venue motion is pending in the Alabama Supreme Court. In July 1998, the Corporation was served with two putative class action complaints covering all persons or entities resident in California which then or formerly owned or leased a 1985 through 1997 model year GM vehicle which was painted without a primer surface layer and which subsequently exhibited peeling or chipping of the paint. The complaints were filed in the California Superior Courts in San Francisco (Eddie Glorioso v. General Motors Corporation) and Alameda County (Scott Arnold v. General Motors Corporation). The complaints assert claims for breach of express warranty, violation of California's Song Beverly Consumer Warranty Act, and unfair competition and/or fraudulent business practices. They request restitution of all amounts paid by class members for GM vehicles and/or disgorgement of related profits or revenues, equitable relief, actual damages, prejudgment interest, costs, and attorneys' fees. No determination has been made that either case may proceed as a class action. In August 1998, a purported class action covering all owners, except citizens or residents of Texas and Alabama, of 1982 to 1989 GM vehicles with Type III door latches was filed in Circuit Court of Cook County, Illinois (Haenisch, et al. v. General Motors Corporation). Alternatively, it seeks a sub-class of Illinois owners. GM has removed the case to the federal court in Chicago, Illinois. As previously reported, purported class actions covering Texas (Rangel, et al. v. General Motors Corporation) and Alabama (McLain v. General Motors Corporation) owners were removed from state courts and are pending in federal courts in those states. Plaintiffs allege that the door latches are "potentially dangerous" because they are prone to open in collisions and subject passengers to risk of injury. The complaint asserts claims under state consumer protection statutes and for common law fraud and seeks the cost of modifying the latches, other unspecified relief, and attorneys' fees and costs. Personal injury claims are expressly excluded. No determination has been made that any of the cases may proceed as class actions. - 31 - GENERAL MOTORS CORPORATION AND SUBSIDIARIES ITEM 1. LEGAL PROCEEDINGS - Concluded General Electric Capital Corporation ("GECC) and DIRECTV, Inc. ("DIRECTV"), a wholly-owned subsidiary of Hughes Electronics Corporation ("Hughes"), entered into a contract on July 31, 1995, in which GECC agreed to provide financing for consumers' purchases of DIRECTV programming and related hardware. Under the contract GECC also agreed to provide certain related services to DIRECTV, including credit risk scoring, billing and collections services. DIRECTV agreed to act as a surety for loans complying with the terms of the contract. Hughes guaranteed DIRECTV's performance under the contract. A complaint and cross claims have been filed by the parties in the U.S. District Court for the District of Connecticut concerning GECC's performance and DIRECTV's obligation to act as a surety for escalating losses. GECC claims damages in excess of $140 million. DIRECTV seeks damages in excess of $70 million. Management vigorously disputes GECC's allegations and does not believe that the litigation will have a material adverse impact on the company. In connection with the 1997 spin-off of Hughes Defense and its subsequent merger with Raytheon, the terms of the merger agreement provided a process for resolving disputes that might arise in connection with, among other things, post-closing financial adjustments that were also called for by the terms of the merger agreement. Such financial adjustments might require a cash payment from Raytheon to Hughes or visa versa. A dispute currently exists regarding the post-closing adjustments which Hughes and Raytheon have proposed to one another. In an attempt to resolve the dispute, Hughes gave notice to Raytheon to commence the arbitration process. Raytheon responded by filing an action in Delaware Chancery Court which seeks to enjoin the arbitration as premature. It is possible that the ultimate resolution of the post-closing financial adjustment provision of the merger agreement may result in Hughes making a payment to Raytheon that would be material to Hughes. However, the amount of any payment that either party might be required to make to the other is not determinable at this time. Hughes intends to vigorously pursue resolution of the dispute through the arbitration process, opposing the adjustments Raytheon seeks and seeking the payment from Raytheon that it has proposed. ***** 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 33 27 Financial Data Schedule (for SEC information only) (b) REPORTS ON FORM 8-K. Seven reports on Form 8-K, dated June 8, 1998, July 8, 1998, July 9, 1998, July 14, 1998 (2), August 3, 1998 and August 17, 1998 were filed during the quarter ended September 30, 1998 reporting matters under Item 5, Other Events and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits. * * * * * * SIGNATURE 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) November 16, 1998 /s/Peter R. Bible - ----------------- ------------------------------------ (Date) (Peter R. Bible, Chief Accounting Officer) - 32 - 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 Nine Months Ended September 30, September 30, ------------------ ------------------ 1998 1997 1998 1997 ------ ------ ------ ------ (Dollars in Millions Except Per Share Amounts) Revenues Product sales $872.8 $703.3 $2,327.5 $2,125.9 Direct broadcast, leasing and other services 640.5 555.0 1,845.8 1,307.8 ------- ------- ------- ------- Total revenues 1,513.3 1,258.3 4,173.3 3,433.7 ------- ------- ------- ------- Operating costs and expenses Cost of products sold 659.5 550.3 1,782.4 1,711.4 Broadcast programming and other costs 284.6 243.9 800.2 598.4 Selling, general and administrative expenses 390.4 261.9 1,052.2 714.0 Depreciation and amortization 111.3 78.0 309.2 195.3 Amortization of GM purchase accounting adjustments 5.3 5.3 15.9 15.9 ------- ------- ------- ------- Total operating costs and expenses 1,451.1 1,139.4 3,959.9 3,235.0 ------- ------- ------- ------- Operating profit 62.2 118.9 213.4 198.7 Interest income 20.5 10.4 88.6 18.1 Interest expense (3.6) (24.4) (9.5) (58.1) Other, net (33.4) (17.8) (102.8) 452.6 ------- --------- --------- -------- Income from continuing operations before income taxes and minority interests 45.7 87.1 189.7 611.3 Income taxes 17.4 34.8 72.1 244.5 Minority interests in net losses (income) of subsidiaries 9.3 (5.1) 19.2 16.8 ------- ------- ------- --------- Income from continuing operations 37.6 47.2 136.8 383.6 (Loss) income from discontinued operations, net of taxes - (0.1) - 1.2 ------- ------- -------- --------- Net income 37.6 47.1 136.8 384.8 Adjustments to exclude the effect of GM purchase accounting adjustments 5.3 5.3 15.9 15.9 ------- ------ -------- --------- Earnings Used for Computation of Available Separate Consolidated Net Income $42.9 $52.4 $152.7 $400.7 ==== ==== ===== ===== Available Separate Consolidated Net Income Average number of shares of General Motors Class H Common Stock outstanding (in millions) (numerator) 105.7 102.0 105.0 101.2 Class H dividend base (in millions) (denominator) 399.9 399.9 399.9 399.9 Available Separate Consolidated Net Income $11.4 $13.4 $40.1 $101.4 ==== ==== ==== ===== Earnings Attributable to General Motors Class H Common Stock on a Per Share Basis $0.11 $0.13 $0.38 $1.00 Reference should be made to the Notes to Financial Statements.
- 33 - HUGHES ELECTRONICS CORPORATION BALANCE SHEET
September 30, 1998 December 31, ASSETS (Unaudited) 1997 ------------ ------------ (Dollars in Millions) Current Assets Cash and cash equivalents $1,509.7 $2,783.8 Accounts and notes receivable (less allowances) 1,067.2 662.8 Contracts in process, less advances and progress payments of $2.2 and $50.2 611.8 575.6 Inventories 570.7 486.4 Prepaid expenses and other, including deferred income taxes of $75.6 and $93.2 399.1 297.3 -------- -------- Total Current Assets 4,158.5 4,805.9 Satellites, net 2,843.1 2,643.4 Property, net 965.9 889.7 Net Investment in Sales-type Leases 181.9 337.6 Intangible Assets, net of accumulated amortization of $388.2 and $318.3 3,587.8 2,954.8 Investments and Other Assets 1,155.9 1,132.4 --------- --------- Total Assets $12,893.1 $12,763.8 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts payable $720.0 $472.8 Advances on contracts 245.6 209.8 Deferred revenues 150.3 110.6 Notes payable 60.2 - Accrued liabilities 564.1 689.4 ------- ------- Total Current Liabilities 1,740.2 1,482.6 Long-Term Debt 778.7 637.6 Deferred Gains on Sales and Leasebacks 130.1 191.9 Accrued Operating Leaseback Expense 38.8 100.2 Postretirement Benefits Other Than Pensions 156.2 154.8 Other Liabilities and Deferred Credits 702.8 706.4 Deferred Income Taxes 618.7 570.8 Commitments and Contingencies Minority Interests 469.0 607.8 Stockholder's Equity Capital stock and additional paid-in capital 8,142.7 8,322.8 Net income retained for use in the business 143.9 7.1 Subtotal 8,286.6 8,329.9 Minimum pension liability adjustment (34.8) (34.8) Accumulated unrealized gains on securities 11.9 21.4 Accumulated foreign currency translation adjustments (5.1) (4.8) -------- --------- Accumulated other comprehensive loss (28.0) (18.2) -------- --------- Total Stockholder's Equity 8,258.6 8,311.7 --------- --------- Total Liabilities and Stockholder's Equity $12,893.1 $12,763.8 ======== ======== Reference should be made to the Notes to Financial Statements.
- 34 - HUGHES ELECTRONICS CORPORATION CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ------------------ 1998 1997 ------ ------ (Dollars in Millions) Cash Flows from Operating Activities Net cash provided by continuing operations $313.7 $315.3 Net cash used by discontinued operations - (0.3) ------ ------ Net Cash Provided by Operating Activities 313.7 315.0 ------ ------ Cash Flows from Investing Activities Investment in companies (960.5) (1,559.1) Expenditures for property (202.7) (140.8) Increase in satellites (526.7) (473.2) Early buyout of satellite under sale and leaseback (155.5) - Proceeds from disposal of property 17.6 - Proceeds from disposal of investments 12.4 - Proceeds from insurance claims 231.2 - -------- --------- Net Cash Used in Investing Activities (1,584.2) (2,173.1) -------- -------- Cash Flows from Financing Activities Net increase in notes and loans payable 60.0 - Long-term debt borrowings 875.3 1,759.1 Repayment of long-term debt (734.2) - Payment to General Motors for Delco post-closing price adjustment (204.7) - Contributions from Parent Company - 518.8 ------- ------- Net Cash (Used In) Provided by Financing Activities (3.6) 2,277.9 ------- ------- Net (decrease) increase in cash and cash equivalents (1,274.1) 419.8 Cash and cash equivalents at beginning of the period 2,783.8 6.7 ------- ----- Cash and cash equivalents at end of the period $1,509.7 $426.5 ======= ===== Reference should be made to the Notes to Financial Statements.
- 35 - 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 Electronics Corporation ("Hughes Electronics") filed as Exhibit 99 in GM's quarterly reports on Form 10-Q dated March 31, 1998 and June 30, 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 Electronics in 1985. On December 17, 1997, 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 systems 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 September 30, December 31, (Dollars in Millions) 1998 1997 ---- ---- Productive material and supplies $104.1 $57.5 Work in process 343.1 328.5 Finished goods 123.5 100.4 ----- ----- Total $570.7 $486.4 ===== ===== - 36 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--Continued (Unaudited) Note 3. Comprehensive Income Hughes' total comprehensive income was as follows: Three Months Ended Nine Months Ended September 30, September 30, --------------------- -------------------- (Dollars in Millions) 1998 1997 1998 1997 -------- ------- -------- ------- Net income $37.6 $47.1 $136.8 $384.8 Other comprehensive income (loss): Foreign currency translation adjustments 2.2 (0.8) (0.3) (1.6) Unrealized gains (losses) on securities: Unrealized holding losses (3.4) - (2.4) - Less: reclassification adjustment for losses (gains) included in net income 0.2 - (7.1) - ----- ------- ------ ------- Unrealized losses on securities (3.2) - (9.5) - ----- ------- ------ ------- Other comprehensive loss (1.0) (0.8) (9.8) (1.6) ----- ------ ------ ------- Total comprehensive income $36.6 $46.3 $127.0 $383.2 ==== ==== ===== ===== 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 (105.7 million and 102.0 million during the third quarters of 1998 and 1997, respectively) and the denominator of which was 399.9 million during the third 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. - 37 - 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%. In October 1998, Hughes purchased an additional 10% interest in Galaxy Latin America from MVS Multivision, increasing its ownership to 70%. Hughes also agreed to acquire an additional ownership interest in Grupo Galaxy Mexicana ("GGM"), pending regulatory approval in Mexico. GGM offers Direct-To-Home Broadcast service in Mexico. 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." - 38 - HUGHES ELECTRONICS CORPORATION NOTES TO FINANCIAL STATEMENTS--Continued (Unaudited) Note 9. Segment Reporting The following presents selected information regarding Hughes' operating segments: Operating Segments:
Direct-To- Home Satellite Satellite Network Broadcast Services Systems Systems Other Elims. Total - ------------------------------------------------------------------------------- (Dollars in Millions) For the Three Months Ended: September 30, 1998 External Revenues $458.0 $152.0 $659.5 $240.4 $3.4 - $1,513.3 Intersegment Revenues 1.1 34.5 29.4 27.3 - $(92.3) - - ------------------------------------------------------------------------------- Total Revenues $459.1 $186.5 $688.9 $267.7 $3.4 $(92.3)$1,513.3 - -------------------------------------------------------------------------------- Operating (Loss) Profit(1) $(61.8) $78.2 $63.8 $16.9 $(14.8) $(20.1) $62.2 - -------------------------------------------------------------------------------- September 30, 1997 External Revenues $343.7 $146.5 $541.1 $215.6 $11.4 - $1,258.3 Intersegment Revenues - 23.8 63.2 0.4 0.5 $(87.9) - - ------------------------------------------------------------------------------- Total Revenues $343.7 $170.3 $604.3 $216.0 $11.9 $(87.9)$1,258.3 - -------------------------------------------------------------------------------- Operating (Loss) Profit(1) $(43.3) $70.8 $53.1 $22.4 $23.6 $ (7.7) $118.9 - -------------------------------------------------------------------------------- For the Nine Months Ended: September 30, 1998 External Revenues$1,247.4 $480.7 $1,806.2 $626.5 $12.5 - $4,173.3 Intersegment Revenues 1.1 89.9 181.8 47.6 0.9 $(321.3) - - ------------------------------------------------------------------------------- Total Revenues $1,248.5 $570.6 $1,988.0 $674.1 $13.4 $(321.3)$4,173.3 - -------------------------------------------------------------------------------- Operating (Loss) Profit(1) $(133.6) $236.7 $178.9 $(20.2) $(26.2) $(22.2) $213.4 - -------------------------------------------------------------------------------- September 30, 1997 External Revenues $861.0 $362.3 $1,605.7 $608.9 $(4.2) - $3,433.7 Intersegment Revenues - 69.7 142.4 0.5 1.6 $(214.2) - - ------------------------------------------------------------------------------- Total Revenues $861.0 $432.0 $1,748.1 $609.4 $(2.6) $(214.2)$3,433.7 - -------------------------------------------------------------------------------- Operating (Loss) Profit(1) $(158.7) $200.4 $159.7 $6.1 $(6.4) $(2.4) $198.7 - --------------------------------------------------------------------------------
(1) Includes amortization arising from purchase accounting adjustments related to GM's acquisition of Hughes amounting to $0.9 million in each of the three month periods and $2.5 million in each of the nine months periods for the Satellite Services segment and $4.4 million in each of the three month periods and $13.4 million in each of the nine 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 Nine Months Ended September 30, September 30, (Dollars in Millions) 1998 1997 1998 1997 ---- ---- ---- ---- Operating profit $62.2 $118.9 $213.4 $198.7 Interest income 20.5 10.4 88.6 18.1 Interest expense (3.6) (24.4) (9.5) (58.1) Other, net (33.4) (17.8) (102.8) 452.6 ------ ------ ------ ----- Income from continuing operations before income taxes and minority interests $45.7 $87.1 $189.7 $611.3 ==== ==== ===== ===== - 39 - 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 and is presently considering a further appeal to the U.S. Supreme Court. 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. Hughes has reached an agreement with the Internal Revenue Service regarding a claim for refund of Federal income taxes for the years 1983, 1984 and 1985. The agreement requires approval by the Joint Committee on Taxation before the refund claim becomes final. If the agreement is approved, a favorable adjustment to Hughes' tax provision would occur which would be material to the earnings of GM attributable to Class H common stock. - 40 - 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 Electronics Corporation 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 Electronics Corporation included in Exhibit 99 to GM's quarterly reports on Form 10-Q dated March 31, 1998 and June 30, 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 Electronics Corporation (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, ability to deal with the Year 2000 issue, 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 systems 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, four Hughes-built satellites have experienced the failure of a primary spacecraft control processor (SCP). With the exception of the Galaxy IV satellite, operated by PanAmSat, control of the satellites was automatically switched to the spare SCP and the spacecraft are operating normally. The spare SCP on the Galaxy IV satellite had also failed, however, resulting in the loss of the satellite. 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. 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. The failure of the second SCP on Galaxy IV appears to be unrelated and is being treated as an isolated anomaly. - 41 - HUGHES ELECTRONICS CORPORATION Battery anomalies have occurred on two other Hughes-built PanAmSat satellites. In both cases, battery cells have failed resulting in the need to shut-off a number of transponders for a brief time during twice-yearly eclipse periods. To date, the impact on customers has been minimal. There can be no assurance, however, that service to all full-time customers will not be interrupted for brief periods during future eclipse periods or that additional battery cell failures will not occur in the future. Such future service interruptions, depending on their extent, could result in a claim by affected customers for termination of their transponder agreements. PanAmSat is developing solutions for its customers that may include transition of certain services to other PanAmSat satellites or the launch of replacement satellites. Results of Operations Three Months Ended September 30, 1998 Compared to Three Months Ended September 30, 1997 Revenues. Third quarter 1998 revenues increased 20.3% to $1,513.3 million compared with $1,258.3 million in the third quarter of 1997. The increase reflects continued record subscriber growth in the Direct-To-Home Broadcast segment, increased sales of commercial satellites in the Satellite Systems segment and increased sales of DIRECTV receiver equipment in the Network Systems segment. Direct-To-Home Broadcast segment third quarter 1998 revenues increased 33.6% to $459.1 million from $343.7 million in the third 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 $408 million, a 37% increase over last year's third quarter revenues of $298 million. With 303,000 net new subscribers in the third quarter, total DIRECTV(R) subscribers grew to 4,058,000 in the United States as of September 30, 1998. Hughes' Latin American DIRECTV subsidiary, Galaxy Latin America ("GLA"), had third quarter revenues of $37 million compared with $22 million in the third quarter of 1997. With the addition of 36,000 net new subscribers in the third quarter, cumulative DIRECTV subscribers in Latin America were 423,000 as of September 30, 1998. In addition, DIRECTV Japan had a total of 181,900 subscribers by the end of the third quarter. The Satellite Services segment third quarter 1998 revenues were up 9.5% to $186.5 million compared with $170.3 million in the prior year. Overall revenue from video services increased by 4% to $135.8 million, primarily due to increased operating lease revenues from the commencement of service agreements for full-time video distribution, as well as short-term special events. Telecommunications services revenue increased by 16% to $40.7 million in the third quarter, in large part due to the growth in data and Internet-related service agreements. For the third quarter of 1998, revenues for the Satellite Systems segment increased 14.0% to $688.9 million from revenues of $604.3 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 American Mobile Radio Corporation. Third quarter revenues for the Network Systems segment were $267.7 million compared with $216.0 million in the same period last year, an increase of 23.9%. The increase in revenues was primarily due to increased sales of DIRECTV receiver equipment, which more than offset lower international sales of private business networks. Operating Profit. Operating profit in the quarter was $67.5 million compared to $124.2 million in the third quarter of 1997. Third quarter operating profit margin on the same basis decreased to 4.5% in 1998 from 9.9% in 1997. The decrease in operating profit and operating profit margin resulted primarily from an expected increase in operating losses in the Direct-To-Home Broadcast segment and other increased expenses, including pension expense. The Direct-To-Home Broadcast segment operating loss for the third quarter of 1998 was $61.8 million compared with an operating loss of $43.3 million in the third quarter of 1997. The larger operating loss in 1998 was principally due to expected higher sales and marketing expenditures that more than offset increased subscriber revenues. The third quarter 1998 operating loss for the domestic DIRECTV business was $31 million compared with $15 million for last year, and GLA's third operating loss was $30 million compared with $26 million last year. - 42 - HUGHES ELECTRONICS CORPORATION 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 third quarter rose 10.3% to $79.1 million from $71.7 million in 1997, resulting from the increased video and telecommunications services revenue noted above. Operating profit margin in the quarter increased slightly to 42.4% from 42.1% in the same period of last year. In August 1998, Galaxy X, a PanAmSat satellite, was destroyed as a result of the launch failure of a Boeing Delta III rocket. Galaxy X was fully insured. For the third quarter 1998, operating profit for the Satellite Systems segment increased 20.2% to $63.8 million from $53.1 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 increased to 9.3% from 8.8% last year, resulting from increased commercial satellite sales in the current period. The Network Systems segment operating profit in the third quarter of 1998 was $16.9 million compared with an operating profit of $22.4 million in the third quarter of 1997. Third quarter operating profit margin declined to 6.3% compared with 10.4% in the same period last year. The decline in operating profit and margin in the third quarter of 1998 was primarily due to lower international sales of private business networks. Costs and Expenses. Selling, general and administrative expenses increased to $390.4 million in the third quarter of 1998 from $261.9 million in the same period of 1997. The increase resulted primarily from increased programming, marketing and subscriber acquisition costs in the Direct-To-Home Broadcast segment and increased general and administrative expenditures in the Network Systems segment. The increase in depreciation and amortization expenses to $111.3 million in the third quarter of 1998 from $78.0 million in the same period of 1997 resulted from increased capital expenditures in the Direct-To-Home Broadcast and Satellite Services segments since September 1997, and amortization of goodwill for the additional 9.5% interest in PanAmSat. Interest Income and Expense. Interest income increased to $20.5 million in the third quarter of 1998 compared with $10.4 million in the third quarter of 1997. The increase was due to the higher level of cash and cash equivalents resulting from the Hughes Transactions. Interest expense decreased $20.8 million in the third quarter of 1998 from the same period in 1997 due to the repayment of debt in conjunction with the Hughes Transactions. Other, net. The third quarter 1998 amount primarily relates to losses from unconsolidated subsidiaries of $28.1 million compared with $11.2 million of losses from unconsolidated subsidiaries in the third quarter of 1997. Income Taxes. The effective income tax rate was 34.1% in the third quarter of 1998 and 37.7% in the third 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 al 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 third quarter earnings decreased to $42.9 million compared with last year's $52.4 million. Earnings per share decreased to $0.11 per share versus pro forma earnings per share of $0.13 in 1997. See Note 4 to the financial statements for further discussion regarding pro forma presentation. Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1997 Revenues. For the first nine months of 1998, revenues increased 21.5 % to $4,173.3 million compared with $3,433.7 million in the first nine months of 1997. This increase was primarily the result of record DIRECTV subscriber growth in the Direct-To-Home Broadcast segment, the PanAmSat merger and increased operating lease revenues for video, data and Internet-related services in the Satellite Services segment, increased commercial satellite sales in the Satellite Systems segment and higher DIRECTV equipment sales in the Network Systems segment. - 43 - HUGHES ELECTRONICS CORPORATION Direct-To-Home Broadcast segment revenues for the first nine months of 1998 increased 45.0% to $1,248.5 million from $861.0 million for the same period in 1997. The increase resulted from continued strong subscriber growth and average monthly revenue per subscriber, as well as low subscriber churn rates. For the first nine months of 1998, the Satellite Services segment revenues increased 32.1% to $570.6 million from $432.0 million for the same period in 1997. The increase in revenues was primarily due to the May 1997 PanAmSat merger, increased operating lease revenues from the commencement of service agreements for full-time video distribution, as well as short-term special events and increased growth in data and Internet-related service agreements. Revenues for the first nine months of 1998 for the Satellite Systems segment were $1,988.0 million compared to $1,748.1 million for the same period in 1997. The 13.7% increase resulted principally from higher commercial satellite sales to customers such as Thuraya Satellite Telecommunications Company, ICO Global Communications and American Mobile Radio Corporation. Network Systems segment revenues for the first nine months of 1998 increased 10.6% to $674.1 million from $609.4 million for the first nine months of 1997. The increase in revenues resulted from the growth in sales of DIRECTV receiver equipment and the increased sales of private business networks and satellite-based mobile telephony equipment offset by lower international sales. Operating Profit. Driven by the above noted revenue growth, operating profit for the first nine months of 1998 grew to $229.3 million versus $214.6 million in 1997, an increase of 6.8%. The increase in operating profit for the first nine months of 1998 resulted primarily from increased commercial satellite sales in the Satellite Systems segment and continued strong performance in the Satellite Services segment, primarily from the PanAmSat merger. These increases were offset by higher sales and marketing expense in the Direct-To-Home Broadcast segment, a provision for losses in the Network Systems segment and higher other expenses. Operating profit margin on the same basis decreased to 5.5% compared with 6.2% in the first nine months of 1997. The decline in operating profit margin for the first nine months of 1998 was principally due to expected higher DIRECTV sales and marketing expenditures, a provision for estimated losses related to the bankruptcy filing by a Network Systems segment customer, goodwill amortization associated with the May 1997 PanAmSat merger and a subsequent additional investment in PanAmSat by Hughes in May 1998 and other increased expenses, including pension expense. The Direct-To-Home Broadcast segment operating loss for the first nine months of 1998 was $133.6 million compared with an operating loss of $158.7 million for first nine 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. Resulting from the noted increased revenues, the Satellite Services segment operating profit for the first nine months of 1998 increased 17.9% to $239.2 million from $202.9 million for the first nine months of 1997. Operating profit margin in the period declined to 41.9% from 47.0% in the same period last year primarily from increased goodwill amortization associated with the PanAmSat merger, a provision for losses relating to the May 1998 failure of PanAmSat's Galaxy IV satellite and increased depreciation expense resulting from increased capital expenditures by PanAmSat. For the first nine months of 1998, operating profit for the Satellite Systems segment increased 12.0% to $178.9 million from $159.7 million. The increased operating profit was principally due to the higher commercial satellite sales noted above. Operating profit margin in the first nine months of 1998 declined slightly to 9.0% from 9.1% in the prior year. The Network Systems segment operating loss in the first nine months of 1998 was $20.2 million compared with an operating income of $6.1 million in the first nine months of 1997. The 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 $1,052.2 million from $714.0 million in the same period of 1997. The increase in these expenses resulted primarily from increased programming, marketing and subscriber acquisition costs in the Direct-To-Home Broadcast segment and increased expenditures to support the growth in the remaining business segments. Depreciation and amortization expenses increased to $309.2 million in the first nine months of 1998 from $195.3 million for the same period in 1997. The increase in depreciation and amortization expenses resulted from increased capital expenditures in the Direct-To-Home Broadcast and Satellite Services segments since September 1997, and amortization of goodwill related to the May 1997 PanAmSat merger as well as the purchase of an additional 9.5% interest in PanAmSat in May 1998. - 44 - HUGHES ELECTRONICS CORPORATION Interest Income and Expense. Interest income increased to $88.6 million in the first nine months of 1998 from $18.1 million in the first nine months of 1997. The increase was due to the higher level of cash and cash equivalents resulting from the Hughes Transactions. Interest expense decreased $ 48.6 million in the first nine 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 nine months of 1998 relates primarily to losses from unconsolidated subsidiaries of $79.0 million, attributable principally to equity investments, and a provision for estimated losses associated with bankruptcy filings by two customers. The amount for the first nine 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 $31.5 million. Income Taxes. The effective income tax rate was 35.1% in the first nine months of 1998 and 39.0% in the first nine 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 nine months of 1998 increased to $152.7 million compared with last year's $82.4 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 $0.38 per share versus pro forma earnings per share of $0.20 in 1997. Including the gain associated with the PanAmSat merger, for the first nine months of 1997, earnings and pro forma earnings per share were $400.7 million and $1.00, respectively. 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 $1,509.7 million at September 30, 1998 compared to $2,783.8 million at December 31, 1997. The $1,274.1 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, offset in part by proceeds from insurance claims from the loss of the Galaxy IV and Galaxy X satellites. Cash provided by operating activities for the nine months ended September 30, 1998 was $313.7 million, compared to $315.0 million of cash provided by operating activities for the same period in 1997. Net cash used in investing activities was $1,584.2 million for the nine months ended September 30, 1998 and $2,173.1 million for the same period in 1997. The 1998 investing activities reflect the purchase of an additional 9.5% interest in PanAmSat, proceeds from insurance claims related to the loss of the Galaxy IV and Galaxy X satellites, 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 used in financing activities was $3.6 million for the nine months ended September 30, 1998 compared with net cash provided by financing activities of $2,277.9 million for same period in 1997. The 1998 financing activities reflect PanAmSat's net borrowings of $200.0 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 $518.8 million to Hughes and Hughes borrowing $1,725.0 million from GM for the PanAmSat merger. Liquidity Measurement. As a measure of liquidity, the current ratio (ratio of current assets to current liabilities) at September 30, 1998 and December 31, 1997 was 2.39 and 3.24, respectively. Current assets decreased by $647.4 million to $4,158.5 million at September 30, 1998 from $4,805.9 million at December 31, 1997, resulting primarily from the decrease in cash, noted above, offset by an increase in accounts and notes receivable. Dividend Policy and Use of Cash. The GM Board has decided that at this time no cash dividends will be paid by Hughes to GM or by GM to holders of GM Class H common stock to allow the earnings of Hughes to be retained for investment in its business. Significant cash requirements in the next year related to capital expenditures for property and equipment, including satellites, and equity investments are expected to be funded from a combination of existing cash balances, amounts available under existing credit facilities and additional borrowings, if necessary. Also, 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 noted above. - 45 - HUGHES ELECTRONICS CORPORATION 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 $60.0 million of short-term borrowings against the commercial paper program at September 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 September 30, 1998. Hughes believes that existing cash balances, amounts available under its existing credit facilities and additional borrowings, if necessary, will provide sufficient resources to meet currently identified working capital requirements, satellite construction, debt service and other cash needs. Year 2000 Many computer technologies made or used by Hughes throughout its business have the potential for operational problems if they lack the ability to handle the transition to the Year 2000. Computer technologies include both information technology (IT) in the form of hardware and software, as well as non-information technology (Non-IT) which include embedded technology such as microprocessors. Because of the potential disruption that this issue could cause to Hughes and its customers, a comprehensive, company wide, Year 2000 program was initiated in 1996 to identify and remediate potential Year 2000 problems. The Year 2000 program addresses both IT and Non-IT systems, related to internal systems and Hughes' products and services. Hughes' Year 2000 program is being implemented in seven phases: 1) Awareness - establish project teams made up of project leaders from each Hughes operating company, assign responsibilities and establish awareness of the Year 2000 issues. The awareness phase has been completed. 2) Inventory - identify all systems within Hughes, determine if they are critical and identify responsible personnel for compliance. The inventory phase is substantially complete. Many of Hughes' systems are already Year 2000 compliant, or had already been scheduled for replacement as part of Hughes' ongoing systems plans. 3) Assessment - categorize all systems and determine activities that are required to achieve compliance, including contacting and assessing the Year 2000 readiness of material third party vendors and suppliers of hardware and software. The assessment phase is substantially complete. All critical systems have been identified in this phase and are the primary focus of the project teams. Critical systems were identified requiring remediation, including satellite control and communication software, broadcast systems, and other systems utilized in customer service/billing systems, engineering and manufacturing operations. Hughes' in-orbit satellites do not have date dependent processing. 4) Remediation - modify, repair and replace categorized systems. Remediation has begun on many systems and is targeted for completion by the second quarter of 1999. 5) Testing - test remediated systems to assure normal function when placed in their original operating environment and further test for Year 2000 compliance. Overall testing is completed at approximately the same time as remediation due to the overlap of the remediation and testing phases. Testing is currently underway and is expected to be a primary focus of the project teams over the next several quarters. Hughes expects to complete this phase shortly after the remediation phase, with on-going review and follow-up. 6) Implementation - once a remediated system and its interfaces have been successfully tested, the system will be put into its operating environment. A number of remediated systems have already been put back into operations. The majority of remediated systems will be put into operations as testing is completed over the next several quarters. 7) Contingency Planning - development and execution of plans that narrow the focus on specific areas of significant concern and concentrate resources to address them. All Year 2000 critical systems are expected to be Year 2000 compliant in a reasonably timely manner. However, Hughes is planning to develop contingency plans to address the risk of any system not being Year 2000 compliant and expects to complete such plans by the end of the second quarter of 1999. Hughes currently believes that the most reasonably likely worst case scenario is a temporary loss of functionality in satellite control and communication software. Contingency plans are being developed for this unlikely event and would result in slightly higher operating costs until any remaining Year 2000 problems are corrected. - 46 - HUGHES ELECTRONICS CORPORATION Hughes is utilizing both internal and external resources for the remediation and testing of its systems that are undergoing Year 2000 modification. Hughes' Year 2000 program is currently on schedule. Hughes has incurred and expensed approximately $2.0 million through 1997 and approximately $4.5 million during the first nine months of 1998, related to the assessment of, and on-going efforts in connection with, its Year 2000 program. Future spending for system remediation and testing are currently estimated to be from $12 million to $19 million, with the majority of the expense expected to be incurred during the last quarter of 1998 and early 1999. Each Hughes operating company is funding their respective Year 2000 efforts with existing IT budgets and current and future operating cash flows. Hughes is currently substantially on target with respect to its Year 2000 budget. Hughes has initiated communications and is working with its suppliers and other third parties in order to assess and reduce the risk that Hughes' operations could be adversely affected by the failure of these third parties to adequately address the Year 2000 issue. A large number of Hughes' third parties' systems are currently expected to be Year 2000 compliant. For those third party systems which are not yet Year 2000 compliant, Hughes will continue to identify action plans or alternatives to meet Hughes' requirements. In view of the foregoing, Hughes does not currently anticipate that it will experience a significant disruption of its business as a result of the Year 2000 issue. However, there is still uncertainty about the broader scope of the Year 2000 issue as it may affect Hughes and third parties that are critical to Hughes' operations. For example, lack of readiness by electrical and water utilities, financial institutions, governmental agencies or other providers of general infrastructure could pose significant impediments to Hughes' ability to carry on its normal operations. If the modifications and conversions required to make Hughes Year 2000 ready are not made or are not completed on a timely basis and in the event that Hughes is unable to implement adequate contingency plans in the event that problems are encountered internally or externally by third parties, the resulting problems could have a material adverse effect on Hughes' results of operations and financial condition. 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 third quarters of 1998 and 1997 and $15.9 million for the nine months ended September 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 $431.7 million at September 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 Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ------ -------- ------- -------- (Dollars in Millions Except Per Share Amounts) Total revenues $1,513.3 $1,258.3 $4,173.3 $3,433.7 Total operating costs and expenses 1,445.8 1,134.1 3,944.0 3,219.1 ------- ------- ------- ------- Operating profit 67.5 124.2 229.3 214.6 Non-operating (loss) income (16.5) (31.8) (23.7) 412.6 Income taxes 17.4 34.8 72.1 244.5 Minority interests in net losses (income)of subsidiaries 9.3 (5.1) 19.2 16.8 (Loss) income from discontinued operations - (0.1) - 1.2 Earnings Used for Computation of Available Separate Consolidated Net Income $42.9 $52.4 $152.7 $400.7 ==== ==== ===== ===== Earnings Attributable to General Motors Class H Common Stock on a Per Share Basis $0.11 $0.13 $0.38 $1.00 ==== ==== ==== ====
Pro Forma Condensed Balance Sheet
September 30, December 31, Assets 1998 1997 ------------- ------------ (Dollars in Millions) Total Current Assets $4,158.5 $4,805.9 Satellites, net 2,843.1 2,643.4 Property, net 965.9 889.7 Net Investment in Sales-type Leases 181.9 337.6 Intangible Assets, Investments and Other Assets, net 4,312.0 3,639.6 -------- -------- Total Assets $12,461.4 $12,316.2 ======== ======== Liabilities and Stockholder's Equity Total Current Liabilities $1,740.2 $1,482.6 Long-Term Debt 778.7 637.6 Postretirement Benefits Other Than Pensions, Other Liabilities and Deferred Credits 1,646.6 1,724.1 Minority Interests 469.0 607.8 Total Stockholder's Equity (1) 7,826.9 7,864.1 --------- --------- Total Liabilities and Stockholder's Equity (1) $12,461.4 $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 Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in Millions) Direct-To-Home Broadcast Total Revenues $459.1 $343.7 $1,248.5 $861.0 Operating Loss $(61.8) $(43.3) $(133.6) $(158.7) Depreciation and Amortization $31.2 $21.2 $77.2 $62.5 Capital Expenditures(1) $82.0 $24.0 $130.1 $54.2 Satellite Services Total Revenues $186.5 $170.3 $570.6 $432.0 Operating Profit $79.1 $71.7 $239.2 $202.9 Operation Profit Margin 42.4% 42.1% 41.9% 47.0% Depreciation and Amortization $56.6 $48.0 $169.8 $91.9 Capital Expenditures (2) $190.7 $191.0 $605.0 $543.7 Satellite Systems Total Revenues $688.9 $604.3 $1,988.0 $1,748.1 Operating Profit $63.8 $53.1 $178.9 $159.7 Operation Profit Margin 9.3% 8.8% 9.0% 9.1% Depreciation and Amortization $12.9 $9.9 $35.1 $27.7 Capital Expenditures $18.2 $28.1 $50.5 $68.2 Network Systems Total Revenues $267.7 $216.0 $674.1 $609.4 Operating Income (Loss) $16.9 $22.4 $(20.2) $6.1 Operating Profit Margin 6.3% 10.4% - 1.0% Depreciation and Amortization $11.4 $5.6 $29.8 $21.7 Capital Expenditures $10.7 $15.3 $26.4 $33.0 Eliminations and Other Total Revenues $(88.9) $(76.0) $(307.9) $(216.8) Operating Loss $(30.5) $20.3 $(35.0) $4.6 Depreciation and Amortization $(0.8) $(6.7) $(2.7) $(8.5) Capital Expenditures $(21.4) $74.1 $114.5 $(147.6)
* 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 $38.0 million in the third quarter and nine-month periods of 1998. (2)Includes expenditures related to satellites amounting to $182.2 million, $180.2 million, $422.2 million and $527.3 million, respectively. Also included in the 1998 nine-month period is $155.5 million related to the early buy-out 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 Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Dollars in Millions Except Per Share Amounts) Operating profit $68 $124 $229 $215 Income from continuing operations before income taxes and minority interests $51 $92 $206 $627 Earnings used for computation of available separate consolidated net income $43 $52 $153 $401 Average number of GM Class H dividend base shares (1) 399.9 399.9 399.9 399.9 Stockholder's equity $7,827 $2,941 $7,827 $2,941 Working capital 2,418 791 2,418 791 Operating profit as a percent of revenues 4.5% 9.9% 5.5% 6.2% Income from continuing operations before income taxes and minority interests as a percent of revenues 3.4% 7.3% 4.9% 18.3% Net income as a percent of revenues 2.8% 4.2% 3.7% 11.7%
* 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 105.7 million for the third quarter of 1998 and 102.0 million for the third quarter of 1997. * * * * * * - 50 - EX-27 3 FDS --
5 This schedule contains summary financial information extracted from General Motors Corporation September 30, 1998 Consolidatd Financial Statements and is qualified in its entirety by reference to Third Quarter 1998 Form 10-Q. 0000040730 General Motors Corporation 1,000,000 U.S. Dollars 9-Mos Dec-31-1998 Jan-01-1998 Sep-30-1998 1 7,961 8,688 73,510 0 12,869 0 80,788 43,459 237,645 0 102,460 221 1 1,103 13,576 237,645 100,115 114,895 85,464 106 94,070 323 5,137 1,719 532 1,184 0 0 0 1,184 1.65 1.60
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